Consumers Will Soon See Relief from High Oil Prices

April 17th, 2005 Leave a comment Go to comments

Oil prices experienced a mild pullback during the past week as weak economic data from the United States brought forth questions about the strength of the global economy. Despite the pullback last week, oil prices remain above $50/barrel. Many analysts have been predicting for months that the global economy would experience softer economic growth this year. The combination of high gas prices and rising interest rates has forced some consumers to limit their discretionary spending. The abruptness of economic pullback during the past month is somewhat surprising, but it is not untypical in comparison to past economic expansions. U.S. GDP growth during 2004 was the strongest in a decade. With the consumer bearing the brunt of the economic growth during the first half of this decade it is not surprising that consumers are finally taking a breather.

The return to more normal growth levels during this year will actually be beneficial to the economy. The exceptional growth rates over the past eighteen months have put significant strain on commodity producers. Hedge fund speculators saw an opportunity to take advantage of the limited excess capacity in order to bid up commodity prices, in particular oil prices. During the first few months of 2005, the strains experienced in the commodity markets have trickled down to consumers through higher inflation levels. As we go through 2005, we expect to see commodity prices return closer to their historical levels.

Among the most noticeable pullback in commodity prices should occur within the oil markets. During the past eighteen months high oil prices have been supported by exceptional growth rates, limited surplus capacity, and low interest rates. During the past few months crude oil inventory data from the United States has shown steady gains. The growth in inventory levels, thus far this spring, exceeds historical norms. As inventories continue to grow in the short-term, expect to see speculators take less interest in crude futures. We expect oil prices to steadily fall back toward the $35- $40 range by the end of the year.

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