Released on September 18, 2002
(Next Release on September 25, 2002)

Whoa Nellie!
Just as he did year after year following an amazing college football play, one can imagine announcer Keith Jackson exclaiming “Whoa Nellie!” after looking at the weekly oil data released today. U.S. commercial crude oil inventories fell another 5.4 million barrels last week, and have now dropped by 15 million barrels over the last three weeks to go below the lower limit of the normal range for this time of year. At 287.8 million barrels, commercial crude oil inventories are at the lowest level since the week ending March 9, 2001. And the situation is even more extreme in PADD II, the region that includes Cushing, OK, the spot where physical West Texas Intermediate (WTI) crude oil barrels are traded. In that region, crude oil inventories are just 54.4 million barrels, or more than 2 million barrels less than the previous low, making it the lowest recorded level since EIA began publishing weekly regional data. What makes the data for last week even more interesting is that OPEC oil ministers are currently gathering in Osaka, Japan to discuss whether to increase production quotas for the first time in nearly two years. The steep drop in U.S. commercial crude oil inventories should help alert OPEC to the need to increase oil supplies.

Since the end of March, U.S. crude oil inventories have fallen by nearly 44 million barrels, going from the upper end of the normal range to below the lower limit of the normal range in just 5 ½ months! What has turned the U.S. crude oil market from a surplus market to a tight market? Lower crude oil imports, particularly from OPEC, appear to be the answer.

From March 2001 through July 2001, the United States averaged 9.65 million barrels per day of crude oil imports, with 5.14 million barrels per day coming from OPEC countries. During this period in 2001, crude oil inventories rose 48 million barrels from the end of February through the end of April, followed by a drop of 18 million barrels between the end of April and the end of July, so that by the end of July, crude oil inventories were 30 million barrels higher than they were at the end of February. But this year, the data tell a completely different story. From March 2002 through July 2002, the United States averaged just 9.04 million barrels per day of crude oil imports, or more than 600,000 barrels per day less than last year. This represents a 6.3 percent reduction, or more importantly, a total reduction in crude oil imports over this 5-month period of 93 million barrels! And, as the major producing group in the world, OPEC took more than its share of the reduction in U.S. crude oil imports. In the same 5-month period this year, U.S. crude oil imports from OPEC countries only averaged 3.96 million barrels per day, a reduction of 23 percent, or a total reduction of over 180 million barrels over this period! It’s amazing that crude oil inventories haven’t fallen even more this spring and summer. Of course, the reason they haven’t is lower inputs into refineries and increased imports from non-OPEC countries. And while the data are preliminary, further crude oil inventory declines may yet register in EIA data, as the implied draws over this period remain somewhat greater, even ignoring the forward imbalance without an OPEC production increase. Regardless, clearly OPEC’s market share in the United States, the world’s largest importing country by a wide margin, has taken a tumble this summer. EIA data for June (see MER, Table 1.8 Overview U.S. Petroleum Trade.) show that OPEC imports represented less than 38 percent of all U.S. crude oil and petroleum product imports, compared to 48 percent in June 2001. In fact, since April, OPEC’s market share of U.S. petroleum imports has been below 40 percent, a level not seen on an annual basis since 1985! EIA estimates that actual OPEC production, excluding Iraq, in the second quarter of 2002 was 3.5 million barrels per day less than averaged in the fourth quarter of 2000. So the end result of all of OPEC’s production quota reductions is that U.S. crude oil inventories are at dangerously low levels and OPEC has lost market share in the world’s largest crude oil market.

Looking at the crude oil market this way makes it clear why WTI prices have been near $30 per barrel in recent weeks. Without more oil coming into the U.S. market, presumably from OPEC, prices are likely to remain at or even increase from recent levels, whether there’s a war in Iraq or not. The belief that WTI prices are near $30 per barrel largely due to a sizable “war premium” is not defensible in light of historic tightening in U.S. and global crude oil markets over the last five months. Whether OPEC increases their production quota at their meeting in Osaka is not as important as OPEC increasing actual production as soon as possible, so that global oil markets, especially the United States, will have a well-supplied market this winter. Since it takes 2 to 3 months for oil to flow from the Middle East into U.S. refineries, and ultimately into usable petroleum products such as heating oil, there is no time left to hesitate if we are to increase inventories ahead of the coldest months of winter. If OPEC does increase production levels significantly, then hopefully, by the time the last college football bowl game is played in early January, we will be looking at a more normally balanced market.

Retail Gasoline and Diesel Fuel Prices Rise
The U.S. average retail price for regular gasoline increased slightly over the last week, rising by 0.6 cent per gallon as of September 16 to reach 140.1 cents per gallon. This price is 12.8 cents per gallon lower than last year. Retail diesel fuel prices increased for the fifth week in a row, rising by 1.8 cents per gallon to a national average of 141.4 cents per gallon as of September 16. For the second week in a row, the average retail diesel price was higher than the average retail regular gasoline price, clearly signaling an end to the gasoline season. In recent years, diesel prices have been higher in the fall and winter, as harvesting and colder weather put increased pressure on diesel and heating oil prices. Retail diesel prices were up throughout most of the country, with the largest price increases occurring in the Gulf Coast and Rocky Mountain regions, which each saw prices rise by 2.1 cents. U.S. diesel fuel prices have shot up 11.1 cents per gallon since August 12, with prices along the West Coast increasing by 15.2 cents per gallon over that same time period.