Gasoline prices have recently been declining, and many experts believe are likely to remain low for weeks or even months. This is due, in part, to increased gasoline production while demand is likely to remain stable or slightly decrease. This partially explains the falling gas prices.

Larger economic factors in fuel markets suggest prices will continue to drop through the year-end. Despite a spike in oil prices, the average U.S. gasoline price decreased to $3.68 per gallon, and even if oil prices rise, it’s unlikely to impact gasoline prices significantly. Changes in the economics of oil refining are currently driving gas prices more than broader oil industry changes.

That said, as consumers, we may be wondering why and how these changes have occurred. Let’s explore three main factors that contribute to the falling gas prices.

Understanding the Crack Spread

Before anything else, let’s discuss the crack spread and its relation to gasoline prices.

A crack spread represents the pricing gap between crude oil and its refined products, including propane, gasoline, jet fuel, diesel fuel, and grease. It’s an industry-specific gross processing margin based on separating crude into these components.

The prices of crude oil and its refined products don’t always align perfectly due to various factors like season, weather, and global supplies. This affects profit margins for refiners. To manage pricing risks, refiners employ futures to hedge the crack spread. Futures and options traders utilize the crack spread for hedging and speculating on oil and refined product price changes.

To hedge against these risks, refiners typically used traditional crack spread strategies. This involved buying and selling oil futures for gasoline, heating oil, or other distillates they produce from these barrels. The goal was to secure a profit by creating a significant positive spread between crude oil and refined products, where crude oil is much cheaper than refined products.

Correlation of Crude Oil and Gas

Crude oil and natural gas prices exhibited limited correlation, though a positive connection might seem logical given their production relationship. Market dynamics and fundamental factors differed significantly, resulting in generally low correlation, with sporadic positive periods.

The correlation coefficient gauges the price movement alignment between natural gas and crude oil. It measures the degree of price association on a scale from -1 (perfect negative correlation) to +1 (perfect positive correlation), with 0 indicating no relationship. Investors often use it to assess portfolio diversification.

Analysts Expect Lower Gas Prices

Households experiencing financial strain due to rising prices saw some relief as gas prices started to decrease, and further declines were anticipated. Over the past week, the national average gas price dropped by 7 cents, a nearly 2% decrease, according to AAA data.

Patrick de Haan, the head of petroleum analysis at GasBuddy, suggested on X (formerly Twitter) that prices could fall by up to 50 cents by the end of the month.

The national average gas price is $3.72, the lowest since July. By month-end, it’s expected to be around $3.20. October should bring falling gas prices across all states. In Georgia, where gas is cheapest, it’s about $3.18 per gallon. Ten states sell gas at or below $3.35 per gallon on average.

California’s gas prices were the highest at $5.88 per gallon, but even there, prices fell about 6 cents in a week. A substantial drop in oil prices, down 13% monthly, drives these declines. California is expected to see a $1/gallon drop by Thanksgiving.

Gas demand dropped as summer travel slowed down, contributing to falling prices. “Drivers now find relief as the seasonal slowdown takes hold,” explained Andrew Gross, AAA spokesperson.

Expect Gas Prices to Continue to Decrease

OPEC and its allies lowered production to raise oil prices, with Russia and Saudi Arabia reducing supplies by 300,000 and 1 million barrels a day, respectively. This caused a diesel shortage, boosting diesel margins from $10-15 to $40 per barrel. Refiners increased diesel production in response.

Refiners increased gasoline production alongside diesel. While three barrels of crude oil yield two barrels of gasoline and one of diesel, low gasoline demand, hitting a 22-year low, and reduced margins, down to one-third of last year’s levels, deter further production growth.

That said, if there’s a concern with this trend, it would be that refiners could go too far and overproduce diesel. If consumer demand remains low, it could result in an oversupply situation. However, as of now, gasoline prices are expected to remain stable or decrease shortly.

Even with ongoing geopolitical tensions and market fluctuations, the outlook for gas prices remains optimistic for consumers. By understanding the relationship between crude oil and gas prices, as well as various market factors, individuals can better prepare for potential changes in gas prices and make informed decisions about their energy usage.

On the date of publication, Chris MacDonald 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.