Gas prices are dropping, but are consumers taking notice? With prices swelling beyond $5 a gallon at one point, many consumers are relieved to see gas prices retreat. In fact, prices at the pump have been in decline for 30 days now. It’s got investors asking two questions: Why are gas prices dropping and will it continue?
The main answer to the first question is oil.
Not only has the price of oil gone down, but global oil production has also improved. In March the price of crude oil was $130.50 per barrel when it hit its high. However, just a month ago, crude prices had climbed back to a high of $123.68. When the Consumer Price Index (CPI) report was released on Wednesday, it showed higher-than-expected inflation. Energy prices are a big driver for the CPI report and given the big rebound in oil and the rise in gas prices, no wonder the inflation numbers were hot.
Since then though, we’ve seen prices retreat. At this week’s low, oil prices were down more than 26% from the June high. As a result, investors have seen the Energy Select Sector SPDR Fund (NYSEARCA:XLE) suffer a 29.8% peak-to-trough decline.
We’ve seen gas prices dropping more recently as well — you may have even noticed on your commute. That reflects the decline in energy prices, as well as the likely lower demand for driving now that the Fourth of July holiday is over. Don’t forget how many people were traveling over the long weekend, with many opting to drive.
Can We See $4 a Gallon With Gas Prices Dropping?
So what does the future show for gas prices? While there’s still plenty of uncertainty, Patrick De Haan, the head of petroleum analysis at GasBuddy, believes that prices will continue to fall. He said, “Barring any unexpected refinery issues, hurricanes, and geopolitical changes, we could see the national average fall under $4 per gallon by mid-August.”
Specifically, De Haan believes that gas could drop to $3.99 by Aug. 14. As long as oil prices keep going down, gas stations should start lowering prices 1 cent or 2 cents every couple days.
In July 2021, gas prices averaged $3.15 a gallon across the country. While down from the $5.02 average consumers saw not all that long ago, the current $4.61-per-gallon average is still quite a bit higher than a year ago. However, if De Haan’s prediction comes to fruition, consumers will likely rejoice if and when they see prices start with a “3” next to the dollar sign.
Further, the U.S. Energy Information Administration (or EIA) estimates that prices will average $4.05 a gallon this year.
Through the first six month of the year, that average was $4.11 a gallon. Given the recent spike in prices though, consumers will need to see gas prices dropping later this year for that estimate to pan out.
For what it’s worth, the EIA estimates gas prices will average $3.57 a gallon in 2023.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.