Released on March 31, 2004
(Next Release on April 7, 2004)

What Month Is It?
With record high temperatures in parts of the country recently and high gasoline prices, it wouldn’t take much to assume today is the last day of May, not March. But it is March 31, not May 31, which means that not only did OPEC meet today and reaffirm its previously stated plan to cut production quotas by 1 million barrels per day effective April 1, but that there are still 5 months of strong gasoline demand on the horizon.

While OPEC’s announcements are eagerly anticipated and widely reported, how much production will actually be cut is still an open question, probably dependent on actual price behavior in the near term. In its Short-Term Energy Outlook – March 2004 (STEO), EIA assumed that OPEC members would reduce production, but that actual production would remain significantly above the quotas, as has recently been the case. This still appears to be a sound assumption. However, EIA had also expected commercial crude oil inventories (excluding the Strategic Petroleum Reserve) to reach 288 million barrels by the end of March, but data for the week ending March 26 shows crude oil stocks over 294 million barrels. In the four weeks between February 27 and March 26 (effectively the month of March), crude oil inventories have increased by 18.5 million barrels, compared to a more typical increase of 14.8 million barrels. In only two other years since 1963 have crude oil inventories increased by more during the month of March (31.4 million barrels in 1990 and 26.1 million barrels in 2001). Unfortunately for product inventories, this larger-than-expected stock build did not come from increased supplies, but largely from lower-than-expected inputs to refineries. Over the last four weeks, about 14.6 million barrels per day of crude oil have been run through U.S. refineries, significantly less than the 15.0 million barrels per day expected for March in the latest STEO. If more crude oil had been put into refineries, refinery production would have been higher, thus probably putting product inventories somewhat higher. But then, crude oil inventories would not be sitting at a 6 million barrel surplus to our expected end-March level.

In any event, it is gasoline prices that have confounded many. The average price of $1.758 per gallon as of March 29 is still a far cry from the inflation-adjusted March 1981 average price, which would be equivalent to $2.99 per gallon in today’s dollars, but it is still the highest seen in many parts of the country in recent memory. Because many people see gasoline prices in two-foot-high numerals staring at them several times a day, the psychological impacts of high gasoline prices can be even more important than their actual effect on the cost of operating vehicles. For a typical family with two vehicles, each driven 11,000 miles per year and averaging 20 miles per gallon, a 10 cent higher gasoline price over an entire year translates into an added fuel cost of $110, assuming no change in miles driven.

So what will the OPEC meeting mean for gasoline prices this summer? Even if our estimate that actual OPEC production will continue to significantly exceed quota levels is borne out, we would still expect gasoline prices to climb somewhat higher than current levels sometime during the next couple of months. EIA’s current short-run forecast estimates a peak monthly average of $1.83 for regular gasoline, and OPEC’s announcement and other recent developments do not suggest the need to significantly revise our forecast. Despite greater-than-expected crude oil stockbuilds recently, these inventories may come down as refineries begin to put 15 million barrels per day or more through their systems. However oil markets play out over the next few weeks, gasoline consumers should expect to be paying even higher prices sometime later this spring/summer.

U.S. Retail Average Gasoline Gains 1.5 Cents
The U.S. average retail price for regular gasoline increased by another 1.5 cents per gallon as of March 29 to hit a record, unadjusted for inflation, of 175.8 cents per gallon, which is 1.1 cents per gallon higher than the previous all-time high set on August 25, 2003. Retail regular gasoline prices were up throughout most of the country last week, with the Midwest and Rocky Mountains both showing a 3.1 cent increase to hit 171.4 cents per gallon and 177.5 cents per gallon, respectively. California prices fell by 0.4 cent but still stayed over the $2 mark for the sixth week in a row, reaching 207.9 cents per gallon. West Coast prices remained over $2 per gallon as well, although prices dropped by 0.2 cent to hit 200.2 cents per gallon. The U.S. monthly average retail price for March 2004 was 173.6 cents per gallon, which is 3.4 cents higher than the previous monthly nominal high of 170.2 cents per gallon set in May 2001.

Retail diesel fuel prices increased by 0.1 cent per gallon as of March 29 to a national average of 164.2 cents per gallon, which is 4.0 cents per gallon higher than a year ago. Retail diesel prices were mixed last week, with the West Coast seeing the largest regional increase of 2.2 cents to hit 181.7 cents per gallon. California prices jumped 3.5 cents to 188.9 cents per gallon.

Propane Posts March Build
Although not a rare occurrence, U.S. inventories of propane logged a March stockbuild that measured about 1.6 million barrels as of March 26, 2004, the highest build for this month since 1997. The record stockbuild for this month occurred during March 1977, totaling more than 3.8 million barrels. Primary inventories moved higher to end the week of March 26, 2004 at an estimated 27.5 million barrels. Regional inventories posted mixed results with a large waterborne cargo boosting East Coast inventories up more than 0.6 million barrels to 3.2 million barrels by the end of the week, while Midwest inventories posted a more moderate gain of about 0.2 million barrels that positioned inventories in this region to reach 10.2 million barrels. However, Gulf Coast inventories lost ground last week with a decline of more than 0.4 million barrels that left stocks in this region at 12.8 million barrels during this same period. Propylene non-fuel use inventories continued lower to 1.4 million barrels last week, a level that accounts for 5.1 percent of total propane/propylene inventories.

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.

Weekly retail and wholesale prices for heating oil and propane will restart for the 2004/05 winter season beginning in October 2004.