Released on July 23, 2003
(Next Release on July 30, 2003)

Fundamentally Tight or Hype?
Some oil analysts (as well as some OPEC oil ministers) continue to think that global oil supplies are more than sufficient to justify prices several dollars or more lower than they currently are. Those expounding this theory generally speculate that there is a substantial price premium in place and that all talk of low inventories is unnecessarily causing the market to bid up the price higher than it would be otherwise. These analysts contend that with improvements in efficiencies due to consolidations across the oil industry and improved technology, inventories can be maintained at lower levels without causing additional price pressures. So are oil markets, especially those in the United States, fundamentally tight or is hype about low inventories causing prices to be substantially higher?

As regular readers of this publication might guess, EIA believes that markets are fundamentally tight, largely due to cuts in OPEC production that were made effective beginning on June 1 and to delays in getting Iraqi oil production, and consequently exports, back to substantial levels. While a case can be made that mergers and acquisitions throughout the oil industry in recent years have enabled the remaining companies to manage their inventories more efficiently, inventories are so much lower than they’ve been in recent years, that it is difficult to write this difference off to improved efficiencies. One of the reasons stated for these consolidations has been an effort to reduce costs, so why would companies be buying oil for several more dollars than needed? Since oil prices have fluctuated around $30 per barrel for West Texas Intermediate crude oil for a lengthy period, since September 2002, one would think extra supplies would have surfaced by now. Clearly, market participants must perceive that WTI prices around $30 per barrel are supported by current market conditions.

Another point some analysts make is that minimum operating inventory levels are much lower than currently estimated. For example, take the Lower Operational Inventory (LOI) level of 270 million barrels for U.S. commercial crude oil inventories, as defined in a National Petroleum Council study released in December 1998. In September 2002 and February 2003, U.S. crude oil inventories approached 270 million barrels and there were no physical indications of spot shortages for refineries. But whether 270 million barrels is the true LOI, or whether it is 260 million barrels, 250 million barrels, or even lower, is not as relevant as comparing inventories to normal levels. This is why EIA calculates normal inventory ranges based on statistical assessments of inventories over the last 5-year period. Graphs depicting inventory levels against these ranges can be found in Figures 2-7 in EIA’s Weekly Petroleum Status Report or by looking at the bottom series of charts on the left of this web page. These charts clearly indicate that crude oil inventories remain at low levels and that until recently gasoline and distillate fuel inventories were also running below normal levels, and even now, remain towards the bottom end of the normal range. If one accounts for growth in consumption, these levels are seen as even lower still, in terms of their capacity to cover expected demand. Whether we here at EIA (or others) state this or not, won’t change inventory levels by even 1 barrel. Inventories are low, across every product and most regions, and this will keep prices from falling much below current levels. In fact, oil prices should be expected to rise further if additional problems develop.

U.S. Retail Gasoline Prices Rise Again
The U.S. average retail price for regular gasoline rose last week for the third week in a row, increasing by 0.3 cent per gallon as of July 21 to reach 152.4 cents per gallon, which is 11.4 cents per gallon higher than a year ago. Stronger gasoline demand along with tight crude oil and gasoline supplies and some refinery problems over the last couple of weeks contributed to the slight rise in prices this week. Prices were up throughout most of the country, with the Rocky Mountain region seeing the largest increase, rising 2.0 cents to end at 154.1 cents per gallon. The West Coast had a price decrease of 2.6 cents, but still showed the highest regional prices at 168.8 cents per gallon. The region with the lowest price is the Gulf Coast, where prices for regular gasoline averaged 144.7 cents per gallon.

Retail diesel fuel prices increased for the third week in a row, rising 0.4 cent per gallon as of July 21 to a national average of 143.9 cents per gallon, which is 12.8 cents per gallon higher than a year ago. Retail diesel prices were up throughout the nation last week, with the largest increase occurring in California, where prices rose on average by 2.8 cents to 164.0 cents per gallon.

Weekly Propane Stockbuild Back on Track
U.S. inventories of propane are once again back on track with a weekly stockbuild that measured nearly 3.0 million barrels, the third highest weekly gain posted so far during the current build season (April through September). This follows on the heels of the rather lackluster 1.8 million barrels stockpiled the previous week. Last week's build put U.S. inventories of propane as of the week ending July 18, at an estimated 51.6 million barrels, a level that remains at the lower edge of the average range for this period. As with past strong weekly builds, imports played a key role with 2.1 million barrels imported last week, accounting for nearly 70 percent of the weekly build. Moreover, at mid-month, the July stockbuild, at 4.8 million barrels, represents about 70 percent of the average July build reported over the most recent 5-year period. But the fact remains that U.S. propane inventories still have some distance to go in order to reach the 60-plus million-barrel comfort zone prior to the start of the next heating season that begins in October. With peak inventory gains typically reached during May, each successive month usually posts ever-smaller gains through September, which leaves little time for any significant stockbuilds to occur in the run-up to the next heating season. Regionally, gains were modest on the East Coast last week, rising by less than 0.1 million barrels. Midwest inventories posted a 0.9-million-barrel increase, while the Gulf Coast, boosted by strong imports, saw inventories rise by 1.9 million barrels. After climbing to a yearly high that totaled more than 3.4 million barrels last week, stocks of propylene for non-fuel use edged lower to about 3.3 million barrels, a level that accounts for 6.4 percent of total propane/propylene inventories, down from last week’s 7.1 percent share.

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.