CA Following World Prices

Notes:

• In 1997, with the return of Iraq to the crude markets and other world supply sources growing rapidly, a crude oil surplus began to develop, and crude prices fell. A large part of the crude supply growth in 1997 was from the heavier crudes.

• With falling crude oil prices, we expected light product markets to weaken and residual fuel oil prices to move closer to crude oil, both of which would cause the light-heavy difference to contract.
  • Light product markets did not weaken, as the world economy grew and growing high refinery utilization struggled to keep pace with demand.
  • Residual demand was weak, suffering at least in part from a warm winter in 1996/97, but it still managed to move closer to crude oil in price as expected since natural gas prices remained high.
  • Light-heavy crude differentials fell and stayed down until the later part of 1997.

• Crude prices continued to weaken, but the light heavy difference expanded in late 1997 and early 1998 -- worldwide as well as in California.
  • Light product markets weakened over the winter, but showed renewed strength in the spring, which is unusual in a weak crude market, but we have never had such high refinery utilizations with weak crude oil prices.
  • Residual fuel prices gave way over the warm winter, but sprang back in April when Mexico and Venezuela started buying the fuel.
  • The major factors pulling differentials apart first quarter 1998 seem to be the weak resid price, increased supply of heavy crude oils that has been occurring since 1997, and the unusually strong light product market.