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The Double Edge of Cheap Gasoline — and It's Getting Even Cheaper

Gas prices could fall another 10 percent or more, and while that's good for consumers, it may not be so for investors.
A motorist pumps fuel into his vehicle at JJ's Express Gas Plus station in Phoenix gas station in Phoenix
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Gasoline prices — at $2.16 per gallon nationally — could fall another 10 percent or more, and while that's good for consumers, it may not be so for stock market investors.

That's because there's now a glut of gasoline, and that is pressuring oil prices. The oversupply of crude in world markets turned into a product glut this summer, with refiners producing more gasoline and diesel than is needed, even with near-record high demand. Oil prices have been falling, and on Monday, the shares of energy companies dropped too. The stock market and oil prices are less in sync than they have been, but there is still a connection.

Analysts say there's simply too much gasoline and too much oil, and prices fell early this week amid crude supply concerns. West Texas Intermediate oil futures dropped 2.4 percent to $43.13 per barrel. According to AAA, the national average for unleaded gasoline is down 15 cents in a month.

"These are the cheapest gasoline prices for the end of July since 2004. There's 36 states where you see gas less than $2 a gallon. The really cheap prices will be between Labor Day and Election Day," said Tom Kloza, global head of energy analysis at Oil Price Information Services. Kloza expects the national average to fall below $2 per gallon, and said another 10 percent decline could easily be in store.

The drop in crude oil has not been unexpected, and John Kilduff of Again Capital said it could bottom in October. That's because refiners, now running at high levels, will be shutting down for maintenance in the next month or two, using even less oil, as they make a switchover for winter fuel production.

"Q4 is artificially high demand season for the Northern Hemisphere because of the winter. If there's a chance for the market to balance it will occur then," said Kilduff. He warned, however, that last December was quite warm, and demand was low.

In the latest weekly government data, consumers used 9.8 million barrels of refined gasoline while refiners manufactured 10.1 million barrels.

"I think you could make the argument that you've got some weakness between now and when refiners take their equipment down because there's too much gasoline and too much diesel," said Kloza. "That could bring crude to $39 to $40. For crude oil and gasoline, I think the bottom comes during campaign season this year."