By Laura Sanicola

U.S. gasoline prices are heading south and may hit $3 a gallon in many places in coming weeks with crude oil futures down $10 a barrel over economic fears and eroding demand.

The drop in gasoline prices could benefit consumers and cool inflation. But it also may be a sign of economic weakness with U.S. government data showing the four week average of gasoline demand at lowest seasonals in 26 years.

Before this week's drop, gasoline prices had posted a 7.4% jump in the third quarter, riding increases in crude oil futures after production cuts from Saudi Arabia, Russia and other OPEC+ members.

U.S. wholesale gasoline prices are tumbling, with percentage drops per gallon on Wednesday between 6.9% and 10.8%.

A flurry of weak economic data took more wind out of the market. Crude futures settled an eye-popping $5 a barrel lower on Wednesday, and fell another $1.66 on Thursday.

The four-week average of motor gasoline product supplied - a proxy for demand - averaged 8.3 million barrels a day, down 5% from the same period last year, the U.S. Energy Information Administration said on Wednesday. [EIA/S]

Demand data was partially influenced as drivers were deterred by severe rain and flooding on the U.S. East Coast.

Gasoline stocks built by 6.5 million barrels in the week, well above analysts' expectations.

"All told, fuel prices may be closer to consumers' pain threshold than inflation-adjusted prices might suggest," JP Morgan said in a note on Wednesday, indicating that high prices have led to consumers cutting back on driving.

The 3-2-1 crack spread, a proxy for refining margins, fell below $20 a barrel for the first time in 18 month on Wednesday, and is down nearly 40% in the past month.

The gasoline crack was $9.63 a barrel, the lowest pandemic-era shutdowns of 2020.

Gasoline prices, currently averaging $3.77 a gallon, could end up near $3 a gallon in regions including the Midwest and East Coast later this autumn, said Tom Kloza, global head of energy analysis at the Oil Price Information Service (OPIS).

There were 20 U.S. states with some retailers charging under $3 a gallon, he said, and he expects half of the U.S. to hit that level by Oct. 31.

The selloff was unusual considering a ban on diesel exports from Russia, continuing oil output cuts from OPEC, and heavy seasonal refinery maintenance curtailing fuel production, Kloza said.

The U.S. ADP National Employment Report on Wednesday showed private payrolls rising by only 89,000 jobs in September, the smallest count since January 2021.

Oil sold off on the view that 18 months of interest rate hikes by global central banks were inflicting economic pain.

"When positioning is stretched it can easily turn into a bloodbath," said one crude trader.

(Reporting by Laura Sanicola; Editing by David Gregorio)