Have Gas Prices Peaked?

Energy & Resources

By Amy Kletch

Earlier this year, there was talk of $5-a-gallon gas prices by summer, as gasoline prices surged upward. Since prices have been dropped in April, it appears as though they will continue to do so as the driving season approaches.

This scenario is evidenced by a 30-cent price drop, from over $3.40 a gallon at the beginning of April 2012 to $3.10 by April 25, 2012, in one of the most common types of traded gasoline futures. The decline in futures prices is the direct result of the declining cost of Brent crude and other crude oil, which gasoline is made from. Tensions easing with Iran over its nuclear program and signs of a slowing global economy have helped drop the cost of a barrel of Brent crude oil from over $125 in early April to its current price of under $120 a barrel.

Futures contracts are defined as financial instruments that buyers and sellers of large amounts of any commodity, such as gasoline, use to set prices. The current drop in gasoline futures should be reflected at the pump within the next several weeks. This decline has already begun, as prices have dropped from $3.95 a gallon in early April to $3.84, according to AAA.

“We’re certainly going to see prices move lower at this point,” said Stephen Schork, publisher of the industry newsletter the Schork Report. Schork also indicated that the decline in retail gas prices might not be as steep as that in the futures markets.

“If we don’t have any supply issues or refinery outages, we’ve seen the highs for the summer,” said Schork.

Demand for gasoline continues to be strong despite low stockpiles in Europe and along the East Coast of the United States. The idling of several East Coast refineries, which are having trouble turning a profit due to the fact they can only process light, sweet and expensive crude oil from Europe and Africa, over the last few months has given analysts cause for concern as they watch for potential supply disruptions. If these refineries were to permanently close, it would take approximately 50% of the East Coast’s refining capacity offline. This may cause wholesale level gasoline supply shortfalls.

“Unplanned refinery outages and a further improvement in the U.S. economy could still create further upside risks to gasoline in May and June,” Merrill Lynch analysts wrote in a recent research note.

Let us hope the risk factors continue to improve, and the current trend of declining prices at the pump continue.

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