$3.80 gasoline coming soon to a station near you

The AAA Daily Fuel Guage Report continues to register steep declines in the retail price of gasoline. The national average retail price for a gallon of regular unleaded gasoline hit a peak of $4.114 on July 17, 2008, but has now fallen to $3.881, a decline of 23.3 cents, more than a 5% decline, and more declines are on the way. The media continues to rant and whine about $4 gasoline, but $3.80 will be here soon.

The wholesale price (September 2008 Gasoline RBOB futures contract) today is sitting at $3.0689 per gallon. Add 60 to 65 cents to the wholesale price to get to target retail price, which would be $3.66 to $3.71. That means we could see declines of up to 17 to 22 cents over the next week or two. That would certainly be a welcome relief to consumers.

We may only be halfway through the Summer driving season, but traders will increasingly be looking ahead to the Fall when retail demand for gasoline tapers off.

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