The Energy Information Administration revised sharply higher its price expectations for retail gasoline and diesel fuels from its previous assessment in May, with the updated forecast sparked by a rallying oil market amid sentiment that the economy is recovering and demand for fuel will increase as a result.

"Oil prices rose for the third consecutive month in May, driven in part by expectations of a global economic recovery and future increases in oil consumption," the agency said. "In addition, a weaker dollar and increasing financial market activity are prompting higher prices for commodities, overshadowing weak oil supply and demand fundamentals."

Publishing the information in its Short-term Energy Outlook for June released last week, the EIA adjusted higher by 21cts its forecast for what retail gasoline will average in 2009 to $2.33 gal. The agency expects a monthly summer seasonal peak in July that averages near $2.70 gal.

In 2008, regular grade retail gasoline averaged $3.26 gal.

While total consumption of liquid fuels and other petroleum production is expected to decrease 550,000 bpd or 2.9 percent in 2009, EIA said motor gasoline consumption is projected to increase by 30,000 bpd as "a result of the substantial declines in retail prices from last summer and the stabilization of real disposable income."

The agency said that the gradual economic recovery in 2010 is expected to contribute to a 300,000 bpd or 1.6 percent increase in total liquid fuels consumption.

Retail gasoline prices are expected to climb to a $2.56 gal average in 2010, up 26cts gal from EIA's May outlook.

Retail diesel fuel is projected to average $2.40 gal this year, which was revised higher by 14cts and compares with a 2008 average of $3.80 gal. The agency projects diesel fuel prices in 2010 will average $2.67 gal, up 19cts from the previous outlook.

Based on the weak economy, distillate fuel consumption in 2009 is seen down of 220,000 bpd or 5.5 percent.

The EIA said its estimate for diesel fuel was adjusted higher because of climbing crude oil costs, with the price of West Texas Intermediate crude oil expected to average $67 bbl for the second half of this year, an increase of $16 bbl versus the first half of the year.

WTI is the U.S. price benchmark for crude oil.

The EIA did leave its global oil demand estimate for 2009 and 2010 unchanged with the previous month, saying that world oil consumption will fall by 1.8 million bpd this year and then grow by 700,000 bpd next year "in response to positive global economic growth."