Gas Price Bubble May Have Burst for Now

We may have seen the peak of gas prices this summer, as oil prices are coming down from all-time highs. Oil futures prices fell to $117 a barrel on Wednesday, a decline of 20% from the record $147 a barrel on July 11. This could signal the beginning of a bear market in oil prices. Oil futures traders are concerned that demand for gasoline will decline as the summer driving season ends, and that a slowing economy is reducing demand for oil. (Source: Bloomberg, Oil Falls 20% From July Record, Reaches Bear Market Threshold, August 6, 2008)

As traders have pulled out of commodities markets they are reinvesting in the stock market, driving the Dow up more than 330 points to 11,615. This could signal that the stock market is nearing the end of its bear market decline, begun in December 2007. (Source: WSJ, Cheaper Oil, Steady Fed Lifts Stocks, August 5, 2008)

What It Means to You

This doesn't mean that oil prices won't bounce up and the Dow won't plummet like a meteor before the summer's through. Like everything else in life, neither the commodities markets nor the stock markets runs in a straight line. Furthermore, most bear markets last 18 months, meaning the Dow may lanquish for another 9 months. However, as investors' money moves out of the commodities market, it needs to move into something else, and the stock market seems to be the next landing spot.

Your best bet is to talk to your financial planner about possibly adjusting your investment portfolio sometime in the next six months to be less defensive and take advantage of a potential upturn. Since changes in the stock market usually precede changes in the economy by about six months, expect economic indicators to still be low throughout the rest of the year. However, this flight out of commodities is yet another signal that there is light at the end of the tunnel...and it is not an oncoming train.

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Background Articles

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• Gas and Oil Prices - How Oil Prices Affect Gas Prices