Released on June 3, 2004
(Next Release on June 9, 2004)

The End of the Tunnel?
Historically, retail gasoline prices have increased seasonally during spring, often peaking around Memorial Day. This year, prices have climbed steadily since the start of the year. From about $1.48 per gallon on December 29, 2003, the average retail price of regular gasoline in the United States increased 18 out of the next 21 weeks up to May 24, 2004, totaling a net increase of 58.6 cents per gallon, before dropping by 1.3 cents per gallon on May 31, 2004. Was last week’s drop just an aberration or was it a sign that the light at the end of the tunnel is here, and that consumers will see further price declines in the coming weeks?

While it is difficult to know what will happen in the near future, especially in light of recent events in Saudi Arabia and elsewhere in the Middle East, several key indicators suggest that gasoline prices may continue to fall in coming weeks. First, average spot prices (one type of wholesale price) have been falling for a couple of weeks now, dropping a total of 16 cents per gallon since May 19. Since it takes about 1 to 2 weeks for changes in spot prices to begin being reflected in retail prices, last week’s drop may indicate the beginning of a decline in retail prices over the next couple of weeks.

Events taking place now also show some promise of lower prices beyond the next couple of weeks. Saudi Arabia and several other suppliers have pledged significant increases in crude oil production. Actual increases in crude oil production would help put downward pressure on crude oil prices, which would help lower gasoline prices (see last week’s This Week In Petroleum). Additionally, recent high prices have also encouraged more imports from numerous Atlantic Basin sources. Crude oil imports last week averaged 10.7 million barrels per day, the second largest weekly amount ever, with most of the increase in short-haul crude oil, notably from Mexico and Nigeria (the latter a provider of high quality crude oil). These imports have helped to increase commercial crude oil inventories, even above the usual increase seen at this time of year. As of May 28, commercial crude oil inventories stood at 301.7 million barrels, just above the lower end of the normal range. While this implies that inventories are still relatively low, having them within the normal range, even if just barely, is an improvement over what has happened in recent months. Increases in imports from longer-haul crude oil import sources, such as Saudi Arabia, are more likely to begin being seen next month, which would help offset seasonal downward pressure on commercial crude oil inventories, thus relieving some of the upward price pressure experienced over the last several months.

Finally, U.S. gasoline inventories have risen, increasing by another 1.3 million barrels between May 21 and May 28. With imports averaging about 1 million barrels per day and production, including at gasoline blenders, averaging 8.8 million barrels per day last week, there continues to be enough supply to not only meet demand, but add some to inventories as well. It should be noted that gasoline inventories typically increase in May, and that they still are significantly below the 5-year average. Again, the higher inventories are, the more flexibility is inherent in the system, thus relieving some price pressure.

Consumers should not expect retail prices to fall back to prices seen before the recent increases. While prices could drop below $2 per gallon over the next couple of weeks, and may continue to fall thereafter, present market conditions do not provide a reason to expect prices to return to their level at the start of this year anytime soon.

Retail Gasoline Prices Fall by a Penny
The U.S. average retail price for regular gasoline decreased by 1.3 cents per gallon as of May 31 to reach 205.1 cents per gallon, 57.8 cents higher than this time last year. This decrease comes after four previous weeks of price increases, and it’s the third week in a row the national average price has been over $2. Inflation adjusted prices have not been in this range since the fall of 1985. Retail regular gasoline prices were mixed last week, with the East Coast seeing an increase of 0.7 cent to hit 204.0 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices rising by 0.3 cent to 232.7 cents per gallon. Prices on the West Coast gained 0.2 cent, to hit 229.1 cents per gallon, which is 61.4 cents higher than this time last year. The Midwest saw a decrease of 4.8 cents to reach 200.0 cents per gallon.

Retail diesel fuel prices decreased for the second week in a row by 1.5 cents per gallon as of May 31 to a national average of 174.6 cents per gallon, which is 32.3 cents per gallon higher than a year ago. Retail diesel prices were mostly down last week, with the West Coast seeing a decrease of 9.3 cents to hit 210.5 cents per gallon. California prices lost 8.0 cents to 218.6 cents per gallon, marking the ninth week California average diesel retail prices have topped $2 per gallon.

May Propane Build Near Record Low

Primary stockholders of propane posted one of the lowest May builds in recent years totaling a mediocre 4.2 million barrels that positioned U.S. inventories of propane as of May 28, 2004 at an estimated 35.4 million barrels. Last week's modest 1.1-million-barrel gain only added to the lackluster build seen earlier in May, a month that typically adds close to 9 million barrels. The monthly stockbuild was the lowest for May since 1990 and was the second lowest for this month since 1982. Although inventories remain slightly ahead of last year at this time, the national level, nonetheless, continues on a path slightly below the average range for this time of year. Regional inventories were mixed with only the Midwest showing a weekly build that measured 1.2 million barrels, followed with a weekly loss in the Gulf Coast that totaled 0.1 million barrels. Elsewhere, inventories remained flat in the East Coast and the combined Mountain and West Coast regions. Midwest inventories continued to track well within the average range last week, while East Coast and Gulf Coast inventories continued to track slightly below the lower boundary of the average range during this same period. Propylene non-fuel use inventories moved lower last week to 2.8 million barrels that accounted for a smaller 7.9 percent share of total propane/propylene inventories, compared with the prior week.