New York - U.S. gasoline prices at the pump have broken out of a four-month slump, hitting $2 a gallon, but weak demand will likely keep prices from soaring this summer.
The average price of retail gasoline in the U.S. has climbed more than 11cents a gallon in the past month to $2.046 a gallon Monday, according to the Energy Information Administration, the statistical arm of the Department of Energy. Rising prices in the early spring are an expected seasonal pattern, but this year's price increase doesn't signal a return to seasonal trends usually witnessed during more stable market conditions.
Without a resurgence in demand, prices may not rise significantly during the summer driving season from Memorial Day to Labor Day. Growing unemployment, a preference for cars with better gasoline mileage and lingering economic worries may keep demand low, depressing prices.
"This has been a demand-driven market," said Dave Hackett, president of with Irvine, Calif.-based Stillwater Associates LLC. Gasoline consumption has fallen as prices last year that topped $4 a gallon prompted drivers to buy cars with better gasoline mileage.
The Obama administration's task force on Detroit's automakers has stressed the production of fuel-efficient vehicles, to conform with consumer preferences and government standards.
The administration's focus on reforming the automakers, including Chrysler LLC and General Motors Corp. (GM), could result in the creation of a vehicle fleet that complies with more stringent efficiency standards, thus further reducing gasoline demand. The Obama administration could use bankruptcy protection filings to split GM and Chrysler into "good" and "bad" components, The Wall Street Journal reported Monday, citing people familiar with the matter. In its leading plan to address the auto maker's troubles, the government would like to purge the companies of the biggest problems, including their onerous debt burden.
Falling auto sales, which have exacerbated the financial struggles of auto companies, have accompanied falling gasoline demand as unemployment has risen. About a third of gasoline consumption in the U.S. is work-related, so an increase in the number of jobless will continue to cut fuel demand, said Tancred Lidderdale, a petroleum supply analyst at the EIA.
The national unemployment rate was 8.1% for February, the most recent month for which data is available. Despite the current economic stimulus measures adopted by Congress, some economists have forecast growing unemployment through the end of the year.
As the newly unemployed quit commuting, gasoline demand may not pick up enough to offset rising production from U.S. refineries.
Flooding The Market
Ordinarily, refiners perform annual maintenance in the spring, cutting back production as they prepare their units for the summer driving season. During this downtime, they are able to liquidate winter-grade gasoline, a blend that cannot be sold in the summer due to environmental requirements.
This year, most refiners shut their units early in the year, due to low demand for gasoline. As a result, inventories fell in February, prompting a rise in pump prices to rise.
As these units return to service, they're producing gasoline that refiners will have to sell before the grade change. The additional supply may dampen the price of gasoline this spring said Ann Kohler, an analyst with Caris & Co., a New York-based investment bank.
Demand for the past four weeks has been about 0.5% below last year's levels, said Kohler, citing preliminary federal data. This demand decline may make it difficult to absorb this additional production.
"Realistically, we're prepared to see demand flat," said Jeff Lenard, a spokesman for the National Association of Convenience Stores, a trade association representing gasoline station owners.
A sudden spike in crude prices could also drive gasoline prices up. While there was a run-up in crude prices from February to last Thursday, the price of benchmark crude futures dipped below $50 a barrel Monday.
Source: COMMODITIESCONTROL
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