This slide shows how, as world crude markets tighten,
light product prices frequently rise even more.
This is most evident with the gasoline crack
slide on the left, which shows that the crack spread has risen as crude oil
moved from that $20 level shown at the beginning of this presentation to the
$30 level after 1999.
It also shows
that higher crack spreads have not come smoothly, but in large part as the
result of higher volatility.
When world crude
markets tighten, product markets tighten as inventories for both crude oil and
products fall in response to changing price signals.
Lower inventories result in less cushion to
respond to unexpected imbalances, and thus increase the probability of price
refining capacity in the United States and the growth in number of different fuel
types since the mid 1990’s also add to the increased potential for volatility,
since supply flexibility is reduced.
As we now move
into the winter, high distillate demand season, we see U.S. diesel and heating
oil cracks increasing.
oil imports during normal markets are not as critical as gasoline imports, if
the United States experiences an unexpected cold snap, European imports have
been an important source of supply and price relief.
But European markets for distillates are
also strong this year, indicating that any imports we may want to use will
come at a higher price.