Gasoline Soothsayer

$1.97 sounds cheap, and after paying $2.15 for the last three weeks I guess it is. But, when I returned home and had a chance to think about it, I became a little confused. Why am I so excited? What's the big deal? If I saw that price six months ago I'd figure it came with a free car wash or discount tickets to a baseball game. I then realized that I'd become accustomed to paying out the nose for gas and seeing the first drop in prices in months is what got me excited.

Back in March, I wrote regarding gasoline pump prices and where they'd be by Memorial Day. If you recall, I used simple algebraic equation using that day's unleaded gas contract price, that day's national pump average and the futures price and pump average from last Halloween to calculate a June price of $2.01 per gallon. That estimate was pretty close to the mark.

So, after my $1.97 fill up and hours of pondering, I decided to take another crack at estimating pump prices for the middle and end of summer...So here we go!

Gasoline futures for July delivery were trading last Thursday at $1.18. A quick algebraic equation using the same futures/pump price numbers from last October as a constant gives me a national pump price average of $1.93 in July. This means that gas prices, barring a major terrorist attack or OPEC crude supply cut, should continue to fall through June. OPEC has already increased output and may do so again in September, so OPEC will only pressure prices to the downside...at least for now. We should see the national average pump price fall by about 10 cents in the next five or six weeks.

Unleaded gasoline futures for August delivery are now trading at $1.14. The same simple equation gives a price of $1.76 per gallon at the pump by mid to late August...a bit more reasonable, but unlikely. Considering the fact that gas stations are quick to increase prices and slow to decrease them, a price of $1.83 would be more like it, but rest assured, prices will fall.

What about the rest of the year?

While I can quickly review autumn gasoline futures contracts, the delivery date is so far in the future that price swings are likely making this prediction much more difficult. Anyhow, September gasoline futures are trading at $1.10, October at $1.09, November at $1.04 and December is trading at $1.02. Plugging these figures into my equation gives pump prices of $1.72, $1.71, $1.65 and $1.63 respectively. While the market is currently predicting lower prices in fall, it's just too early to call these figures accurate.

Remember though, these estimates are simply that...estimates. While I do figure pump prices should fall by 10 to 20 cents per gallon by fall, they may not. There are simply too many factors to accurately predict gasoline prices in a simple math equation.

It is much easier to predict pump price increases using futures trading than it is to predict pump price decreases.

If you have plans of taking a summer vacation, you may want to wait until August to do so, especially if you're driving. The good news is prices should continue to fall all year.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."