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("=Gasoline Prices Headed Lower But Unclear If Travel Will Rise," at 6:03 p.m. EDT, misstated the gasoline futures month in the 13th paragraph. The correct version follows:) By Naureen S. Malik Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Gasoline futures dropped below $2 a gallon Thursday, good news for U.S. drivers heading into the busy July 4 travel weekend. However, even with the expectation that prices at the pump will fall in the days and weeks ahead, it remains unclear whether consumers will take the bait. Falling retail gasoline prices should be a cause for some celebration among consumers, especially since gasoline doesn't appear to be marching toward $3 a gallon as it was this spring. But even though demand has picked up in part of the country, consumers continue to demonstrate uneasiness as employment and housing numbers remain worrisome. "We are starting to see a bit of a pickup [in demand] and the Fourth of July weekend will determine if that pickup continues" as long as prices remain low, said John Gamel, director of economic analysis for MasterCard Advisors SpendingPulse. Gasoline consumption is weak on the West Coast, the Gulf Coast and the Southeast while the Midwest is showing signs of stabilizing demand, Gamel said. Fuel distributors and retailers hope that further declines in retail prices will push consumers to take more road trips by easing the strain on their wallets. "We are cautiously optimistic" that low prices will encourage consumers to drive, said John Phelps, president of Carroll Independent Fuel Co., a Baltimore-based fuel distributor. "We do well when gasoline prices fall." Car travel is expected to increase 18% this weekend compared with last July 4, according to a June 23 report by travel and leisure group AAA. That projection came out, however, before a spate of disappointing data this week cast doubts on the economic recovery. In addition, supply disruptions caused by what is expected to be an active hurricane season in the coming months could cause gasoline prices to spike. Consumers are very sensitive to increases at the pump. The memory of gasoline prices north of $4 a gallon in July 2008 is still firmly entrenched in consumers' minds. In the meantime, fuel distributors, analysts and traders said a test of confidence is being played out over the economy with every economic data release. "We are going to have some pretty serious volatility for some time," said Michael Theesfeld, an independent futures trader. Benchmark gasoline futures contracts for August fell 3.1% to $1.9976 Thursday on the New York Mercantile Exchange, closing below the $2 level for the first time since June 8. Prices have fallen 18% since rallying to a 2010 high of $2.4351 May 3. Retail pricing activity has been almost entirely driven by volatility in crude-oil prices, which are driven more by economic expectations rather than fundamentals of supply and demand. Crude-oil prices fell 3.5% Thursday to settle at $72.95 a barrel following disappointing U.S. reports on jobless claims, manufacturing and housing. As long as crude-oil prices stay at these levels, "we might expect to see some drop in [retail] gasoline prices, possibly by late next week," said Tancred Lidderdale, a senior economist at the U.S. Energy Information Administration. Unusually high fuel inventories across the U.S. have kept retail prices low. This dynamic has played out on the West Coast, the U.S.'s largest gasoline market, where prices have risen just 5.3% from January through June 28. They typically post double-digit percentage gains during this period in anticipation of the peak summer driving season. In 2009, retail prices on the West Coast rose 58% in the first half of the year. Nationwide, retail prices rose 4.4% to $2.575 a gallon for the week ended June 28 after posting five consecutive weekly declines. "We are going to see a precipitous decrease in [retail] gasoline, which is very rare for the Fourth of July" time frame, Theesfeld said. "The question is whether or not they hit prices this weekend or whether retailers will wait until after the holiday to lower prices." -By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com (END) Dow Jones Newswires July 01, 2010 21:12 ET (01:12 GMT)