Released on August 28, 2002
(Next Release on September 5, 2002)

$26, $27, $28, …
Completing an established pattern of numbers is a popular question that many children will be answering as they return to school this week and next. But determining what will happen next in oil markets is not as straightforward. The price for West Texas Intermediate (WTI) crude oil has increased over the last couple of weeks, and actually topped $30 per barrel last week, before falling back somewhat early this week. But where the WTI price will go in the future is still under much debate.

Before trying to decide which direction WTI prices will head over the next several weeks, it’s important to understand what has driven prices to their current levels in order to see if these circumstances will continue to exist in upcoming weeks. Clearly, fears about a possible war with Iraq reducing global supplies of oil are reflected in the latest prices. In addition, where once many oil market traders and analysts had assumed that OPEC would increase production quotas (and thus production) when they meet in Osaka, Japan on September 19, statements from some OPEC oil ministers are adding doubt into the market as to whether that will occur. This doubt over a production increase from OPEC has also added some pressure on prices. But it is important to note that fundamental economic issues such as supply and demand have also been a key factor in an increasing WTI prices over the last few weeks.

The balance between supply and demand can most readily be seen by looking at inventory levels. When supply exceeds demand, the excess supply will end up increasing inventory levels, while when demand exceeds supply, inventories must be drawn down to make up the difference. Over the past several months, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) have been drawn down considerably, putting current inventory levels in the lower end of the normal range for this time of year. At the end of March, the United States held over 331 million barrels in its primary inventory system. Typically, crude oil inventories build throughout April and May, before beginning a gradual decline from June through September. However, this year, crude oil inventories actually fell about 5 million barrels between the end of March and the end of May, and since then, crude oil inventories have fallen at a much sharper than typical pace, with inventories as of August 23 at 303 million barrels, a drop of more than 28 million barrels (or nearly 9 percent) since the end of March. This pattern has even been more dramatic for the PADD II (Midwest), the region that contains the terminal point (Cushing, OK) at which WTI physical barrels are priced. PADD II crude oil inventories, which were more than 72 million barrels at the end of March, are now hovering around 60 million barrels, a drop of nearly 17 percent. So while there are non-fundamental reasons why WTI prices are as high as they are, there are also supply and demand factors (as seen in declining inventories) driving prices higher. But where prices will go from here is a question that many oil market traders and analysts have to try and answer over the next few weeks leading up to OPEC’s meeting in Japan.

Iraqi Oil Imports Into the U.S. Remain Low
Although they are very preliminary and thus not accurate enough to provide exact amounts, weekly data on crude oil imports into the United States show that over the last 9 weeks, Iraqi imports are much lower than they averaged last year or the first few months of this year. During the first five months of this year, only four countries (Saudi Arabia, Mexico, Canada, and Venezuela) exported more crude oil to the United States than Iraq. Then, in June, Iraqi oil imports into the United States averaged just 167,000 barrels per day, ranking Iraq as only the 11th largest import source of crude oil. Looking at data over the last nine weeks, it is apparent that Iraqi oil imports remain low, albeit not quite as low as they were in June. Since the week ending June 28, it appears that there have been seven or eight countries that have exported more oil to the United States than Iraq. Clearly, Iraqi oil imports since June are much lower than they were either last year or especially compared to the first few months of 2002.

Retail Gasoline and Diesel Fuel Prices Rise
After declining for four consecutive weeks, the U.S. average retail price for regular gasoline increased last week, gaining 1.1 cents per gallon, to end at 140.3 cents per gallon as of August 26. This price is 8.5 cents per gallon lower than last year, marking the second week in a row that 2002 prices were lower than 2001 prices. Prices were up throughout the country, with the largest increase occurring in the Midwest, where prices rose 2.8 cents to end at 140.2 cents per gallon. Gasoline prices have remained relatively flat throughout the summer, with prices fluctuating within a 3.5-cent range since April 15. Prices typically decline somewhat after the Labor Day holiday, but it is unlikely that price decreases will be as steep this year as in 2001, especially with the price of West Texas Intermediate crude oil hovering around $29-$30 per barrel. Retail diesel fuel prices increased for the second week in a row, rising by 3.7 cents per gallon to a national average of 137.0 cents per gallon as of August 26.