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.
Consumers 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 two and a half 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 across 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.
Commodity prices began to rise in late August. That's when the Federal Reserve signaled its intention to embark on what eventually became a $600 billion government bond-buying designed to push down interest rates, boost stock prices and jolt the economy.
But the dollar fell as a result. Investors knew the Fed would be flooding financial markets with U.S. currency. Many of those dollars poured into commodities, pushing them ever higher.
Other factors such as concern about Middle East oil supplies and China's demand for raw materials contributed to the momentum in commodities buying. Analysts warned it was overdone. When the dollar rose this week - and reports suggested demand for commodities was weakening in the U.S. - that was a tipping point for many investors.
"You had the sense that the price had gone up too far too fast," said Michael Lynch, president of Strategic Energy and Economic Research. "People were leaning against the door and waiting for a signal."
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.
Before Friday, the price of gasoline had increased every day since March 23. It's been on an upward trend with oil over the past few months as the Libyan rebellion cut off the country's oil exports, the dollar fell and numerous refineries shut down due to power outages and other unexpected problems.
Gasoline prices also tend to rise every spring as refineries follow federal regulations to produce summer gasoline blends that evaporate less readily and are more expensive to make.
Andrew Lipow, president of Lipow Oil Associates in Houston, said problems with U.S. refineries have been resolved and gasoline supplies should start to grow this summer as refineries get back into gear.
"Combine those extra supplies with still rather high gas prices, and you're going to see continued pressure on gas prices throughout the summer" to fall, he said.
Gasoline dropped a tenth of a cent on Friday for a national average of $3.984 per gallon, according to AAA, Wright Express and Oil Price Information Service. Gas prices are still $1.06 more per gallon than they were a year ago. The average is also higher than $4 in 13 states and Washington, D.C.