Released on May 19, 2004
(Next Release on May 26, 2004)

Cycles
Recently, there has been a lot of discussion concerning strong growth in oil demand in China, due in part to the shift from bicycles to cars as the main vehicle for transportation in some parts of the country. While this may have been a factor in keeping oil prices at elevated levels, there is another aspect of “cycling” that has not received as much attention: the cycling between product and crude oil inventories, particularly here in the United States.

Weekly surveys of analysts by Bloomberg, Dow Jones, and Reuters all pointed to expectations of an increase in U.S. crude oil inventories for the week ending May 14, ranging from an average of nearly 0.7 million barrels in the Dow Jones survey to as much as 1.8 million barrels in the Reuters survey. Yet, the data show that crude oil stocks fell by 1.1 million barrels per day. So, how were so many experts wrong in guessing the direction of crude oil stocks last week? Perhaps it may be because we are likely at the beginning of a new cycle in inventory patterns.

From the end of February to May 7, U.S. commercial crude oil inventories rose by 23.3 million barrels to reach a hair’s width away from 300 million barrels, a level not seen since August 2002! Clearly, with a trend such as this, it may be reasonable to expect it to continue. But a look at Figure 3 in EIA’s Weekly Petroleum Status Report indicates otherwise. The inventory build from the end of February to early May was almost exactly in line with seasonal norms. By the end of February we were right at the bottom end of the normal range, and we have stayed that way since. Looking ahead in the chart, we see that crude oil stocks typically level out sometime in May and then fall rather substantially throughout June, July, August, and September. This occurs because during these months, U.S. refineries are typically using a lot more crude oil than in other times of the year, in order to maximize gasoline production. With domestic crude oil production running about 5.6 million barrels per day, if crude oil refinery inputs average 16 million barrels per day, crude oil imports would need to average about 10.4 million barrels per day just to keep inventories from falling, much less continue to increase. In fact, there have only been a total of five weeks in which U.S. crude oil imports have ever averaged above 10.4 million barrels per day, much less averaging such a high level over several months. Thus, it is more likely that crude oil inventories will fall away from the 300-million-barrel mark over the next few months.

The previous cycle (from end-February to early May) saw product inventories drop sharply, even as (and because) crude oil inventories were building. A major reason crude oil inventories built at a seasonal pace was due to relatively low refinery inputs, which, while allowing more crude oil to go into inventory, reduced the amount of available product to go into storage. This may change, as refiners once again start to pour a lot of crude oil through their refineries. But there will be a cost to this increase in refined product production, which will come in the form of lower crude oil inventories. Hopefully, the market won’t be surprised if crude oil inventories once again begin to fall, as this would simply represent a seasonal shift in petroleum inventory cycles.

Retail Gasoline Prices Top the $2 Mark
The U.S. average retail price for regular gasoline increased by 7.6 cents per gallon as of May 17 to reach 201.7 cents per gallon, 51.9 cents higher than this time last year. This is the highest price (unadjusted for inflation) since EIA began recording this data series in August 1990, and the first time the inflation-adjusted price has been in this range since the fall of 1985. Retail regular gasoline prices were up throughout the country last week, with New England seeing the largest price increase of 10.5 cents to hit 202.8 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices rising by 4.6 cents to 226.9 cents per gallon. Prices on the West Coast gained 4.3 cents, to hit 224.3 cents per gallon, which is 50.8 cents higher than this time last year.

Retail diesel fuel prices increased by 1.8 cents per gallon as of May 17 to a national average of 176.3 cents per gallon, which is 32.0 cents per gallon higher than a year ago. Retail diesel prices were up throughout most of the country last week, with the West Coast seeing a decrease of 0.5 cent to hit 225.0 cents per gallon. California prices also lost 1.6 cents to 234.0 cents per gallon, marking the seventh week California average diesel retail prices have topped $2 per gallon.

Propane Continues Lackluster Build
U.S. inventories of propane continued to rack up lackluster gains last week with a 0.8-million-barrel increase that placed inventories as of May 14, 2004 at an estimated 32.1 million barrels. Despite consecutive weekly increases in both production and imports since the beginning of the month, inventories have risen by only 0.9 million barrels during this same period. With only a little over two weeks remaining in May, the monthly stockbuild, in all likelihood, will fall short of the 5-year average that totaled more than 8.9 million barrels. Moreover, if the monthly stockbuild continues at the same sluggish pace, U.S. inventories may dip below the lower boundary of the normal range by the end of the month. Regional inventory gains were spread across all the major areas last week with stocks in the East Coast posting a 0.3-million-barrel increase that reversed a 5-week slide in inventories. During this same period, inventory gains were also reported in the Midwest and Gulf Coast regions with respective gains totaling 0.5 million barrels and 0.6 million barrels. Inventories in the combined Mountain and West Coast regions reported a loss of 0.5 million barrels last week. Propylene non-fuel use inventories rose by 1.1 million barrels last week to 3.1 million barrels, accounting for a 9.7 percent share of total propane/propylene inventories.

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