No Dr. Krugman, the futures curve is *not* a prediction of the future
In a tweetstorm on X talking about President Biden’s reelection chances, New York Times columnist and Nobel Prize-winning* economist Paul Krugman claims:
The good news for camp Biden is that futures prices suggest that gas prices will come down significantly in the coming months 2/
— Paul Krugman (@paulkrugman) May 18, 2024
Krugman is likely referring to a dynamic in the NYMEX gasoline futures market in which there’s a downward trend from the July contract through February 2025. But, you’ll note, there’s also a very clear seasonal pattern.
The futures curve should be taken seriously, not literally. It is not, as the name might suggest, a predictor of where the price will be in the future. The shape of the futures curve sends an important signal as to what producers and traders who hold these commodities in storage should be doing.
Generally speaking, if the futures curve is downward-sloping (or “in backwardation”), it is telling producers that they should be bringing product to market to sell now. If it is upward-sloping (or “in contango”), it is signaling that producers should withhold output or build inventories.
Here’s the monthly evolution of implied gasoline demand (based on the product supplied to market) from 2014 through 2019, to avoid pandemic-related distortions.
That the price on the futures curve is consistently higher for spring and summer months tells you everything about the seasonal pattern of gasoline demand in the US, and much, much less about what the market is “predicting” for gasoline prices.
In simple terms, the curve goes down because demand goes down. And the shape of the curve is telling suppliers of gasoline how to act to keep the market mostly in balance throughout the year and avoid a lot of price volatility.
*Yes, we know there is no such thing as the Nobel Prize in economics.
Here’s the monthly evolution of implied gasoline demand (based on the product supplied to market) from 2014 through 2019, to avoid pandemic-related distortions.
That the price on the futures curve is consistently higher for spring and summer months tells you everything about the seasonal pattern of gasoline demand in the US, and much, much less about what the market is “predicting” for gasoline prices.
In simple terms, the curve goes down because demand goes down. And the shape of the curve is telling suppliers of gasoline how to act to keep the market mostly in balance throughout the year and avoid a lot of price volatility.
*Yes, we know there is no such thing as the Nobel Prize in economics.
