NEW YORK – Just shy of $4 a gallon, average U.S. pump prices are about to start falling and could hit $3.50 by summer.
You probably won’t see a change at the gas station this weekend. But relief will come soon because oil prices fell 15 percent this week, the steepest decline in 2 ½ years. Oil hit a two-year high of $114.83 in Monday trading. It closed Friday at $97.18.
The plunge was part of a sharp sell-off in commodities this week. Analysts say investors – demonized as “speculators” by some market watchers – got nervous that oil, metals and grains had risen over the past few months to unrealistic heights.
Their rush to sell knocked silver prices down 28 percent, sugar down 13 percent and natural gas down 10 percent.
While analysts cited reasons specific to each commodity, they had one common explanation for the pullback: the strengthening U.S. dollar.
Commodities such as oil and silver are bought and sold in dollars. When the dollar is weak, those commodities look cheaper to holders of foreign currency so they buy. Conversely, when the dollar rises, commodities look more expensive. So they sell.
Speculators, knowing this, tend to sell commodities and buy dollars if they anticipate the dollar will rise. That amplified this week’s retreat in prices.
“This move wasn’t about supply issues,” said Rich Ilczyszyn, senior market strategist at Lind-Waldcock, a Chicago futures brokerage firm. “It was people hedging and people investing.”
An index of the dollar compared with a basket of foreign currencies rose 2 percent for the week.
Still, traders say this week’s sell-off is very likely just a pause in a long-term upward trend for commodity prices. While prices could fall in the near term, a stronger U.S. economy and rapidly growing economies of Asia will continue to need food, energy and raw materials.
On Friday some commodities rose after a U.S. Labor Department report showed surprisingly robust job growth in April. Also, some investors saw a bargain in commodities after the big price declines earlier in the week.