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Oil Prices Continue Their Retreat

Bearish signs for oil market are bullish for consumers

By Mark Huffman
ConsumerAffairs.com

June 22, 2009

The reason for the decline, however, might not be such good news. Beginning last week traders began to back away from commodities in general because economic recovery this year looks less certain. Fears of inflation, which had been a significant driver of oil prices, lessened with release of a government report last week showing prices remain almost deflationary.

Now, the World Bank has revised its economic forecast, suggesting the global recession may be deeper than expected. Traders are selling their positions, smelling a correction.

So far, we're just beginning to see the signs of that correction at the gas pump. The national average price of a gallon of self-serve regular dipped slightly today, from $2.693 to $2.690, according to AAA's daily Fuel Gauge Report. Gasoline prices have steadily climbed throughout 2009 – with most of the increase in the last two months – on the belief that an economic recovery will spur new oil demand.

It was belief in that long term economic growth – and shortages of supplies – that drove gasoline prices well over $4 a gallon last year. Last fall's economic meltdown also brought oil and gasoline prices crashing back to earth, with pump prices settling in the $1.50 a gallon range at the end of the year.

Last week's report by the U.S. Energy Information Administration showed supplies of gasoline remain plentiful, suggesting steadily rising prices have prompted recession-weary consumers to trim demand again. Gasoline inventories rose to 205 million barrels.

All of this appears to have created a marked change in market sentiment, which is the best news for consumers. Traders are now hedging their bets, no longer convinced that energy prices are heading higher. As a result, their actions are much less likely to keep bidding market prices higher.

Tetsu Emori, a commodities fund manager at Astmax Co. in Tokyo, told Bloomberg News that if oil prices for the August contract remain below $70 a barrel, he would take that as a bearish sign for the market.

But it would probably be a bullish sign for consumers.

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