Released on May 12, 2004
(Next Release on May 19, 2004)

Gasoline Price Reprieve?
Only a few weeks away from the start of the peak summer driving season that typically begins with the Memorial Day holiday, pervasive fear of a summer gasoline supply crunch continues to dominate media headlines given the already sharp rise in retail gasoline prices since the beginning of the year. Gasoline supply data in recent years might suggest that consumers could reasonably expect to see some temporary easing in gasoline prices in the run-up to, or immediately following, the Memorial Day holiday, as refiners and importers rush to take advantage of tight gasoline markets with higher production and imports. Arguably, the exceptionally bullish gasoline price increases seen over the last several weeks may not seem consistent with this scenario.

Following a similar pattern to that seen last year, when total gasoline inventories remained below the normal range through March, but rebounded above the lower boundary of the normal range prior to the start of the summer driving season, gasoline inventories during 2004 have recently begun to move above the lower boundary of the normal range. Last year, as gasoline inventories began to move higher during the spring months, retail gasoline prices, in conjunction, began to drift lower starting from the March 17th initial peak of 172.8 cents per gallon. However, as market conditions retightened after the Memorial Day holiday, retail gasoline prices once again rose as the summer driving season progressed, hitting a yearly peak of 174.7 cents per gallon by August 25, 2003. This year, following completion of seasonal maintenance programs in recent weeks, many refiners ramped up production of gasoline in time for peak summer demand. Through the week ending April 30, 2004, refinery production of gasoline averaged about 8.5 million barrels per day, 347 thousand barrels per day higher compared with gasoline production through the end of April 2003.

Gasoline imports have also shown strength since April, with a record 1.3 million barrels per day reported for the week ending April 16, 2004, albeit that on a year-to-date basis through April, imports remain relatively flat compared with the same four-month-period last year. Maintaining April’s higher rate of gasoline imports may be difficult this year due to more stringent regulations on the sulfur content of gasoline that, some analysts believe, may limit foreign refiners’ ability to export greater volumes of the lower-sulfur-content gasoline to the U.S. Likewise, questions still remain with respect to foreign refinery short-term capacity to ship extra supplies of gasoline blendstocks that can be mixed with ethanol to meet new stiff summer requirements in New York and Connecticut. It is probably too early to fully gauge the total impact these regulations may have on gasoline imports in the months ahead.

Despite significantly higher gasoline production this year through April 2004, gasoline inventories at the end of last month continued to lag year-ago stock levels by about 4 million barrels, or about 2 percent. Gasoline inventories typically build from pre-driving season lows, most often occurring in March, through April and May. During 2004, gasoline inventories began their seasonal build from 199.5 million barrels on March 19, reaching 204.0 million barrels by April 30, 2004. Notwithstanding the dip of 1.5 million barrels reported for the week of May 7, 2004, the average gasoline stock build during May, based on the most recent 5-year period from 1999 through 2003, totals about 5 million barrels. Hence, inventories could start the driving season near year-ago levels, albeit still near the lower boundary of the normal range, provided gasoline production and imports maintain recent peak levels.

The key factor in the slow start to the buildup in gasoline inventories, and the key to any easing in the gasoline balance this summer, lies in the strong recovery of the U.S. economy, which has driven high levels of gasoline demand so far this year. Gasoline demand during the first four months of 2004 averaged about 8.9 million barrels per day, compared with only 8.6 million barrels during this same period last year. EIA weekly data reported even stronger gasoline demand, reaching 9.3 million barrels per day in both late April and early May. As long as demand continues to grow at a 3 to 4 percent pace, it will be difficult for inventories to move further into the normal range, thus keeping pressure on prices.

So will consumers see any gasoline price reprieve in the run-up to the Memorial Day holiday as they did last year? Most likely not, as some petroleum industry analysts believe total gasoline inventories would need to reach more than 210 million barrels before some price relief is seen. However, price relief for the peak July/August period is still an open question, as underlying demand growth for this year is still expected to run close to 2 percent, and may yet be observed over the second half of 2004, as the onetime factors clouding comparisons with last year through the first six months disappear. Furthermore, as mentioned, domestic and foreign refinery production has shown glimpses of the capacity to meet even strong demand growth.

Retail Gasoline Prices Gain Almost 10 Cents
The U.S. average retail price for regular gasoline increased by 9.7 cents per gallon as of May 10 to reach 194.1 cents per gallon, 45.0 cents higher than this time last year. This is the highest nominal price since EIA began recording this data series in August 1990. Retail regular gasoline prices were up throughout the country last week, with New England seeing the largest price increase of 12.1 cents to hit 192.3 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices rising by 10.8 cents to 222.3 cents per gallon. Prices on the West Coast gained 11.7 cents, to hit 220.0 cents per gallon, which is 41.6 cents higher than this time last year.

Retail diesel fuel prices increased by 2.8 cents per gallon as of May 10 to a national average of 174.5 cents per gallon, which is 30.1 cents per gallon higher than a year ago. Retail diesel prices were up throughout the country last week, with the West Coast seeing a regional increase of 10.9 cents to hit 225.5 cents per gallon. California prices gained 8.2 cents to 235.6 cents per gallon, marking the sixth week California average diesel retail prices have topped $2 per gallon.

Propane Inventories Post Modest Weekly Gain
Primary stockholders added a modest 0.1 million barrels of propane last week, with U.S. inventories ending the week of May 7 at an estimated 31.3 million barrels. With last week’s modest gain, U.S. inventories of propane continued to follow a path near the lower boundary of the normal range for this time of year. Regional gains were limited to the Midwest with a 0.5 million-barrel increase that moved inventories up to 12.5 million barrels last week, while the East Coast region reported the only weekly loss that totaled 0.3 million barrels. Gulf Coast and combined Rocky Mountain and West Coast inventories remained unchanged during this same period. Propylene non-fuel use inventories moved up to 2 million barrels last week to account for a 6.4 percent share of total propane/propylene inventories.

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