You may have noticed the very low gas prices near you. While we all enjoy cheap gas, why are the prices falling? Because oil prices are. In recent weeks, oil has hit historic lows. So, yes, this means inexpensive gas, but even more, oil prices are an indicator of the overall state of the economy. They can even give us insights into where the market may be headed.

Why the falling prices?

From an economic standpoint, two basic factors drive the price of everything: supply and demand. On the supply side, there is a huge surplus. Oil producing countries are supplying more than ever before, and now that sanctions against Iran have been lifted, prices are expected to fall even further. Iran has the capacity to supply even more oil to an already saturated market.

On the demand side, falling oil is usually an indicator of a weak overall economy. When the economy is strong, countries demand more oil, as they use oil to produce goods and services. But when the economy is weak, countries produce less, and therefore don’t require as much oil.

With the European economy struggling, and China slowing down while it transitions, global demand is falling. Lower demand and higher supply have created the historically low oil prices we are seeing around us.

What could oil tell us about the markets?

The lower oil prices have taken their toll on the energy sector. Energy stocks have decreased in value, and the uncertainty over the future of oil prices has sent shockwaves into the rest of the market.

The lower prices hurt oil producing countries. This drag on the global economy may lead to more volatility in the market. Uncertainty will cause more swings in the market, and the lower prices fall, the more likely it becomes the market could enter into a correction.

Where are oil prices headed?

As Iran enters into the oil market, prices are expected to continue falling. There is no way to know by how much, but we can surmise with Iran’s additional supply added to a surplus, oil will become cheaper.

Furthermore, OPEC is unlikely to try and raise oil prices in the near future. Saudi Arabia is unlikely to support such a measure when they are rivals of Iran. In addition, Saudi Arabia, whose economy has traditionally revolved around oil production, has reported plans to diversify its economy, signaling their lack of confidence in the oil market.

All signs point to continued cheap oil for the foreseeable future. At least this will mean the price at the gas pump stays low for now.