|SThis 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.
|SWhen 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 volatility.
|SBut tighter refining capacity in the United
States and the growth in number of different fuel types since the mid 1990ís
also add to the increased potential for volatility, since supply flexibility
|SAs we now move into the winter, high
distillate demand season, we see U.S. diesel and heating oil cracks
increasing.† Although heating 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.