Lower gas prices this Memorial Day... weird

By Chavon Sutton and Ben Rooney, staff reporters


NEW YORK (CNNMoney.com) -- Gas prices have been drifting lower over the past few weeks, which is welcome news for drivers who are gearing up to hit the road for Memorial Day weekend.

Gas prices have fallen about 6% in the last 22 days. The average price for unleaded gas sits at about $2.75 a gallon, according to motorist group AAA, down 18 cents from $2.93 a gallon. And prices are nearly a third cheaper than the record highs hit in the summer of 2008.

Analysts say the decline in gas prices is unusual at this time of year. Prices normally rise ahead of the Memorial Day weekend, which is the official start of the summer driving season.

"It's a bit of an oddity that gas prices are trending downward ahead of the official driving season," said James Cordier, president of Liberty Trading Group.

The reason for this reprieve at the pump, analysts say, is a stubbornly high level of oil inventory, which has helped to drive down crude prices, making gasoline cheaper for refiners to produce and thus, cheaper for consumers. Worries about the strength of the global economic recovery, fueled by Europe's debt woes, have also pushed down crude prices in recent weeks.

The Energy Information Administration said Wednesday that crude inventories had risen for 16 of the last 17 weeks. Crude prices, though up 17% over last year, are now down to $74.55 a barrel, well off highs of about $87 a barrel seen in early April.

The surplus is also one of the reasons why crude prices have not been impacted by the massive oil spill in the Gulf of Mexico. Indeed, since the leak began last month, when a well operated by BP was ruptured, the nation's oil supplies have increased by 7.3 million barrels, according to EIA data.

Although analysts are expecting average prices to level out at around $3 a gallon, they say gas prices could climb again as inventories fall and speculators return to the oil market.

Cordier says averages gas prices could fall another 10 cents to 15 cents to as low as $2.75 a gallon on average by Memorial Day weekend, before an "inevitable" climb up to $2.95 a gallon by late June.

"Eventually we'll have a draw on inventories and the speculator, who's alive and well, but not today, will be coming back into the market," said Cordier. "Crude is about $14 off its 2010 highs; so, it's looking like a bargain."

Other analysts say gasoline is still cheap relative to other consumer products, giving way to the possibility of a ramp-up in prices.

"We're paying more for our iPods and TVs in relative terms than gas. There is a cushion for retailers to increase gas prices," said Hamza Khan, a commodities analyst at The Schork Group.

Although 10 states including California, Connecticut and New York have already hit the $3 mark -- Hawaii and Alaska are above $3.50 -- analysts have said that the oversupply of crude oil coupled with excess capacity at U.S. refineries should keep a cap on prices for the holiday weekend.

"Crude prices seem to have found a home in the $70 to $80 a barrel range; so, gas prices should stay in the general vicinity they're in now," said Dr. Dan Seiver, a finance professor at San Diego State University. "So, enjoy it."  To top of page

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