Economy: Relief From The Gas Pump

This morning we got news that U.S. retail sales dropped in March. I reckon this is a response to the U.S. tax increases and to the high gas prices. The taxes won`t go away, but there is some relief at the gas pump.

According to AAA, an American automobile club, average U.S. gas prices are falling since March 18 (blogs.cars.com). The drop follows months of steadily rising gas prices.

The price of gas is closely connected to the price of oil, of course. But there are 2 different oil prices on the financial markets: There is a price for WTI (Western Texas Intermediate), the American type of oil, and then the price for Brent crude, the European & International type of oil. Today WTI closed on the market at $91.29 a barrel, Brent crude cost $103.11 a barrel (bloomberg). For some reason (pundits claim quality differences), U.S. gas prices ignore the American oil price and follow the price for Brent crude.

Until lately WTI and Brent Crude went separate ways. WTI came under pressure because US oil production & inventories were rising in response to high fuel high prices and technological progress (fracking & deep sea exploration). On the other hand, oil demand is shrinking (demand destruction) because consumers drive less and use cars which burn less fuel more and more often.

But the market for Brent Crude has ignored economic fundamentals and supply & demand. Instead the price of Brent crude has been rising recently because its supply depends to a large amount upon producers in the politically unstable Near Eastern region. Speculation about possible supply disruptions due to sanctions again Iran, the war in Syria and the Palestinian conflict caused many funds to bet on further rising oil prices and to invest in Crude which inflated the bubble more and more.

Since March the price of Brent is under pressure as a (tardy) response to the the ongoing mess in Europe, mixed economic news from the U.S. & China and a lack of new conceerns from Iran and other Near Eastern countries. It looks like many funds are fleeing from oil and switching into stocks which have been performing better.

Chances are high that prices for WTI & Brent will stay under pressure because of rising U.S. oil  production and the ongoing demand destruction. This could translate into lower gas prices in the forthcoming summer season. Cheaper gas would be a relief for consumers worldwide and could rekindle US retail sales in the coming weeks.