Falling Gasoline Prices: A Temporary Relief for Inflation

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In recent months, falling gasoline prices have served as a breath of fresh air for Americans, providing some relief from inflation. However, investors should not expect this trend to continue indefinitely.

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The Recent Numbers

The October consumer price index (CPI) report, released on Tuesday, indicated a 5% decrease in gasoline prices from September, after adjusting for seasonal factors. On an annual basis, gasoline prices dropped by 5.3%. As a result, the inflation rate also experienced a decline, dropping to 3.2% on an annual basis compared to the previous month’s 3.7%.

What Lies Ahead?

When the November numbers are revealed next month, it is expected that gasoline prices will continue to drop. However, the impact on the overall price index may not be as significant in the coming months due to several factors.

Tom Kloza, global head of energy analysis at OPIS, highlights the difficulty in predicting future gasoline prices. Currently, gas demand is weak and is expected to remain so until the end of the year, potentially leading to further price decreases. Nevertheless, it is worth noting that gasoline prices typically reach their lowest point around this time of year and can rise significantly once demand rebounds.

Recent Trends in Gasoline Prices

Gasoline prices have been steadily declining in the past few weeks, reaching their lowest level in nine months. The average price per gallon at the pump now stands at $3.35, which represents a 7% decrease in the past month, according to AAA. In comparison to last year, Americans are saving approximately $165 million per day on gasoline expenses, as reported by Patrick De Haan, head of petroleum analysis at GasBuddy. Furthermore, in 12 states across the country, average prices have dropped below $3 per gallon.

Factors Influencing Gasoline Prices

Several factors influence the price of gasoline. Foremost among them is the price of oil, which has been declining due to concerns about global demand. Notably, Brent crude, the international benchmark, has fallen by 5% this month.

In conclusion, while falling gasoline prices have brought some relief to inflation, it is uncertain whether this trend will persist. Future fluctuations in gas prices will largely depend on demand and other market factors.

The Impact of Refining Oil on Gasoline Prices

One crucial aspect to consider is the profitability of refining oil into various products, such as gasoline. In recent months, an overproduction of gasoline by refiners has been the primary driver behind falling prices. As the market price dropped, the profit margins for refiners on gasoline decreased significantly. What was once over $30 per barrel a year ago has narrowed to less than $10 per barrel last month.

Refineries tend to reduce their operations as they undertake maintenance during the fall season, following the busy summer driving period. Consequently, there is always a decline in capacity during this time. However, this year’s recovery from maintenance has been slower than usual. In comparison to the previous year when global refineries were operating at 90.6% capacity, this year’s capacity stands at a mere 85.4%, marking its lowest level since January. The decrease in gasoline output increases the likelihood of prices rising as demand begins catching up with supply. Over the past few days, wholesale gasoline prices have started to climb, experiencing a 5% increase in the last three days alone and a 0.6% increase for the entire month.

Furthermore, the rate at which gasoline prices are declining each month is slowing down, suggesting that the overall impact of deflation may be less significant in the weeks to come. In October, pump prices fell by 9%, but they have only dropped by 7% over the past month.

When December arrives, it will become increasingly challenging to achieve sharp annual price declines when compared to the previous year. For example, in December 2022, gasoline prices fell by 13% to reach $3.32 per gallon.

While there remains a good possibility that gasoline prices will hover around their current levels or even dip lower in the next few weeks, it seems that the rapid decline has come to an end – at least for now.

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