Reading the Derivatives Markets: Oil Futures Prices May Not Mean What You Think
From Sheridan Titman's Energy Insights blog on Texas Enterprise
March 26, 2011
Although futures prices can indeed be used to forecast commodity prices, the futures prices themselves are not the forecasts. Prices of commodity options can be used to gauge the accuracy of those forecasts. And the options markets tell us that we should not put a lot of confidence in the price forecasts that can be obtained from the futures markets. This does not suggest that there exist forecasts that are better – just that commodity prices are difficult to forecast. Here's a bit of background about how to understand the relation between futures prices and the prices that we expect will be realized in the future.
Read the full blog post on Texas Enterprise.