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Oil Price Trend May Be Good News For Consumers

Analysts changing tune on the cost of gas

August 6, 2008

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Oil prices are headed lower, and have been for a couple of weeks now. In trading on the New York Mercantile Exchange Wednesday, light crude hit $118 a barrel, down $30 from its high reached three weeks ago.

What's happened?

A strengthening dollar may have something to do with it, but it seems clear market sentiment has shifted. Traders buying and selling oil futures are now betting that the future price of oil is going lower, whereas all year long they've been betting that it will go up.

Previously, any bit of news about oil production or inventories would be interpreted in the most negative light, and serve to reinforce the rising price of oil. Now, traders seem to be putting an altogether different spin on essentially the same types of news.

For example, a hurricane plowed the Gulf of Mexico oil fields earlier this week without having much impact on the price of oil.

There was a fire this week affecting a Turkish pipeline that supplies oil to major Western markets. The market more or less shrugged it off. True, neither the storm nor the fire did any real damage, but these events might have been enough to send prices up several dollars a barrel last month.

Analysts say high prices have finally begun to affect the way consumers use gasoline, leading to a reduction in demand. But the U.S. Government's comforting news that oil inventories rose last week was offset by a surprising drop in gasoline supplies. Still, the hyper-reaction we could have expected from the market a month or two ago didn't occur. The price of oil continued its downward trend.

If the trend continues, consumers will see some relief from the high prices they are paying at the pump. Already there are some hopeful signs that the situation is improving. The nationwide average of a gallon of gas is down to $3.86, according to AAA.

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