Released on March 6, 2002
(Next Release on March 13, 2002)

Curve Ahead. Watch Out for Falling … Inventories
Total U.S. commercial petroleum inventories (excluding the Strategic Petroleum Reserve) have now fallen nearly 16 million barrels in the last three weeks, despite crude oil stocks rising 4.3 million barrels this past week. Such a steep decline in total petroleum inventories over a similar 3-week period at this time of year has only occurred once since 1991, when they dropped an astounding 26.4 million barrels back in 1996. So why aren’t retail and spot prices for petroleum products higher? It is simply because stocks started this decline from a relatively comfortable level. But with OPEC production cuts and reduced Iraqi exports beginning to impact available crude oil supplies and reducing crude oil imports, crude oil inventories may be needed to supply refineries. With crude oil inputs to refineries returning again to average levels after being well above them in three out of the four previous months, U.S. petroleum product inventories are likely to continue to fall in upcoming weeks. The story appears to be unfolding just as we had thought a few weeks ago. With less crude available worldwide, inputs into refineries were expected to fall. This puts an increased reliance on product inventories to supply any increases in demand. With signs starting to emerge that the worst of the recession (which appears mild by historical measures) is in the past, demand has been surprisingly strong (see below) and product stocks are getting drawn down. Whether crude oil inventories fall or remain relatively flat depends on the level of crude oil inputs into refineries. With product inventories still within the normal range and refinery margins low, there is little pressure for inputs to increase much above current levels. However, if product inventories (specifically, gasoline) get significantly lower, then more product will need to be produced from refineries, thus necessitating an increase in refinery inputs. If this occurs at the same time imports are reduced as a result of less crude oil being exported into the global market, then crude oil inventories will also fall. While it’s impossible to know what’s around the next curve in the oil market, inventory levels will be an important statistic to monitor over the coming weeks and months.

Did We Say Demand Was Surprisingly Strong?
While many oil market watchers have commented on how demand has been “weak”, we have been highlighting in previous “This Week In Petroleum” issues how “strong” demand has been in the face of warmer temperatures and much lower natural gas prices than were seen last year. We have consistently pointed out how demand was unusually high last winter, due, in large part, to high natural gas prices encouraging the use of not only residual fuel, but also distillate fuel. While gasoline is not entirely immune from natural gas prices and weather, the linkages are much more remote, and, not surprisingly to us, has often shown an increase over last year’s level, despite the recession. Gasoline demand in February (which corresponds with the most recent four-week period) averaged 8.5 million barrels per day, or more than 200,000 barrels per day higher than the previous February record (February 2000). With signs that the economy may have started to recover (and gasoline demand strength may be yet another indicator), total petroleum demand may indeed be increasing over the next few months

Crude Oil Prices Are Rising
Over the last few days, crude oil prices have been rising, as a number of factors have coalesced to produce powerful upward pressures. First, it appears that OPEC has been successful in cutting production following its decision to cut quotas once again effective this past January 1. Secondly, while many analysts (including EIA) are expecting OPEC to increase production over the second half of the year as petroleum demand increases, representatives from various OPEC countries continue to state that production quotas are fine and there is no need to increase them, even later this year. Thirdly, speculation over the future of events related to Iraq has also help to raise prices somewhat. Whether it takes a military form or a self-imposed cut of Iraqi exports under the United Nations “oil-for-food” program when the current phase expires at the end of May is unclear. But it does appear that many analysts and traders expect less Iraqi oil to be available this summer. Combined with falling inventories as noted above, oil markets do appear to be tightening, with the OPEC Basket price for March 5 reaching $21.22 per barrel, the closest it has been to the low end of OPEC’s price band since late September.

Retail Gasoline Prices: Is It Déjà Vu All Over Again?
The average U.S. retail price for regular gasoline rose to 114.4 cents per gallon as of March 4, 2002, an increase of 2.8 cents from the previous week, the largest 1-week jump since Labor Day. Retail gasoline prices have risen unsteadily nationwide since bottoming out at 105.9 cents per gallon on December 17, 2001, the lowest price since March 1999. The strongest increases have occurred in California (up 23.1 cents since December 31) and the Midwest (up 12.1 cents since December 17, including a 6.5-cent jump this week). The increases seen so far mostly reflect rising crude oil prices. Still, the national average price remains 27.3 cents lower than a year ago, and those in California and the Midwest are 36.3 and 21.6 cents, respectively, lower than year-ago levels. While EIA does not forecast a return to the high spring gasoline prices seen the last two years, the potential for a stronger than normal seasonal increase is rising. Retail diesel fuel prices increased as well last week, climbing 1.9 cents to a national average of 117.3 cents per gallon as of March 4, but typically do not display the same strong seasonal pattern seen in gasoline.

Propane Market and Heating Oil Prices
Cold weather sent U.S. inventories of propane tumbling last week with a nearly 3.3 million-barrel draw that lowered stocks to an estimated 42.6 million barrels by the end of February 2002. Moreover, February’s stockdraw totaled 10.5 million barrels, a near record for this month as recent cold weather and the possibility of a rebound in the chemical sector increased demand for propane. However, U.S. inventories still remain high for this time of year since we began February at the highest level seen since 1982. For this reason, despite the large stockdraw this past week, residential propane prices declined to 112.4 cents per gallon for the week ending March 4, a 0.1-cent decrease from the previous week and 34.1 cents lower than a year ago.

A late-season frenzy of winter storms had little effect on heating oil prices for the week ending March 4, 2002. The average residential heating oil price remained relatively stable at 116.1 cents per gallon, only a 0.2-cent increase from last week’s mark, but 28.2 cents below the March 5, 2001 posting of 144.3 cents per gallon.