The problem with buying forward in large quantities for long periods of time, are that you limit any opportunity to gain from potential falls in price. There is no doubt that the recent falls in prices have caused some to get their buying boots on, but perhaps the market has been overbought for sometime. If we look at contractual years out of Oct 2006 we can see that there are few fundamental influences which we do not know about, for example we know about Rough and we know that emissions for phase 1 are likely to be lower than where they have been in the last year. So now looks like a prudent time to buy in the first year, there may be a few short term issues which cause prices to go marginally lower but they are unlikely to go significantly lower.

The following year 2007/08 is already in backwardation and so average prices are already lower than the front year, the reason for this is that fundamental fuel supplies are expected to be greater, and the ability for supply to meet demand should be greater. Emissions prices are in contango and so higher in Phase 11 than in Phase 1, this is perhaps tempering some of the size of the backwardation. Coupled with this oil stocks are much larger than they have been for a while and oil tends to stick to a five year cycle, by 2008 2009 we should be seeing oil prices reduce. However, this is dependent upon the geopolitical state of the world and the worlds economy.

If the economy moves into recession then world demand on gas and oil will reduce and this will emphasise an oil price collapse. Emissions markets have shown that they are highly dependent upon the political negotiations that governments complete in the next six months. The market encourages players to be long (because you get fined if you are short) so before compliance the market is being bought, after compliance the market will be sold when players get the chance to re-assess models. In time they will get better at modelling and so the dramatic falls should be fewer.

On the balance of fundamentals, it is fair to suggest that there will be opportunities to buy five year volume at better times than today. Certainly one year volume looks reasonable, but hedging all five years in one hit, suggests that players are backing one horse in one race and betting their mortgage on it. It might come in as an each way run, but unlikely to be a clear winner.