Released on May 14, 2003
(Next Release on May 21, 2003)

Foreign Dependence
Petroleum imports, both for crude oil and major refined products, are a major source of supply for U.S. oil markets. Rarely has this been made clearer than by observing the path of oil prices over the last few months.

Beginning in December, when a general strike in Venezuela began to curtail crude oil production and, consequently, reduce exports to the United States and elsewhere, oil prices began to rise. With imports from a major supplier such as Venezuela dramatically reduced, there was not enough crude oil available (at prices refiners were willing to pay) by late January to supply crude oil to refineries at a sufficient rate to produce enough refined products, nor enough to build up crude oil inventories for use later in 2003. Consequently, both U.S. crude oil and refined product inventories were drawn down severely in the first part of 2003, leaving oil markets with little available inventory should a problem arise. Thus, it wasn’t surprising that with inventories this low and with war in Iraq looming, by mid-March the price for West Texas Intermediate crude oil reached nearly $38 per barrel, the U.S. average price for regular gasoline in the United States reached nearly $1.73 per gallon (a new-all time record if unadjusted for inflation), and the average retail price of heating oil for residential customers in the Middle Atlantic region averaged reached $1.94 per gallon.

Following the onset of war in Iraq, prices began to drop fairly rapidly. Why? Increased crude oil imports, particularly from Saudi Arabia, have allowed crude oil inventories to build some from an extremely low level, while also providing enough crude oil to refineries to increase production of refined products. At the same time, Venezuelan imports recovered substantially while crude oil imports from Iraq continued to arrive, as oil produced before the war was already in transit. Thus, over the last several weeks, the U.S. has continued to receive Iraqi imports while also receiving increased imports from both Saudi Arabia and Venezuela. Meanwhile, gasoline imports over the last several weeks have been pouring into the country as well. While preliminary monthly data for April are not yet available, weekly data for that month indicate that gasoline imports in April will probably set an all-time monthly record. This has allowed gasoline inventories to build back into the normal range, thus relieving some pressure on gasoline markets this spring.

Data for the week ending May 9, once again, indicate how important oil imports are to the United States. Total gasoline imports (including blending components) averaged below 800,000 barrels per day for the first time since the week ending March 7. So, even though gasoline refinery production increased, the build in gasoline inventories was less than it might have been had recent higher import levels been sustained. Crude oil imports for the week ending May 9 also point to the importance they play in the U.S. crude oil market. While imports from Iraq continue to arrive, even seven weeks after Iraqi oil exports ceased, they continue to drop, and are likely to fall to zero within the next week or two. As a result, overall U.S. crude oil imports dropped last week compared to the previous week, and as such, crude oil inventories fell by 2.7 million barrels. With OPEC talking about reducing production, crude oil imports will be a critical data point to watch this summer, as without sufficient quantities of oil arriving from foreign sources, oil prices may continue their recent recovery. And conversely, the more oil imported into the United States this summer, the more likely any price rise will prove to be temporary, both for crude oil and refined products. The degree to which the United States is dependent on foreign sources of supply will be a critical component in determining which direction prices will move this summer.

U.S. Retail Gasoline Prices Fall by Another Two Cents
The U.S. average retail price for regular gasoline fell last week for the eighth week in a row. Prices dropped by 2.2 cents per gallon as of May 12 to hit 149.1 cents per gallon, which is still 10.3 cents per gallon higher than a year ago. Over the last eight weeks, the average price for regular gasoline has declined by 23.7 cents per gallon. The recent reductions in gasoline prices are largely due to the large decline in crude oil prices experienced since mid-March. Prices were down throughout most of the nation last week, but the Midwest did see a 0.7-cent increase to 141.3 cents per gallon. The region with the lowest price is the Gulf Coast, where prices for regular gasoline averaged 137.3 cents per gallon, while the region with the highest price is the West Coast, where prices for regular gasoline averaged 178.4 cents per gallon on May 12. California prices continued to drop, decreasing by 6.1 cents to 186.7 cents per gallon.

Retail diesel fuel prices decreased for the ninth consecutive week, falling 4.0 cents per gallon as of May 12 to a national average of 144.4 cents per gallon, which is still 14.5 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 136.6 cents per gallon, while the region with the highest price is New England, where prices averaged 161.2 cents per gallon on May 12.

Will Retail Gasoline and Diesel Fuel Prices Continue to Fall?
With retail gasoline and diesel fuel prices having fallen nearly 24 cents and 33 cents per gallon, respectively, since their all-time record highs (unadjusted for inflation) in mid-March, many people have begun to wonder how much further they will fall, and perhaps more importantly, what will prices be like over the summer driving season? EIA addresses the latter in its Short-Term Energy Outlook , updated monthly, but the gasoline price picture can change much more quickly, sometimes from day to day. Since crude oil prices have risen more than $3 per barrel over the past two weeks, will this mark the end of declines in retail gasoline and diesel fuel prices?

EIA uses a number of techniques to "model" petroleum markets and forecast what they will do next, but one of the simplest measures is to look at average margins, or spreads. The typical spread between average spot and retail gasoline prices (including taxes) in recent years is about 60 cents, once all movement in spot prices has been "passed through" to retail. After the significant declines of the past two months, the gasoline spot-to-retail spread is down to about 66 cents, implying that retail prices could yet decline about another 6 cents relative to spot prices. However, spot gasoline prices have risen an average of over 7 cents in the past week, so it's very possible that a reduction in the spread could occur due to rising spot prices before retail prices fall much further. Nevertheless, given current patterns, our expectation is for continued small price declines for a few more weeks. Of course, any further rise or fall in spot gasoline prices, possibly driven by crude oil prices, would further change this picture as we move into the driving season.

For diesel fuel prices, the picture is slightly different. The average spot-to-retail spread is about 65 cents per gallon, and it now stands at about 67 cents, so retail diesel fuel prices might be expected to drop another 2 cents to restore their "normal" relationship to spot prices.

It should be noted that the numbers cited above are national averages, and prices can vary significantly between regions. Particularly in California, where both gasoline and diesel fuel prices spiked more sharply this spring, the spot-to-retail price spreads widened as spot prices declined quickly and retail prices lagged typically behind. While California retail diesel fuel prices have returned near a typical spread to spot prices, retail gasoline prices there remain elevated by as much as 20 cents. As such, there should be some continuing downward momentum in California retail gasoline prices over the next few weeks, assuming spot prices don't rise sharply for any reason.

Propane Inventories Sharply Higher Last Week
Following on the heels of one of the most lackluster April builds in years, U.S. inventories of propane soared sharply higher last week, posting a robust 3.2 million-barrel stockbuild to finish the week ending May 9, 2003 at an estimated 26.8 million barrels. Moreover, last week’s stockbuild was by far the highest yet for the 2003 build season and was the largest weekly increase since the week ending August 31, 2002. Although still far from reaching normal levels for this time of year, U.S. inventories of propane moved closer to the lower limit of the average range last week. Inventory gains were strong in all the major regions, boosted in part by imports into the Lower Atlantic and Midwest regions that accounted for a large part of those region’s weekly gains. The East Coast and Midwest regions reported similar 0.9-million-barrel gains last week, while the Gulf Coast region posted an even larger 1.3-million-barrel gain during this same period. The boost in East Coast inventories moved the level above the average range for the first time since the end of September 2002, while inventories in the Midwest and Gulf Coast regions continue to track below their respective average ranges. Rising propane inventories outpaced the increase in propylene non-fuel use inventories to account for a smaller 5.5 percent of total propane/propylene inventories, down slightly from the previous week’s 5.8 percent share.

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