Oil prices rose $2.74 yesterday to close at $108.97 on reports that OPEC doesn't plan to increase its production of crude oil anytime soon.
Meanwhile, U.S. gasoline prices rose to their highest level ever, with the average price of a gallon of regular unleaded gasoline rising to $3.34.
With the value of the U.S. dollar continuing to fall against other world currencies and China's demand for petroleum products continuing to rise, my research suggests that gasoline prices could advance to $4.00 per gallon by the end of August. Keep in mind that the summer driving season in the U.S. begins in less than a month and the Atlantic hurricane season officially begins on June 1.
This past weekend, Iran's oil minister said "The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world's oil, will maintain current production levels to preserve the oil price at $100 a barrel."
OPEC pumped 85,000 fewer barrels of oil per day during March than it did in February, as Nigerian output dropped to the lowest level in almost five years due to maintenance work at the country's Bonga field.
Meanwhile, most Wall Street economists expect the Federal Reserve to cut short-term interest rates again when its Federal Open Market Committee meets on April 30. Hence, there's a good chance that the exchange-value of the dollar will continue to fall during the weeks ahead and that oil prices will continue to rise; keep in mind that oil is priced in dollars.
Although many Americans feel that OPEC's plan to maintain oil production at current levels is unjustified, I remind you that inflationary pressures have risen dramatically in the Middle-East due to the falling value of the U.S. dollar. For example, consumer prices rose 8.7 percent, on average, in Saudi Arabia during February, following a 7.0 percent increase during January.
So, unless something is done to halt the dollar's decline, you should probably begin preparing for higher gasoline prices.
Higher oil and gas prices would likely bode poorly for the future direction of the equities market. In addition to taking another bite out of consumers' budgets, any further increases in energy prices could significantly constrain corporate profits during the months ahead by raising business operating costs.
I therefore urge you once again to not get overly confident in the recent rally in stock prices. My research suggests that stocks will trade in a volatile trading range for at least the next couple of months. Click here if you'd like to learn how to profit during a sideways market.
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