Released on January 29, 2003
(Next Release on February 5, 2003)

No Surprises
Although the outcome of the Super Bowl may have surprised some people, recent movements in U.S. oil markets reflected the expectations of many analysts, including those at the U.S. Energy Information Administration. Two weeks ago, and again last week, “This Week In Petroleum” provided analyses of how the current situation in Venezuela could lead to declining inventories for key refined products. To summarize, declines in crude oil imports from Venezuela were expected to lead to crude oil inventories, at some point, being drawn down to about as low as they could economically go. At that point, refineries would reduce crude oil refinery inputs, in order to husband inventories. This has, in fact, already occurred, as crude oil refinery inputs have fallen by more than 800,000 barrels per day over the last two weeks. The analysis then assumed that lower crude oil inputs would mean lower refinery output, which would ultimately lead to a greater reliance on drawing down product inventories to supply demand for these products. Data released today, for the week ending January 24, show that gasoline inventories fell contra-seasonally by 3.3 million barrels, diesel fuel (low-sulfur distillate fuel oil) fell by 3.5 million barrels, heating oil (high-sulfur distillate fuel) dropped by 3.4 million barrels, and propane declined by 4.1 million barrels. Of course, with crude oil refinery inputs at their lowest level since mid-October, when refineries were beginning to come back on-line following Hurricane Lili, it’s not a surprise that product inventories were drawn down, especially for distillate fuel, which last week averaged the fourth highest demand level ever.

So, what happens next? The answer depends on how strong oil demand is over the next several weeks. With crude oil prices remaining relatively flat over the last couple of days, while spot prices for refined products have continued increasing, refinery margins have improved significantly. If this trend continues, refiners may be encouraged to increase refinery inputs, or at least push back discretionary maintenance, especially if strong demand continues. But where would the crude come from to increase refinery inputs? For the last three weeks, U.S. crude oil inventories have remained just above the Lower Operational Inventory of 270 million barrels. Of course, no one truly knows how low crude oil inventories can go, and the National Petroleum Council figure of 270 million barrels as a Lower Operational Inventory level is simply an estimate of how low crude oil inventories could go without reducing supply flexibility and increasing chances of localized disruptions in refinery operations. Regardless of how low crude oil inventories can ultimately go, it can’t be too much below where they currently stand, because for crude oil inputs to increase significantly, a significant increase in crude oil imports (perhaps to a level at or above 9 million barrels per day) would be required. While replacement supplies may yet arrive from the Persian Gulf, weekly data show no signs yet of a significant further upward movement in shipments from either Iraq or Saudi Arabia. Of course, if demand begins decreasing due to warmer weather, a slowdown of the economy, or some other factor, there would be reduced pressure to increase refinery production. But with refined product inventories falling, we wouldn’t be surprised to see prices for key refined products (gasoline, diesel fuel, heating oil, and propane) continue to increase over the next couple of weeks.

Average U.S. Retail Gasoline Price Highest Since September 2001
The U.S. average retail price for regular gasoline rose for the seventh week in a row last week, increasing by 1.4 cents per gallon as of January 27 to end at 147.3 cents per gallon, the highest price since September 24, 2001. This price is 37.2 cents per gallon higher than last year. Prices throughout the country were up, with the largest increase occurring in the Rocky Mountain region, where prices rose 2.4 cents to end at 143.8 cents per gallon. The West Coast and the Midwest also saw price increases of 2.1 cents. If gasoline inventories erode further, as noted above, retail prices may climb over the $1.50 per gallon mark over the next several weeks.

Heating Fuels Demand Pushes Residential Prices Higher
With distillate fuel demand averaging its fourth highest amount ever last week, residential heating fuel prices increased for the period ending January 27, 2003. The average residential heating oil price was 149.7 cents per gallon, up 4.4 cents per gallon from the previous week. Residential heating oil prices are 33.6 cents per gallon higher than last year at this time. Wholesale heating oil prices increased 6.9 cents per gallon this week, to 98.0 cents per gallon.

Propane Inventories Continue Sharp January Slide
On the heels of the previous week’s 4.5 million barrel stock plunge, U.S. inventories of propane continued to drop sharply lower last week with a stock draw measuring 4.1 million barrels, positioning inventories at an estimated 39.0 million barrels as of January 24, 2003. But the severe January weather has not yet caused U.S. stockpiles of propane to reach dangerously low levels because of the apparent inventory cushion built up last summer that resulted in U.S. inventories beginning the heating season at the highest level since 1998. Consequently, the inventory cushion has been a major factor contributing to U.S. propane stocks remaining within the average range during the 2002-03 heating season, and thereby limiting, to some extent, upward pressure on prices.

Regional inventories were lower in all major regions last week with East Coast inventories falling about 0.7 million barrels while inventories in the Midwest and Gulf Coast areas plunged 1.7 million barrels and 1.5 million barrels, respectively. Regional inventories continued to stay within their respective average ranges last week, except in the East Coast where inventories are at the lower limit of the average range.