AAA: Despite 'Demand Destruction,' Pump Prices on the Rise

Refinery production cuts, other potential supply disruptions counter weak demand

AUGUSTA, Va. -- The cost of gas continued to rise to unseasonably high levels this week, despite decreases in the price of crude oil, reported the Augusta Free Press. Reports show extremely weak gasoline demand; however, refineries are responding to this decrease in demand by cutting back on production, resulting in some upward movement in prices at the pump.

Gasoline prices climbed to the highest price in more than four months this week, reaching $3.50 Friday, up 3 cents in the past week, up 13 cents in the past month and up 38 cents since this time last year, said the report, citing AAA. Yet, gasoline prices remain 61 cents below the all-time record high of $4.11 set in July 2008.

According to AAA, while demand destruction both in the United States and overseas has weighed on crude prices, more dramatic downward price movement has been limited by speculation of a potential disruption to supply, as tension has continued to build with Iran.

At the same time, the impact of positive news for the U.S. economic recovery has been largely offset by bearish news surrounding the euro zone. Oil futures shrugged off dismal demand data and headed higher (around $100) Thursday, when Greek political leaders announced they had reached an austerity deal and unemployment fell; however, questions about the Greek financial reforms prompted concerns about economic downturn in Europe, sending crude oil lower Friday to settle at $98.67.

There has not been a $100-plus crude settle in almost three weeks, the report said.

In its weekly report, the Energy Information Administration (EIA) showed the nation's crude oil stocks rose by 304,000 barrels to 339.2 million barrels, in contrast to expectations of a several million barrel draw. Gasoline stocks rose 1.6 million barrels, to 231.8 million barrels, more than a projected 875,000 barrel gain. The four-week average level for petroleum demand sunk to 18.116 million barrels per day (bpd), the lowest 28-day level since April 1997 (177 months).

Since the beginning of 2000, there have only been nine weeks of sub-18 million bpd implied demand--including the four weeks seen this year. On a four-week average basis, gasoline demand is down 6.8% from last year.

"Despite weak demand, prices at the pump have been on the rise at a time when they typically see a seasonal drop, much to the dismay of motorists," said Martha M. Meade, a spokesperson for AAA Mid-Atlantic. "According to some analysts, speculation surrounding events in the Middle East, coupled with Northeast refinery closings, will steadily push gasoline prices up in the coming weeks and months, perhaps as much as 60 cents through the spring."

Gasoline prices have been rising so far this year, despite January typically being a month where prices decline before rising again in late February. Instead, prices have done the exact opposite and analysts believe the trend will continue into the spring and summer months.

Tom Kloza, chief analyst for Oil Price Information Services (OPIS), warned gasoline prices are likely to rise significantly over the next few months, especially in the Northeast, because of two Northeast refineries closing, seasonal demand and high oil prices. The Northeast is considered a "hot spot" for gasoline prices this coming season as two refineries along the Delaware River that typically provide fuel to the region close.

Citing Kloza, the newspaper said prices at the pump could jump 60 cents through the spring and reach $4 per gallon by Memorial Day.

Click here for AAA's report.