Falling gasoline prices - $4 becoming a memory

The AAA Daily Fuel Guage Report continues to register a steep pullback in retail gasoline prices over the past two weeks. The national average retail price for a gallon of regular unleaded gasoline hit a peak of $4.114 on July 17, 2008. In only twelve days the price has fallen 17.3 cents to $3.941 per gallon. I am sure there are plenty of consumers glad to see that "3" handle in prices again, although the media still cannot resist referring to "near $4" gasoline. More declines are on the way, and they will be fairly dramatic.

The wholesale price (August 2008 Gasoline RBOB futures contract) closed Tuesday at $3.0015 per gallon. Add 60 to 65 cents to the wholesale price to get to target retail price, which would be $3.60 to $3.65. That means we could see declines of up to 29 to 34 cents over the next week or two. That would certainly be a welcome relief to consumers.

OTOH, the sharp declines in crude oil and gasoline and other commodities could simply be part of a short-term trading move by speculators which could reverse at any moment and reclaim all of the recent declines and then some in a matter of weeks if not days. Hard to say for sure.

The three big wildcards are that we do not know: 1) what the hedge funds are thinking in terms of their asset allocation plans for commodities over the short and medium term, 2) what the invesment banks are recommending to their institutional clients as far as asset allocations for commodities, and 3) what the in-house proprietary trading desks at financial firms are planning as far as their asset allocations. These are the three key variables which will drive commodities price swings until we get to a stage where all three groups finally lose interest in commodities and drive their commodities allocations to zero and we return to a normal commodities market with garden-variety "mom and pop" traders and speculators rather than an environment in which commodities are (misguidely) treated as an "investment class."

-- Jack Krupansky