This summer's gas price forecast better than last

Gasoline prices, which surprised many by jumping 27 cents a gallon in the past month, may be within 10 to 15 cents from topping out, some energy experts say.

The argument for gasoline prices stabilizing or declining goes like this: The US economy is still not out of the woods. In fact, demand for gasoline remains moderate. And, if gasoline prices continue to rise for whatever reason, refiners will step up production since they have plenty of spare capacity.

“We’ll see supplies start to come back and that will take edge off,” says Sander Cohan, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. “Prices usually peak after Memorial Day, perhaps sometime in June.”

But for this Memorial Day weekend, the rising prices – now at $2.36 a gallon according to AAA – mean it will cost more to get to Uncle Joe’s annual backyard barbeque.

“It will just be a minor increase in the cost of the trip,” says Geoff Sundstrom, a spokesman for AAA, the national motor club based in Heathrow, Fla.

Americans plan to drive 640 miles this weekend, AAA found in a survey. Factoring in the nation’s average fuel economy, this will mean the trip will cost an extra $6.97, hardly a budget breaker.

Lower fuel prices compared with last year are a prime reason AAA recently predicted that travel this Memorial Day will rise by 1.5 percent, or 500,000 travelers, compared with a drop of 10 percent last year when gasoline prices were $3.94 a gallon, $1.58 higher than this year.

“More worrisome is the effect on the overall economy and the consumer outlook depending on the degree society is fearful of a return to much higher gasoline prices,” says Mr. Sundstrom.

Some energy experts – many of them surprised by the current run-up – don’t think consumers need to get worked up. Mr. Cohan predicts gasoline prices at the pump will peak at $2.45 a gallon and then come back down. But, he admits being nervous about the forecast.

Other energy analysts forsee the price of gasoline continuing to rise because most of the increase is linked to the rising price of oil. At $60.61 per barrel, oil is up the equivalent of 31 cents a gallon in the past month compared to 27 cents a gallon for gasoline.

“Our projection is that oil is now heading for $70 to $74 a barrel, then hopefully it stabilizes,” says Phil Flynn, director of research at Alaron Trading in Chicago. “Then, it depends on the economy from that point forward.”

Mr. Flynn says the main reason the price of oil has moved up so quickly is that international buyers are beginning to hedge against a pick-up in inflation. “Government policy and Federal Reserve policy is driving up commodities,” he says. “Then, the oil price gained momentum on the rising budget deficit at the same time the dollar got whacked.”

Flynn says one of the big buyers of oil has been the Chinese. In his view, they are getting tired of lending the US money and then watching the value of their holdings drop as the dollar weakens. “So, now they are spending all those dollars they have on commodities,” he says. “I think they believe holding oil is a better investment than dollars in the bank.”

However, Paul Ting, an expert on the Asian fuel situation, says the demand for petroleum products is also improving in China. In January, demand for oil was off 10 percent compared with a year earlier. Demand today is only off 2 percent compared with last spring.

“So, some of the buying may be that they actually need the product,” says Mr. Ting, who is president of Paul Ting Energy Vision, based in Short Hills, N. J. One sign of this, he points out, is that exports of gasoline and diesel from China are slowing as domestic demand is rising.

Some of the recent price rise in oil could also be related to other global factors, such as an upsurge in fighting in the oil-producing delta region of Nigeria. Government troops are battling disgruntled residents who periodically disrupt oil pipelines. Some analysts say oil production from the country, an important supplier to the US, is off by nearly 1 million barrels of oil per day.

In the past, such disruptions overseas could cause the oil markets to rise. But now some analysts think there might be a cap on the ability of oil to climb – the rising unemployment rate in the US. Compared with a year ago, demand over a four-week period for gasoline is running about 250,000 barrels per day lower, according to the Energy Information Administration.

“Because of the unemployment situation, I think we will see consumer resistance to price hikes early,” says Mike Fitzpatrick, an analyst at MF Global in New York. “If we approach $3 a gallon, we’ll hit the squawk level,” says Mr. Fitzpatrick.

However, Fitzpatrick doesn’t think gasoline prices will get that high. He thinks it will peak by July 4 at $2.60 to $2.70 a gallon and as much as $3 a gallon in California.