Released on April 30, 2003
(Next Release on May 7, 2003)

What’s Next for Crude Oil
With the war in Iraq virtually over and the start of the peak gasoline season (Memorial Day weekend) less than a month away, many analysts are wondering what the outlook for U.S. crude oil markets will be during the next few weeks. The near-month futures price of West Texas Intermediate (WTI) crude oil has fallen from almost $38 per barrel as of March 12 to slightly above $25 per barrel as of April 29. Will the WTI price continue to fall or will it head in another direction? By looking at what supply and demand might be over the next few weeks, we may get an insight in the near-term future of U.S. crude oil markets.

Crude Oil Demand
When looking at oil demand, most analysts look at refined product demand, i.e., the sum of products such as gasoline, distillate fuel, jet fuel, etc. But when looking at crude oil demand, a good proxy is how much crude oil is being used in refineries, or, what is referred to as, crude oil input to refineries. So, what is the near-term outlook for crude oil demand?

Although very high amounts of crude oil imports recently are gradually replenishing crude oil inventories, which not that long ago were the lowest since 1975, refined product inventories are also at low levels. Therefore, a logical assumption would be that increased imports would not only replenish crude oil inventories, but also would allow for an increase in refinery crude oil inputs. Following seasonal refinery maintenance programs that typically take place during February and early March, refinery inputs of crude oil generally increase during April, as refiners race to build inventories of gasoline for the approaching summer driving season. Looking at the most recent 5-year period, refiners averaged a nearly 4.5-percent increase in crude oil inputs between March and April, with crude runs increasing on average by 650 thousand barrels per day, and it seems like the increase this April will be close to the average amount. However, the data for May over the same 5-year period is a little less clear. Although crude oil inputs increased an average of about 150,000 barrels per day from April to May over the last 5 years, in two of the years, crude oil refinery inputs actually declined in May. One factor that seems to be critical in determining refiner behavior in May is gasoline prices, as many refiners use May to make adjustments in refinery inputs depending on the gasoline supply situation. With gasoline prices continuing to fall (see below) and record levels of imports of gasoline arriving recently, there may not be a large increase in crude oil refinery inputs in May. But this is clearly an area in which a lot of uncertainty still exists.

Crude Oil Supply
When looking at the supply of crude oil, there are generally two sources to measure: domestic production and imports. But since domestic production is usually fairly constant over the near-term, any change in the near-term supply of crude oil is likely to come from imports. Recently, imports have averaged much higher than the same period last year. For example, over the last four weeks, crude oil imports have averaged over 700,000 barrels per day more than during the same period last year. This has allowed for an increase in crude oil refinery inputs (as described above) as well as increasing very low crude oil inventories. Will this trend continue?

While this is difficult to gauge, we can look at the origins of U.S. crude oil imports recently to try and discern if there is some reason they might increase or decrease in coming weeks. Although the origins of weekly crude oil imports are preliminary and thus not published, we can look at the general trend and attempt to make some conclusions about the future. Over the last five weeks, imports from Saudi Arabia have increased significantly. Only once, in May 1991, following the end of the first Gulf War, have U.S. crude oil imports from Saudi Arabia averaged more than 2 million barrels per day over a whole month. Again, although the data are preliminary and are subject to change, it does appear that crude oil imports from Saudi Arabia in April may average close to this level. This is consistent with estimates that show a significant increase in crude oil production from Saudi Arabia in March. With the time lag in shipping the oil, it takes at least one month for oil produced in Saudi Arabia to arrive in the United States. If their production remained at high levels in April, it’s likely that large amounts of crude oil from Saudi Arabia may continue to arrive here next month. However, the situation may be different for Iraq. Based on weekly data, the U.S. continued to import significant volumes of Iraqi crude oil during the week ending April 25. However, with Iraqi oil exports stopping in mid-March as the war began, given the 4-6 week shipping time, crude oil imports from Iraq should stop completely at some point over the next few weeks, meaning that crude oil imports from Iraq in May will be almost non-existent. Without an offsetting increase in imports from somewhere else, this implies that U.S. crude oil imports may decline over the next several weeks. Of course, imports from other countries could rise, thus compensating for the inevitable shut-off of U.S. crude oil imports from Iraq. But the magnitude of the imports the United States has recently received from Iraq will make this scenario difficult, at best.

So what does the future hold for U.S. crude oil markets? With a likely decline in crude oil supply stemming from a drop in crude oil imports, it is unlikely that crude oil prices will drop too much further over the next few months. But whether they increase or not will depend on the supply and demand balance over the next couple of months. And any change in crude oil prices will likely begin to be reflected in retail gasoline prices within two to four weeks. Clearly, the next few weeks will be critical in determining the status of oil markets at the outset of the coming peak driving season.

U.S. Retail Gasoline Prices Continue to Drop
The U.S. average retail price for regular gasoline fell last week for the sixth week in a row. Prices dropped by 1.7 cents per gallon as of April 28 to hit 155.7 cents per gallon, which is still 16.4 cents per gallon higher than a year ago. Over the last six weeks, the average price for regular gasoline has declined by 17.1 cents per gallon. The recent reductions in gasoline prices are largely due to continuing decreases in crude oil prices. Prices were down throughout the nation last week. The region with the lowest price is the Gulf Coast, where prices for regular gasoline averaged 143.7 cents per gallon, while the region with the highest price is the West Coast, where prices for regular gasoline averaged 188.1 cents per gallon on April 28. However, the West Coast also saw the largest price decrease, with prices falling 3.1 cents over the last week. California fell below $2 per gallon after eight straight weeks above that mark, decreasing by 3.2 cents to 197.7 cents per gallon.

Retail diesel fuel prices decreased for the seventh consecutive week, falling 2.1 cents per gallon as of April 28 to a national average of 150.8 cents per gallon, which is still 20.6 cents per gallon higher than a year ago. Diesel fuel prices are down in conjunction with recent drops in crude oil prices and in anticipation of weaker market conditions. Retail diesel prices were down throughout the nation last week. The region with the lowest price is the Gulf Coast, where prices for diesel averaged 141.9 cents per gallon, while the region with the highest price is New England, where prices averaged 166.2 cents per gallon on April 28.

Propane Inventories Unseasonably Lower
Restocking efforts by the nation’s primary stockholders took a turn for the worst last week after reporting a highly unseasonably 0.4 million-barrel stockdraw that pushed U.S. inventories of propane lower, ending the week of April 25, 2003 at an estimated 21.9 million barrels. This movement follows in the footsteps of the past several weeks of weak to modest weekly stockbuilds that have persisted since the end of the winter heating season in March. With last week’s drop in inventories, the gap between the current level of inventories and the lower limit of the average range of inventories for this time of year widened to an estimated 8 million barrels. Although most of the weekly decline in inventories occurred in the Midwest region, which fell by almost 0.4 million barrels, the Gulf Coast region also reported a weekly decline that measured nearly 0.1 million barrels. In contrast, inventories in the East Coast region reported a modest 0.1-million-barrel gain during this same time. Subsequently, inventories in the East Coast continued within the average range last week while at the same time Midwest and Gulf Coast inventories continued below their respective average ranges. Inventories of propylene for non-fuel use remained relatively flat last week at 1.6 million barrels, a level that accounts for 7.2 percent of total propane/propylene inventories.

Note: Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.