Released on March 17, 2004
(Next Release on March 24, 2004)

The Luck of the Irish
On this St. Patrick’s Day, U.S gasoline consumers are seeing average prices slightly lower than last week, as EIA’s weekly retail price survey this past Monday (March 15) showed a drop of 1.4 cents nationally to $1.724 per gallon for regular gasoline. This is not much different from last year’s St. Patrick’s Day, when the average retail price peaked at $1.728 per gallon, then an all-time record (not adjusted for inflation - see historical gasoline prices in today’s dollars). So are prices likely to continue dropping, or is this a temporary lull before prices begin to increase again? To gain some insight into this question, it would be helpful to see why gasoline prices have been relatively high in recent weeks.

As the chart below shows, there are many reasons why consumers have seen relatively high gasoline prices. But simply put, gasoline prices have risen because of two primary factors: 1) a rise in global crude oil prices, and 2) tight gasoline markets nationwide.

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As the chart indicates, crude oil prices have increased by about $7 per barrel since early December. Converted into cents per gallon, this would explain about 17 cents of the 26-cent increase seen in retail gasoline prices since December. So what has led to the increase in crude oil prices? First, OPEC has kept production, and consequently global exports, at levels that have prevented crude oil inventories worldwide, and especially here in the United States, from returning to more normal levels. This OPEC restraint has been followed by a call to decrease production further beginning in April. Should OPEC even be half successful in this endeavor, EIA predicts inventories would continue to remain tight and prices would stay relatively high. Of course, part of the reason for this thinking is that global oil demand continues to increase, particularly in China and the United States. While supply and demand factors explain most of the increase in crude oil prices, there are some other factors, including the large net long position by non-commercial participants in the near-month NYMEX contract and even a demand pull from higher gasoline prices. Nevertheless, crude oil prices have increased in recent months primarily due to a tightening global crude oil market.

Crude oil markets are not the only ones that have tightened in recent months. Gasoline supply and demand factors, particularly this year, have played an important role in explaining higher gasoline prices. Despite relatively high nominal prices, U. S. gasoline demand has been very strong, averaging 4.5 percent above year-ago levels over the last four weeks, and supply has simply not increased enough to keep up. With the refining system globally showing much less excess capacity than last year, the lack of ability to further increase gasoline production substantially, including here in the United States, may make it difficult for refiners to supply enough gasoline this spring. Gasoline imports (including gasoline blending components, which can include gasoline that just needs to be blended downstream to turn into finished gasoline meeting U.S. specifications) have averaged significantly below year-ago levels, particularly in January and February, despite the fact that product imports in January and February 2003 were adversely affected by the disruption in Venezuela that had resulted from the oil workers strike in December 2002. Gasoline imports have been lower so far this year for a number of factors: relatively high freight rates, low supplies available for export from Europe, and, possibly, from lower-than-normal exports from Venezuela. High freight rates have made it less economical to ship gasoline here, even with relatively high prices, and despite European refiners running at high utilization rates, European inventories continue to stand at low levels, meaning that there simply has not been as much gasoline available for export from Europe to cross the Atlantic.

With supply unable to keep up with demand growth this year, U.S. inventories have been drawn down much more than normal this year. January, which would typically be expected to see an increase of more than 12 million barrels, actually saw total gasoline inventories fall by nearly 1 million barrels, and there wasn’t any significant improvement in February, relative to normal changes. As a result, there is little, if any, flexibility in the gasoline market to respond to any imbalances, be they nationally or in specific regions of the country.

So, will gasoline prices continue to fall or are they likely to increase again over the next several weeks? EIA still expects gasoline markets to remain tight and crude oil prices to remain relatively high, thus putting increased pressure on prices to go higher this spring. While nothing is certain, one thing is sure: luck will have nothing to do with the path of gasoline prices over the next several weeks, as supply and demand factors will drive prices.

U.S. Retail Average Gasoline Drops 1.4 Cents
The U.S. average retail price for regular gasoline decreased last week by 1.4 cents per gallon as of March 15 to hit 172.4 cents per gallon, which is 0.4 cent per gallon lower than a year ago. Retail regular gasoline prices were down throughout most of the country last week, with the Midwest leading the way with a 3.6-cent drop to hit 164.7 cents per gallon. California prices averaged 209.7 cents per gallon after moving down 1.5 cents this past week and keeping California prices over $2 for the fourth week in a row. The Rocky Mountains were the only region showing an increase, rising 1.8 cents to reach 172.5 cents per gallon.

Retail diesel fuel prices decreased by 1.1 cents per gallon as of March 15 to a national average of 161.7 cents per gallon, which is 13.5 cents per gallon lower than a year ago. Retail diesel prices were mostly down last week, with the West Coast seeing the largest decrease of 4.4 cents to hit 180.1 cents per gallon. The Rocky Mountains saw another price increase, the fifth in a row, of 1.3 cents to hit 163.6 cents per gallon, which is still 14.4 cents lower than last year.

Residential Heating Fuel Prices Continue Decreases Toward Spring
Residential heating oil prices decreased for the period ending March 15, 2004. The average residential heating oil price fell 1.0 cent from last week to reach 159.1 cents per gallon, a decrease of 21.2 cents from this time last year. Wholesale heating oil prices dropped 5.0 cents to 96.7 cents per gallon, a decrease of 12.7 cents compared to the same period last year.

The average residential propane price decreased 3.0 cents, to 148.3 cents per gallon. This was a decrease of 9.9 cents over the 158.2 cents per gallon average for this same time last year. Wholesale propane prices decreased 1.9 cents per gallon, from 65.2 cents to 63.3 cents per gallon. This was a decrease of 11.2 cents from the March 17, 2003 price of 74.5 cents per gallon.

These prices come from the last survey done for the 2003/04 winter heating season. Weekly retail and wholesale prices for heating oil and propane will restart for the 2004/05 winter season beginning in October 2004.

Propane Inventories Flat
U.S. inventories of propane remained essentially flat last week at an estimated 26.7 million barrels as of March 12, 2004. Nearing the mid-month point for March, U.S. inventories of propane have gained about 0.7 million barrels so far this month. Comparatively, U.S. inventories over the most recent 5-year period, from 1999 through 2003, reported a net loss of about 2.5 million barrels for all of March. Regionally, East Coast inventories continued to reflect some level of winter demand with a weekly draw totaling more than 0.2 million barrels, while at the same time, Gulf Coast inventories reported a weekly increase of nearly 0.2 million barrels. During this same period, Midwest inventories remained relatively unchanged. Propylene non-fuel use inventories slipped lower to end the week at 1.6 million barrels, accounting for a 6.1 percent share of total propane/propylene inventories.

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