Released on July 16, 2003
(Next Release on July 23, 2003)

You Never Know
Just prior to the July 4 holiday, we provided analysis on gasoline prices, which concluded that retail prices would not surge much higher the rest of the summer, and would stay well below the peak price seen in March. We still firmly believe that prices will stay well below their March peak. While a 3.2 cents per gallon rise in the U.S. average price for regular gasoline between July 7 and July 14 suggest that the near-term path of gasoline prices in July may differ from what we opined earlier, the increase may be temporary.

What has changed in the last two weeks? First, crude oil prices have recently increased. Between June 27 and July 14, the price of West Texas Intermediate crude oil increased by $2 per barrel, which when fully passed through to retail prices would explain an increase of nearly 5 cents per gallon. Some of the crude oil price increase has been attributed to delays in getting Iraqi crude oil exports to pre-war levels, as well as recent cuts in OPEC production. Another change in recent weeks has been a smattering of minor refinery problems in various parts of the country, which combined, had the effect of decreasing recent gasoline production levels. However, with gasoline production last week averaging nearly 9.0 million barrels per day (the second highest average ever), it appears that these problems have largely ended. Additionally, gasoline product supplied (or demand, if you will; see an explanation of gasoline product supplied in the July 9, 2003 edition of This Week In Petroleum), which had reached a record level in the week ending June 27, continued at a relatively strong pace for the week ending July 4, before dropping below 8.8 million barrels per day last week. Some of the strength prior to last week was perceived as stockbuilding by retailers leading up to the July 4th 3-day weekend. With gasoline demand falling off last week, this would lend some credence to this theory, as retailers had plenty of gasoline available and needed to buy less from their sources, thus helping to rebuild primary inventory levels.

But with near-record gasoline production last week and a drop in demand, gasoline inventories rose by 3.9 million barrels at a time of the year when they typically are drawn down. Most of the increase was on the East Coast (PADD 1), where inventories are now back within the normal range, and on the West Coast (PADD 5), where they actually jumped to just above the average range for this time of year (see new regional gasoline inventory charts in Figure 4 of the Weekly Petroleum Status Report when the PDF file is available at 9:00 am EDT on July 17). And with wholesale prices averaging between 90 and 95 cents per gallon, refiners had the incentive to increase gasoline production, which apparently they did, according to data for last week. With the increase in production going into inventories (since demand fell last week), this could dampen any price pressures that were starting to become apparent. But, regardless of how quickly markets can change, we still feel strongly that retail gasoline prices will not approach the peak prices we saw this past March, barring any major unforeseen problems. Of course, in a rapidly evolving gasoline market, one never knows how the winds might shift in the near future.

Crude Oil Inventory Deficit
Since November 2002, U.S. crude oil inventories have consistently remained below the lower end of the normal range, which in turn has supported crude oil prices in the United States. The situation worsened considerably beginning in late December 2002, once imports from Venezuela slowed to a trickle following strikes in that country which began in early December. Even though imports from Venezuela have since returned to close to normal levels, and preliminary data indicate daily imports in May 2003 averaged the second highest amount ever recorded (see http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html), U.S. commercial crude oil inventories (excluding crude oil stored in the Strategic Petroleum Reserve) have remained more than 15 million barrels below the lower end of the normal range (see graph below) since the end of January 2003. Of course, low crude oil inventories would not be as much of a concern if inventories of major petroleum products were plentiful. If this were the case, refiners could cut back the amount of crude oil being used in refineries, drawing upon ample product inventories to meet their commitments, thus helping to rebuild crude oil inventories. However, until last week, gasoline, distillate fuel, propane, and residual fuel oil had all been at or below the lower end of the normal range for inventories, thus preventing crude oil inventories from rebuilding more quickly. But until the commercial crude oil inventory deficit gets eliminated, or is at least perceived to be close to being eliminated, U.S. crude oil markets will remain tight, thus helping to support prices at or near current levels.

U.S. Retail Gasoline Prices Pop Up 3 Cents
The U.S. average retail price for regular gasoline rose last week for the second week in a row, increasing by 3.2 cents per gallon as of July 14 to reach 152.1 cents per gallon, which is 12.7 cents per gallon higher than a year ago. Prices rose on increasing gasoline demand and recent tightening in the wholesale gasoline balance, as reflected in lower inventories in late June. Prices were up throughout most of the country, with the Lower Atlantic seeing the largest increase, rising 6.1 cents to end at 150.5 cents per gallon. The West Coast had a price decrease of 2.3 cents, but still showed the highest prices at 171.4 cents per gallon. The region with the lowest price is the Gulf Coast, where prices for regular gasoline averaged 143.4 cents per gallon.

Retail diesel fuel prices increased for the second week in a row, rising 0.7 cent per gallon as of July 14 to a national average of 143.5 cents per gallon, which is 13.5 cents per gallon higher than a year ago. Retail diesel prices were mostly up throughout the nation last week, with the largest increase occurring in the Lower Atlantic, where prices rose on average by 1.4 cents to 139.3 cents per gallon. California and New England saw price decreases of 0.2 cent and 0.8 cent, respectively.

Weekly Propane Build Slows
Last week's propane stockbuild slowed considerably to 1.8 million barrels following more robust stockbuilds seen over the past several months, with U.S. inventories ending the week of July 11 at an estimated 48.7 million barrels. The slowdown in the propane stockbuild was mostly due to lower imports last week than in past weeks, which had been the driving force for the higher weekly builds. But industry sources continue to say propane import levels are expected to remain strong through July and August due to the favorable market fundamentals that exist in the United States. Thus, last week's relatively low stockbuild may be viewed as just a lull in the ongoing armada of propane imports seen so far this year. Nevertheless, primary inventories at the national level continue to lag slightly below the average range for this time of year. Regional gains remained flat in the East Coast for the seventh consecutive week, while Midwest and Gulf Coast inventories reported respective gains measuring 0.7 million barrels and nearly 1.0 million barrels. Inventories of propylene for non-fuel use inched higher to 3.4 million barrels to account for a slightly higher 7.1 percent share 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.