Correlation of Price to Inventory Levels

Source: EIA

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• Gasoline prices move with changes in crude oil prices, and crude prices have varied significantly over the past decade, as illustrated above with the monthly average spot prices for West Texas Intermediate crude oil. Gasoline prices were as low as 91 cents per gallon in early 1999 when crude prices were very low, and were around $1.56 per gallon mid to late September 2000 when crude prices were high, even though the peak gasoline demand season was over at that point.

• We have observed that crude oil., like other commodities, responds to basic market fundamentals of supply and demand. Inventories are a good means of measuring the balance between demand and supply in the marketplace, and thus are a good barometer of price pressure. For example, when demand exceeds supply over and above the typical situation, inventories fall, and prices rise.

• The graph illustrates the correlation. For example, from the end of 1996 through 1998, inventories were building. This was the time period when Iraqi crude oil came back into the market, and the Asian financial crisis reduced Asian demand growth. Production exceeded demand, inventories built, and prices fell.

• OPEC took action to reverse the situation with a series of cutbacks that removed excess production from the market. At the same time Asian economies were recovering, adding demand pressure to the market. Demand exceeded production, inventories were used to help meet demand, and they fell to very low levels. Prices rose in conjunction.