Released on May 15, 2002
(Next Release on May 22, 2002)

“30”
The number 30 is on the lips of many oil traders, analysts, and industry executives these days. The price for West Texas Intermediate (WTI) crude oil, the benchmark crude oil for most of the Americas, rose above $29 per barrel on May 14 for the first time since mid-September 2001, and has risen by more than $3 per barrel since May 6. If prices continue to rise, as many market participants are beginning to expect may happen, the WTI price will rise above $30 per barrel for the first time since February 2001. As loyal readers of “This Week In Petroleum” know, this is a phenomenon that was not unexpected, as we have been highlighting how the crude oil market has been tightening of late, especially since March. As recently as April 5, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) were about 18 million barrels above year-ago levels, and even this was a large decline from the 40-million-barrel year-to-year surplus that existed on March 1. However, as of May 10, commercial crude oil inventories are now nearly 10 million barrels below year-earlier levels, and are in the bottom half of the normal range for inventories at this time of year.

With crude oil imports consistently running much lower than last spring, it was predictable that the crude oil surplus we had at the end of winter would melt away this spring. The production cutbacks from OPEC 10 countries (OPEC excluding Iraq) and some non-OPEC producers that went into effect beginning in January were bound to reduce imports. Even with reports that OPEC 10 crude oil production may have increased slightly in recent months, it is still much lower than it was a year ago. As the world’s largest importer (and consumer) of petroleum, it was inevitable that lower production from OPEC 10 countries would ultimately lead to lower U.S. crude oil imports. Added into this mix is that Iraq ceased exporting oil under the United Nations program for 30 days beginning on April 8. While sources of crude oil imports on a weekly basis are very preliminary and thus not publishable, it does appear that Iraqi crude oil imports into the United States are beginning to have an effect on reducing imports. With product prices, particularly gasoline, not rising at the same pace crude oil prices have recently, it is likely that refiners may cut back on production, which would help slow the decline in crude oil inventories. And with product inventories much better off relative to crude oil (see the section below on the gasoline inventory situation), refiners could use inventories to supplement decreases in refinery production. However, if demand begins to pick up after Memorial Day, then product inventories may also begin to decline. If this occurs, then we may be looking at a repeat of 1999, when inventories fell over the second half of the year in a dramatic fashion, and $30 per barrel WTI prices will seem like a bargain!

Gasoline Supply More Than Ample For Now
One bright spot for consumers in the run-up to the summer driving season is the continued strong buildup of motor gasoline inventories over the past several weeks. Total motor gasoline inventories ended the week of May 10, 2002 at 217.2 million barrels, a level more than 13 million barrels above the same period last year. With inventories at the upper end of the normal range, gasoline prices are not expected to spike as high as the last two years, even if demand picks up over the summer as expected. The combination of strong refinery production and the flood of gasoline imports during the last four weeks in particular, explain the current motor gasoline inventory cushion. Over this period, motor gasoline refinery production is up by nearly 400,000 barrels per day over an average of the same four-week period in 2000 and 2001, while gasoline imports are up nearly 300,000 barrels per day above the average for 2000 and 2001. With this much additional gasoline supply, it is not surprising that gasoline inventories are currently much higher than they were in 2000 and 2001. Nevertheless, this surplus may also evaporate if refiners cut back production and imports fall off to more normal levels, just as demand begins to increase heading into the summer driving season. In this case, renewed gasoline market strength will reinforce crude oil price pressure stemming from ongoing tightening in the crude oil balance.

Retail Gasoline Prices See Little Action
The retail gasoline market was quiet again this week, with the national average retail price for regular motor gasoline edging down 0.7 cent on May 13 to end at 138.8 cents per gallon. This price is 32.5 cents per gallon lower than last year. Prices have remained relatively flat over the past five weeks, with slight up and down changes. Prices were down throughout the country on May 13, with the largest decreases occurring on the West Coast. California retail gasoline prices fell 1.8 cents last week to end at 157.1 cents per gallon. With relatively little movement in spot gasoline prices over the last several weeks, it seems that the retail gasoline price has reached a new equilibrium for the very near-term and any price changes in the retail market can mostly be attributed to white noise. Again, this plateau may prove to be a brief pause, if recent crude oil price increases hold or grow further, or the gasoline balance tightens after Memorial Day.

Retail diesel fuel prices decreased by 0.6 cent per gallon to a national average of 129.9 cents per gallon as of May 13 after rising the previous week.