Released on September 5, 2002
(Next Release on September 11, 2002)

Turn the Page
With Labor Day behind us, it’s now time to “turn the page,” as Bob Seger sung in his 1976 hit by the same name. The focus for most oil analysts will now shift from gasoline towards distillate fuel oil (a combination of diesel fuel and heating oil.) And as this focus sharpens over the next several weeks, many eyes will look to see if distillate fuel inventories going into winter will be sufficient to avoid any major price spikes.

Distillate fuel oil inventories generally build between April and November, so that by the time the coldest part of winter comes, they can be used to supply any increase in demand due to the cold weather. But something different happened last month. At the beginning of August, distillate fuel inventories were about 135 million barrels, at the high end of the normal range for that time of year. It appeared that even if distillate fuel inventories built less than normal through November, inventories would still end well above 140 million barrels, which would mean that supplies would be considered “comfortable” for the upcoming winter. But last month, rather than increasing by about 5 million barrels as they typically would, distillate fuel inventories fell by over 5 million barrels, which by the end of the month put them in the bottom half of the normal range for the end of August. In one month, we went from “comfortable” to “average,” and this change in the inventory level was reflected somewhat in a 8.5 cent per gallon diesel price increase over the last three weeks of August.

So what happened in August to turn a “comfortable” situation into one that bears more watching? While distillate fuel imports have remained only slightly below last year’s averages over the last few weeks, distillate fuel production is off sharply from the same time last year. Apparently, the refining industry also felt distillate fuel inventories were ample at the beginning of August and cut back on their production of this product. If this is true, then increases in prices should signal a tightening market, which would encourage refiners to increase production of distillate fuel oil. Offsetting this, however, are continued weak refinery margins and refinery maintenance that often occurs in the autumn, both of which would limit the amount refiners could increase refinery production of distillate fuel as well as other products. If gasoline demand remains strong in the autumn, refinery flexibility in shifting refinery yields away from gasoline and towards distillate fuel may be reduced, which would also limit any increase in distillate fuel production. Of course, weather will play a key role, as last year’s relatively warm weather in much of the country limited the amount of distillate fuel that was needed. EIA’s latest monthly forecast, due to be released on September 6, will contain the latest assessment of how much distillate fuel inventories might build leading to the upcoming winter. But if distillate fuel inventories don’t increase much and we have a cold winter, distillate fuel oil, or more specifically heating oil, could be “playin’ star again” in oil markets, just as Bob Seger was in his hit 26 years ago.

U.S. Crude Oil Inventories Fall to Lowest Level Since March 2001
Reported U.S. commercial crude oil inventories fell by 4.6 million barrels last week, much more than would be expected looking at the relatively small changes seen in crude oil refinery inputs and crude oil imports. But occasionally, there are weeks in which big movements in reported inventories (either up or down) are not easily explained by looking at other components of supply (e.g., crude oil imports) or demand (i.e., crude oil refinery inputs), so this is not too unusual. And, a case can be made that this large drop in reported crude oil inventories is balancing out larger than expected cumulative inventory builds in previous weeks. Regardless of the path that got them there, the fact remains that at 298.5 million barrels, U.S. crude oil commercial inventories are at their lowest level since the week ending March 16, 2001. And with OPEC gathering together in exactly two weeks (September 19) to discuss production levels for the last three months of the year (or longer), the direction U.S. commercial crude oil inventories will move in the near future remains highly uncertain.

Retail Gasoline Prices Fall But Diesel Fuel Prices Rise
The U.S. average retail price for regular gasoline declined for the fourth time in five weeks on September 2, falling 0.9 cent per gallon to end at 139.4 cents per gallon. This price is 15.1 cents per gallon lower than last year, marking the third week in a row that 2002 prices were lower than 2001 prices. Retail diesel fuel prices increased for the third week in a row, rising by 1.8 cents per gallon to a national average of 138.8 cents per gallon as of September 2. Prices were up throughout the country, with the largest price increase occurring in the Rocky Mountain region, where prices rose by 3.0 cents to end at 141.9 cents per gallon. The West Coast saw a 2.6 cents per gallon increase, bringing prices up to 150.6 cents per gallon; prices in California rose by 3.0 cents per gallon to end at 158.6 cents per gallon. U.S. diesel fuel prices have shot up 8.5 cents since July 29, with prices in California increasing by 16.3 cents over that same time period.