Oil price update

Crude oil prices have fallen rather sharply since late February, down almost 25%. This is likely the result of oil production being up, demand being a little softer than expected, and crude oil inventories reaching a new all-time high (but only 3% above their year ago levels). In other words, crude production responded to the high prices we saw earlier this year by increasing, and demand responded by weakening. Consumers are now breathing a little easier as prices decline to a new clearing level.

Gasoline is still pretty expensive, but the good news is that it's going to get cheaper, as suggested by the second chart above. This chart compares the price of wholesale gasoline futures (white line) with retail gasoline prices at the pump (orange line). Note how retail prices lag futures prices, which is what you'd expect. With the recent declines in futures prices, we can expect gasoline prices at the pump to fall to $3.30/gal. or less in coming weeks; that would represent a decline of at least 15% from the early April highs, and possibly more before all the dust settles. It was just a few months ago that the market fretted over the possibility that rising gasoline prices would amount to a significant headwind to growth, but now that risk is fading.

Meanwhile, the huge decline in natural gas prices in recent years is acting as a big stimulus for the economy, transforming entire industries as they switch from more expensive energy sources to very cheap natural gas.