Published: 08 Jun 2009 17:34:53 PST

* Lower prices boosting demand in United States

* Signs of economic recovery could boost consumption

* But demand may never return to 2007 peak

NEW YORK/LONDON, June 8 - Demand for gasoline in the United States looks set to be stronger than first predicted this summer, as the slowing pace of economic deterioration and improving consumer confidence sees more drivers hit the road.

Compared with robust historical levels demand still appears anaemic, and may never return to the peak consumption of two-years ago.

But some industry watchers bet the six-week rally in U.S. gasoline and oil futures has solid fundamental roots.

Wholesale New York RBOB gasoline prices have risen by more than 40 percent since mid-April, from around $1.40 a gallon to almost $2 a gallon on Friday, dragging the entire oil complex higher.

"We are looking at the gasoline market to finally show growth this summer over last year, when demand was hobbled by record prices, " said Tancred Lidderdale, an economist with the U.S. Government's Energy Information Administration (EIA).

The EIA forecast last month U.S. gasoline demand would rise to average of 9.15 million barrels per day (bpd) in June, up from the 9.07 million bpd consumed in June 2008.

Demand in June 2007 was 9.49 million bpd, before hitting an all-time peak of 9.64 million bpd the following month -- a level many analysts now see as unlikely to be surpassed near-term as motorists switch to more fuel efficient cars.

The key reason for demand recovering was lower pump prices.

Last year, drivers paid an average of $3.98 a gallon for gasoline; this year the price is around $2.50 a gallon, despite rising wholesale prices.

"We are looking at a more normal seasonal trend in gasoline prices. In general, the economy is weaker this year but that is more than offset by lower gasoline prices, " Lidderdale said.

THE RETURN OF SUMMER VACATIONS?

U.S. gasoline demand historically peaks in July as millions of Americans pile into their cars and head for beaches, mountains and lakes for their summer holidays.

Last July as crude oil prices hurtled toward the $147 a barrel peak, many U.S. families panicked by high pump prices opted for a "staycation" rather than a vacation, driving down gasoline demand to the lowest level in years.

Lower pump prices combined with the onset of warmer weather may have some drivers rethinking summer vacation plans.

"There will definitely be a pick-up this summer but it's coming off a low base. We've already seen U.S. demand jump above 9.5 million barrels per day last week for the first time in 21 months." said Amrita Sen, oil analyst at Barclays Capital in London.

"For people that are taking a holiday this year, many of them would much rather drive than fly because of the recession."

Data from a MasterCard SpendingPulse report showed more Americans drove this year than last on the long Memorial Day weekend, the traditional kick-off to the summer driving season.

Demand for gasoline was up 2.2 percent, the report showed, in line with travel and auto group AAA's forecast before Memorial Day which predicted a 2.7 percent jump in holiday auto travel.

At the same point last year demand was plummeting by almost 5 percent year-on-year as record prices and the initial stages of the recession curbed consumer behaviour.

A recovery in consumer confidence could also see demand pick up. While the economy is still in the doldrums, U.S. consumer confidence has improved as the rate of economic decline slows, leading to hopes from retailers people will soon be more comfortable spending again.

THE ECONOMY TRUMP CARD

To many economists and analysts, the larger picture of job concerns and economic uncertainty remain bleak enough to override lower gasoline prices, keeping any recovery in U.S. gasoline consumption in check.

"Demand expectations might be getting a little bit ahead of themselves, " said Antoine Halff, Vice President of Research at NewEdge in New York.

"It's really a question of judgement at this stage as none of the models we have for predicting demand have historic data for a recession of this magnitude."

U.S. unemployment has soared to its highest level in 26 years and some analysts think that will mean the U.S. consumer is less capable or willing to absorb price increases at the pumps, even if they are well down on last year.

The rally in wholesalse prices is yet to fully filter through to consumers, threatening to stall the pick-up in demand dead in its tracks.