Gas and oil prices are heading in the right direction, finally. But the reasons why might be no cause for celebration.
Traders drove down the price of U.S. crude oil 11% over the past two weeks and gas prices followed suit, dropping 12 cents a gallon to a national average of $4.90, travel club AAA said in its weekly gas price update.
Patrick De Haan, head of petroleum analysis for the price comparison website GasBuddy.com, said prices could continue dropping another 25 to 30 cents over the next couple weeks, barring a hurricane or other unforeseen supply problem. “We’re probably halfway done,” he said, referring to the price decline.
The price of a barrel of U.S. crude oil fell from a high of $122.75 on June 10 to $101.53 at one point during trading on June 22. On Monday, however, it was hovering back up in the $110 range.
According to AAA, the drop in oil and gasoline futures prices stemmed from traders’ concerns about an overall drop in U.S. economic activity following the Federal Reserve Board’s three-quarters-of-a-percentage point increase in benchmark interest rates on June 15 — the most aggressive hike since 1994.
While the Fed’s action was intended to curb inflation, economic analysts said it would slow economic activity by making it more expensive for businesses to borrow money, buy machinery and purchase commodities used in manufacturing. That in turn will cause them to slow hiring or even lay off workers, which would reduce discretionary income.
Economic slowdowns typically lead to downward pressure on oil and gasoline if fewer goods are being made, fewer trips are needed to move them, and fewer consumers are driving to stores to buy them.
De Haan said economic concerns are a big reason for the price drop, but another reason could be that oil prices rose as high as traders believed they could go, and many decided to pulling out of the market, triggering the decline.
“They get the jitters that the market is overbought,” he said. “When prices are that lofty, you don’t need a whole lot to turn them around.”
Fundamentals of the oil and gas market hadn’t changed significantly since prices hit record highs, he said.