Oil, Gasoline Prices Drop as Weather Worries Fade

On Tuesday, the American Automobile Association announced that the price of a gallon of gasoline reached an average price of $2.82, the lowest since April. On the same day, oil dripped below $70 a barrel, the first time that has happened since June. The downward move may signal the start of a trend, in part because the weather threat to US refining capacity has diminished in the minds of traders. In addition, the speculators may decide it’s time to book profits and find other pastures.

Next month is key. The summer vacation driving season will end as the kids are all back in school. Also, the summer gasoline blends that are required for environmental reasons are not forced on consumers any more. Add to that the cooling of the weather in the Gulf of Mexico over September (although hurricane season runs through October), and one has a recipe for lessened demand and rising supply – which equals lower prices.

Wholesale gas prices have already dropped 60 cents a gallon or thereabouts in the last few weeks, and some of this will make it to the retail level. This suggests that the $2.82 AAA average price has another 20-30 cents to go. However, beyond that, something significant would have to happen to oil supply and demand for gas to cheapen further.

What might bring that about, and drive oil down another $10 or so a barrel is the departure of the long-term oil speculators from the market. The day traders will always be with the market, but the people who bought oil in the $30 to $40 a barrel range and who have seen prices get toppish at $75 or so may well exit the market with their profits permanently. The home run has been hit, and there won’t be another in this market for some time.

If they square up their positions, they would release more supply and decrease the demand for oil and its derivatives. This would be the end of the speculative premium that has been a part of the oil market for a year and a half or so. The market would then be a match between those who produce oil and those who use it. The question then becomes, where do they put their profits?

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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