Released on May 22, 2002
(Next Release on May 30, 2002)

Forgone Conclusion
Only a few weeks remain before the June 26 policy-setting meeting of OPEC oil ministers, where they will decide whether to raise or leave flat crude oil output levels through the end of the third quarter 2002. But the overwhelming consensus so far points to the cartel maintaining current crude oil production quotas at current levels, which were cut to 21.7 million barrels per day in January. While western nations view this decision as likely to squeeze future crude oil supplies, OPEC producers have an entirely different perspective. The International Energy Agency (IEA) recently issued a statement predicting that oil supplies could tighten significantly in the next six months and inventories could plunge to dangerously low levels if the OPEC cartel maintained its supply curbs. Conversely, some OPEC members view world oil markets as essentially balanced, with global and U.S. inventories at comfortable levels, thereby suggesting no increase in output is necessary at this time. Some OPEC members argue that the recent run-up in crude oil prices is not the result of reduced supplies but rather rising Middle East tensions from the Israeli-Palestinian conflict that some observers say may include a “war premium” on top of already high prices. Presumably, much of the difference in viewpoint stems from differing points of focus. OPEC on current conditions, while the IEA and others focus on the declining trend already evident and set to deepen over the second half of the year, if demand grows as expected. While less noted, both camps expect world markets to tighten in the third quarter of 2002. The real difference may lie in the pace of expected demand growth and thereby, the rate at which current perceived inventory surpluses may be worked off.

The unexpected increase in crude oil inventories last week appears to have fed support to market bears. It should be noted, however, that both the decrease in crude oil inventories during the week ending May 10 and the increase last week reflected shifts in West Coast supply patterns that are largely irrelevant to West Texas Intermediate crude oil price pressures. More notable is the continuing decline in PADD II (Midwest) crude oil inventories, which remain at very low levels for this time of year. Moreover, since crude oil inventories in general normally build during the spring, even the roughly flat pattern of the last several weeks supports higher prices and the notion of tightening fundamentals. One factor that could weaken this pattern would be lower refinery inputs than currently expected. Of course, this would cause product stocks to fall in order to supply expected increases in demand, particularly for motor gasoline.

Crude Oil Inventories Post Unexpected Increase
As noted, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) posted an unexpected 4.6 million barrel build last week as refiners apparently began to pare inputs into refineries in an attempt to reduce the overhang in product inventories. While inputs into refineries declined by 0.3 million barrels per day last week, crude oil imports increased by 0.4 million barrels per day during this same period, in part because of an increase in imports from Iraq. This calls into question whether Iraq’s 30-day cut-off last month has had an effect on reducing imports yet. Despite the increase last week, crude oil inventories remain 5 million barrels below year-ago levels, and are still generally expected to remain flat over the next several weeks, spurred in part by the effects of the production cuts made by OPEC earlier this year.

Product Inventories Mixed
While inventory gains were reported for distillate and jet fuel last week, motor gasoline inventories reported a modest decline despite record imports during this same period. But more importantly, petroleum product inventories continued to show gasoline and distillate stocks exceeding year-ago levels, with distillate showing the largest year-over-year increase of nearly 17 percent, followed by gasoline inventories with a 4.5 percent gain. Inventories of jet fuel continued to track slightly below last year’s level by 1 percent. Recent gains in product inventories occurred during a period of increasing crude oil prices but with softening product prices. Consequently, this situation contributed to severely eroding refining margins over the period. But in a move to help rein in high product inventories and reduce operating costs, several independent refiners announced last week that they would reduce the level of crude oil they process over the next several months. And, if joined by other refiners, which is expected, a concerted effort to work off excess product inventories would probably occur, possibly relieving some of the pressure on future crude oil inventories.

Crude Oil Inventories Revised Up for March
Based on EIA's weekly survey, U.S. commercial crude oil inventories at the end of March were estimated at 325.1 million barrels. However, the monthly survey data, which will be released later today or tomorrow, puts U.S. commercial crude oil inventories at the end of March at 331.4 million barrels, or 6.4 million barrels above the estimate from the weekly survey. Does this mean that in fact our current estimate for the week ending May 17 is really 6.4 million barrels higher, or 326.8 million barrels rather than the 320.4 million barrels reported? No, it doesn't. When the latest monthly data are available, EIA "benchmarks" to that data, essentially adjusting the weekly data to account for any differences from the monthly. Therefore, the weekly estimate of 320.4 million barrels is indeed our best estimate based on the data reported on our weekly survey. Over the last 27 months (January 2000 through March 2002) in which we have monthly data, there have been 13 upward revisions and 14 downward revisions to crude oil inventories. The largest amount crude oil inventories have been revised up during this period is 9.0 million barrels, while the largest downward revision has been 9.1 million barrels. Thus, a 6.4 million barrel revision is not too unusual.

Retail Gasoline Prices Edge Upwards, Powered by a Midwest Increase
The retail gasoline market saw a small gain last week, with the national average retail price for regular motor gasoline ending up 0.9 cent on May 20 to end at 139.7 cents per gallon. This price is 29.0 cents per gallon lower than last year. Prices have remained relatively flat over the past six weeks, with small up and down changes. Prices were mostly down throughout the country on May 20, with the increase in the U.S. price stemming from a large increase in the Midwest price. The Midwest retail price for regular motor gasoline increased by 3.9 cents per gallon from the previous week, ending at 140.5 cents per gallon. Prices have remained stable over the last several weeks, with very few changes in the spot market indicating that retail gasoline prices may have reached a new equilibrium for the very near-term. However, prices at the pump may rise if gasoline demand increases around Memorial Day. Retail diesel fuel prices increased by 1.0 cent per gallon to a national average of 130.9 cents per gallon as of May 20 after falling the previous week.