Despite the increase in absolute demand compared to last year, the rate of increase since January is lower than the rate of increase through this time of year in 2005.

In contrast, total demand for distillate (all uses) is down 3.6% for the same four-week period, from an average of 4.246 million barrels per day a year ago to 4.095 this year.

The EIA issued an optimistic forecast of the prospects for gasoline prices as part of its report, indicating that:

...while some stations have already posted prices for regular gasoline that exceed $3 per gallon and it is certainly possible that average retail prices across the country could reach that level sometime this year, EIA is not forecasting prices that high, on average, over a whole month. Our forecast assumes that there are no major problems in US refineries, pipelines, or any part of the distribution chain. It also assumes that no additional oil production disruptions occur overseas.

The primary factor underlying its assessment is the projected return to production of a larger-than-normal amount of refinery capacity that is currently offline.

Three refineries on the Gulf Coast shut down by last fall’s hurricanes are only now reportedly beginning to return to operation, or soon will be. Additionally, some refineries that were not damaged by the hurricanes deferred planned fall maintenance until this spring, so as to maximize production immediately following the hurricanes.

As a result of the loss in capacity, gasoline production for the most recent four-week period was down 457,000 barrels per day, while gasoline demand was up slightly compared to last year.

As a result, finished gasoline inventories have been pulled down sharply, dropping more than 20 million barrels over the past four weeks, despite large volumes of imports. However, as these refineries return to full operation, gasoline production should increase, thus adding much-needed supply into the system.

While demand will generally increase as we move closer to summer, increased domestic production, in addition to the expected continuation of significant volumes of gasoline imports, should be enough to cause prices to begin to fall again, albeit not nearly as much as they have increased. Whether this occurs later this month or next, EIA does expect prices to begin to come down. While the average US price of regular gasoline could reach $3 per gallon sometime this year, that outcome is by no means a foregone conclusion given the current market situation.