Released on April 28, 2004
(Next Release on May 5, 2004)

Would More Crude Oil Help?
Yesterday (April 27), the Center for Strategic and International Studies (CSIS) and the U.S.-Saudi Arabian Business Council co-hosted a conference on “U.S.-Saudi Relations and Global Energy Security.” At this conference, as he has stated recently in other venues, the Saudi Arabian Minister of Petroleum and Mineral Resources, Ali al-Naimi, stated that, “There is no general shortage of crude oil in today's market -- supplies are readily available.” The Saudi Arabian minister pointed to the “balkanized gasoline markets” and a shortage in U.S. refining capacity as reasons why gasoline prices are high in the United States. But the U.S. Deputy Secretary of Energy, Kyle McSlarrow, stated at the same conference that crude oil prices are “the driver” in the recent rise in gasoline prices. If the Saudi Arabian minister is correct, then more crude oil production, which would presumably lead to lower crude oil prices, would not help lower gasoline prices. If the U.S. Deputy Secretary is right, then more crude oil would help to lower both crude oil and gasoline prices, with the latter impacted by downward pressure on both crude oil and refining margins.

While it may be true that gasoline inventories are below the bottom end of the normal range, and thus reflect a tight gasoline market here in the United States, more crude oil production from oil producers with spare production capacity could do a lot to alleviate some of this price pressure. Some countries have stated that they have routinely offered more oil to their customers, but these customers (including major global oil companies) have refused to buy it. These countries point to this as evidence that the market is well supplied, and inferentially, that the companies are the cause of low inventories, not the country’s own production or pricing policies. In fact, this marginal or “surplus” oil is not being offered at market clearing prices, but at relatively high oil prices. With crude oil prices near the upper end of their historic range, most companies are unwilling to buy incremental oil at these prices simply to add to their stockpiles, i.e., oil not necessary to meet minimal contract needs. It is uneconomic for them to do so, even with product prices as high as they are currently. However, if this “surplus” oil was offered at lower, market clearing prices, some companies would add discretionary barrels. According to one news report of the conference, Deputy Secretary McSlarrow made exactly this point. ``Adequate supply to meet current demand is one thing. Supply that will allow people to build inventory is another. The people who are refining gasoline today do not have an incentive to build a cushion because they're buying more expensive crude.''

EIA’s analysis points to fundamental reasons why crude oil (and gasoline) prices are nearly as high as they are. While there is some concern in the market for factors outside OPEC’s control, e.g., supply uncertainty in Iraq, OPEC does have the ability to lower global crude oil prices, if it so chooses, simply by making more oil available at lower prices. Not only would this increase crude oil supply, but it would also reduce the marginal cost of producing gasoline, as well as market backwardation, thereby encouraging refiners to produce more gasoline, and over time, hold higher inventories than would otherwise occur. Since markets anticipate future developments, gasoline prices could decline quickly with falling crude oil prices and gasoline margins, even ahead of the several months required for extra OPEC crude oil to physically work its way through the very long U.S. supply chain. Indeed, it is precisely such action that would reduce non-commercial or “speculative” pressures that have been attracted to oil markets by abnormally tight conditions. While OPEC cites excessive speculation as one of the key reasons underlying high oil prices, OPEC actions can and do impact both market fundamentals and sentiment, especially the strategies and positions held by non-commercial participants. Thus, in our opinion, more OPEC supply could lower the price of WTI to about $30 per barrel, putting the OPEC Basket price back around $27 per barrel, still somewhat higher than OPEC’s stated target of $25 per barrel. A decline of that magnitude from the current WTI price of about $37 per barrel would lower gasoline prices by 15-20 cents per gallon, all else being equal. With many consumers seeing gasoline prices on signs at the highest level they have ever witnessed (not accounting for inflation), a drop of this magnitude would be a welcome relief.

Retail Gasoline and Diesel Prices Take a Break
The U.S. average retail price for regular gasoline decreased by 0.1 cent per gallon as of April 26 to reach 181.2 cents per gallon, 25.5 cents higher than at this time last year. This is the first time in six weeks that prices have fallen instead of increasing. Retail regular gasoline prices were mixed last week, with the Midwest, Gulf Coast, and West Coast all seeing price decreases. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 2.4 cents to 212.4 cents per gallon, but staying over the $2 per gallon mark for the tenth week in a row. Prices on the West Coast lost 1.0 cent, to hit 207.8 cents per gallon, which is 19.7 cents higher than this time last year.

Retail diesel fuel prices decreased by 0.6 cent per gallon as of April 26 to a national average of 171.8 cents per gallon, which is 21.0 cents per gallon higher than a year ago. Retail diesel prices were mostly down throughout the country last week, but the Rocky Mountain region saw a regional increase of 4.1 cents to hit 187.6 cents per gallon. West Coast prices lost 0.9 cent to reach 210.3 cents per gallon, the third week in a row this price has been over $2 per gallon. California prices eased 1.3 cents to 224.7 cents per gallon, marking the fourth week California average diesel retail prices have topped $2 per gallon. These high diesel prices are largely due to unplanned refinery outages over the past few weeks.

Propane Inventories Post Robust Weekly Build
Following a rather lackluster period when U.S. inventories of propane seesawed between modest gains and draws since the end of winter, last week saw inventories finally break from this pattern with a weekly gain that measured a robust 1.9 million barrels. With this gain, primary inventories of propane rose to an estimated 29.1 million barrels as of April 23, 2004, positioning inventories more than 7 million barrels above the same period last year. Nevertheless, U.S. inventories of propane continued to follow a path near the lower boundary of the normal range for this time of year. About 95 percent of the weekly gain occurred in the Gulf Coast region that reported inventories higher by 1.8 million barrels, followed with a weekly stockbuild in the Midwest that measured 0.3 million barrels. Elsewhere, inventories in the East Coast fell by 0.2 million barrels while the combined Rocky Mountain and West Coast areas remained flat during this same time. Propylene non-fuel use inventories moved up 0.1 million barrels last week to 1.8 million barrels, a level that accounted for a 6.2 percent share of total propane/propylene inventories.

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