Released on January 24, 2002
(Next Release on January 30, 2002)

Crude Oil Inputs Fall; Are Further Declines Yet to Come?
After averaging 14.8 million barrels per day over the previous 6 weeks, U.S. crude oil refinery inputs fell to 14.6 million barrels per day last week, as a result of both planned and unplanned refinery outages (see U.S. Crude Oil Refinery Demand worksheet). With relatively high product inventories and low refinery margins, a decline in crude oil inputs in upcoming weeks would be expected, as evidenced by EIA's Short-Term Energy Outlook estimation that crude oil inputs will average about 14.4 million barrels per day in February. A lengthy decline in crude oil inputs would reduce refinery production of major petroleum products such as gasoline, heating oil, and diesel fuel. Last week's data showed a large decline in diesel fuel production, which seemed logical as diesel fuel inventories had reached an historical high in the week ending January 11. If production of these key petroleum products is reduced as a result of less crude oil run through the refineries at the same time demand for these products remains relatively strong (more on this below), then a drawdown in product inventories over the next several weeks could be expected.

Crude Oil Import Levels Could Be Key Factor This Quarter
Crude oil imports (excluding imports into the Strategic Petroleum Reserve) averaged 9.1 million barrels per day last week, the first week in which the average has exceeded 9 million barrels per day since the week ending December 7, 2001 (see U.S. Crude Oil Imports worksheet). However, with Iraqi crude oil imports reduced since December 2001 and OPEC, along with some major non-OPEC producing countries, agreeing to reduce crude oil production over the first half of the year, it is unclear if imports will continue to average above 9 million barrels per day for any significant length of time. With a transit time of about 40 days between the Persian Gulf and the United States, the decline in Iraqi exports to date probably has not yet appeared in U.S. import statistics. Moreover, any reduction in OPEC production that translates into decreased crude oil exports to the United States may not likely show up until February, March, or even April. Historically, OPEC cuts in production usually are maximized in the 2nd or 3rd month following a reduction in production quotas.

U.S. Oil Demand Continues To Show Underlying Strength
How can we say that U.S. oil demand is showing strength when over the last 4 weeks it has averaged nearly 1 million barrels per day less than last year? The answer lies in last year's demand, which was extraordinarily high. Looking back 2 years to January 2000, we see that oil demand averaged 19.03 million barrels per day, or over 0.5 million barrels per day less than has been averaged thus far in January 2002. This occurred, despite an ongoing recession and a reduction in jet fuel demand as a result of reduced air traffic following the September 11 attacks. Comparisons to year-ago demand levels are misleading, as cold weather and high natural gas prices encouraged unusually high demand for distillate fuel and residual fuel. Even with motor gasoline demand over the last 3 weeks down considerably from previous levels, the 4-week average of 8.4 million barrels per day is 1.0 percent above the amount in the same period a year ago. If gasoline demand continues normal annual growth rates of 1 to 2 percent, jet fuel demand gradually increases as more flights get added, and distillate fuel demand continues to average between 3.8 and 4.0 million barrels per day over the next several weeks, then any decline in refinery production as described above could result in a drawdown in total product inventory levels. This could, in turn, put some upward pressure on retail product prices later this Winter or in Spring.

Crude Oil Stocks Increased Last Week But Total Product Stocks Declined
Although commercial crude oil inventories (excluding inventories in the Strategic Petroleum Reserve) increased by 2.7 million barrels last week, total product inventories declined by 0.7 million barrels, led by a 2.9 million barrel decline in distillate fuel and a 3.2 million barrel decline in "other oils". The decline in "other oils" stocks includes a seasonal decline of 3.3 million barrels in propane inventories, as winter weather contributed to push inventories lower. These declines more than made up for a large increase in gasoline inventories (3.6 million barrels) and smaller increases in unfinished oils (1.5 million barrels), residual fuel oil (0.3 million barrels), and jet fuel (0.1 million barrels). If both crude oil inputs and imports decline as expected over the next several weeks, it is possible that crude oil stocks will not increase significantly over this period while product inventories decline.

Most Retail Petroleum Product Prices Fell Slightly Last Week
The national average retail regular gasoline price dropped to 110.5 cents per gallon on January 21, 2002, down 0.6 cent per gallon from last week and 36.6 cents per gallon lower than a year ago. The national average retail diesel fuel price fell for a third straight week, reaching 114.0 cents per gallon on January 21, 2002, the lowest average price since July 26, 1999. This was 1.9 cents per gallon less than last week and 38.8 cents per gallon lower than a year ago. Residential heating oil prices continued their decline this week, as the average on January 21, 2002, stood at 116.2 cents per gallon, down 0.4 cent per gallon from last week and 36.9 cents per gallon lower than a year ago. Residential propane prices were level this collection cycle, as the average on January 21, 2002, remained at 113.4 cents per gallon, which is down 55.9 cents per gallon from year ago prices.