July 1 (Bloomberg) -- Gasoline futures tumbled and profit margins slipped 11 percent after the U.S. government reported that stockpiles rose a third week as refiners kept rates at a six-month high and demand was the lowest in four weeks.

Gasoline inventories increased 2.33 million barrels, or 1.1 percent, during the week ended June 26, the Energy Department reported today, more than the 2 million gain projected in a survey by Bloomberg News. Demand dropped a second consecutive week to the lowest since May 29.

“This is indicative of higher crude runs and lower demand, and is going to put pressure on refining margins,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Gasoline for August delivery, which became the front-month contract today, fell 4.3 cents, or 2.3 percent, to settle at $1.859 a gallon on the New York Mercantile Exchange. It was the lowest close in five trading days. Futures were trading at $1.9472 before the report was released at 10:30 a.m. in Washington.

Inventories are 0.3 percent above the five-year average for the period, according to the Energy Department.

Refinery utilization was almost unchanged at 87 percent of capacity. Finished gasoline production rose 0.2 percent to 9.24 million barrels a day.

Motor-fuel demand, as measured by what blenders and refiners supply to the wholesale market, fell 76,000 barrels, or 0.8 percent, to 9.05 million barrels a day. The four-week average was 0.9 percent above a year earlier.

Crack Spread

The difference between gasoline and crude oil, or the crack spread, based on August futures contracts, lost approximately $1.22, or 12 percent, to $8.77 a barrel, the lowest close for the front-month crack spread in three months.

“Consecutive weeks of stock builds in the middle of gasoline season and fairly boring demand points to refiners having to cut back runs to protect margins, but at least they’re doing their patriotic duty to keep gasoline cheap for the July 4 Independence Day holiday,” said Sander Cohan, an analyst with Energy Security Analysis Inc in Wakefield, Massachusetts.

Prices at the pump have also retreated as gasoline inventories rose.

Average pump prices for regular gasoline fell 0.3 cent to $2.63 a gallon on July 1, AAA, the nation’s biggest motoring organization, said today in its Web site. That’s the ninth consecutive decline and the lowest price since June 9.

Heating oil for August delivery dropped 2.2 cents, or 1.2 percent, to settle at $1.7657 a gallon, the lowest since May 29. The front-month contract rose 4.6 percent in June and increased 28 percent during the quarter, the largest gain since the first quarter of 2005.

Distillate inventories increased 2.9 million barrels to 155 million, the highest in 22 years. Demand for distillates, which include diesel and heating oil, is down 9.4 percent from a year earlier, based on the four-week average for the period, to the lowest since December 2003.

Tsakos Energy Navigation Ltd. Chief Executive Officer Nikolas Tsakos today said 60 million barrels of refined oil products are being stored on ships at sea.

“That volume at sea is going to weigh on the market come winter,” said Lipow.

To contact the reporter on this story: Barbara Powell in Dallas at Bpowell4@bloomberg.net

Last Updated: July 1, 2009 15:54 EDT