Released on June 9, 2004
(Next Release on June 16, 2004)

The Theory of Relativity
While Albert Einstein was referring to more scientific forces in his theory of relativity, a similar concept should also be applied to oil inventory levels. A lot of focus is often placed on whether they increased or decreased from the previous week, or even how they compare to inventories a year ago. But both of these comparisons assume that inventories for the base time period (i.e., the previous week or a year ago) are an appropriate level for comparison. What may be more instructive is to compare current inventory levels to what might be expected for this time of year. Of course, determining this “normal” level has its own issues, but comparing inventories to a “normal” level would seem better than some arbitrary level for the previous week or a year ago.

How should one calculate a “normal” range? A popular method, used by many analysts, looks at the minimum and maximum levels seen over the most recent 3-year or 5-year period for a particular time of year. One advantage of doing this is that it is fairly easy to calculate. However, if there were unusually high and/or low levels over the past few years, then the “normal” range would include levels that are not typical, indeed, ”abnormal.” Under this scenario, inventories would only be outside the normal range when they were higher or lower than those seen for the same time of year over the past few years. To us, this seems to defeat the very purpose in constructing a customary, or normal range.

EIA, however, attempts to overcome such shortcomings by calculating what we feel is a “normal” range using the science of statistics. A detailed description of the methodology behind the calculation is on page 5 of the pdf file for Appendix A of the “Weekly Petroleum Status Report.” The methodology uses a statistical technique to create an average over the last 5 years and then calculates an even band across the whole calendar using seasonal variation over the last 7 years. Figure 2 in the Weekly Petroleum Status Report shows total U.S. commercial petroleum inventories relative to this “normal” band, while Figures 3 to 7 show inventories for crude oil and some of the major petroleum products, not just for the United States as a whole, but also for key regions. These charts are an excellent analytical tool to help gauge the relative level of oil inventories for this time of year. They also contain appropriate information on the normal inventory patterns or expected change for given time periods. The data behind these charts are on page 6 of the pdf file for Appendix A, while EIA also makes the data available in an Excel spreadsheet.

So, what do these “normal” ranges tell us to expect in June? Typically, crude oil inventories begin to drop rather significantly in June as refiners begin to process more crude oil through their refineries to make not only more gasoline to meet current demand, but also to build up heating oil and propane inventories that will be needed in the winter. Gasoline inventories, perhaps surprisingly, are usually relatively flat in June, with most of the draws to meet peak demand seen in July and August. As noted above, distillate fuel (which includes both heating oil and diesel fuel) and propane stocks typically build in June.

Using this framework, while crude oil inventories did not build last week as much as many analysts expected, any build in crude oil inventories in June helps move the relative level of inventories higher. Should crude oil stocks remain flat for the rest of the month, they would actually move from the bottom end of the normal range to well within the lower half of the normal range. Additionally, a build of 2.1 million barrels in U.S. total gasoline inventories for the first week in June is larger than would typically be expected, and also improves the situation relative to normal. Unfortunately, the reverse situation occurred for distillate fuel. Even the slight decline seen last week (0.6 million barrels) is counter-seasonal, and moves distillate fuel inventories closer to the bottom end of the “normal” range. Should distillate stocks continue this pattern of relatively small builds through June, this could portend potential problems in heating oil markets this winter, although it may be a little early to be too concerned at this point. But the point is that inventory levels should be seen within the context of a “normal” level for the time of year in question, and, fortunately, EIA makes this a relatively easy task by supplying “normal” ranges, and perhaps more importantly, Figures 2 to 7 in the Weekly Petroleum Status Report.

Retail Gasoline Prices Decrease Again
The U.S. average retail price for regular gasoline decreased by 1.7 cents per gallon as of June 7 to reach 203.4 cents per gallon, 54.4 cents higher than this time last year. This is the second week in a row that prices have dropped, but it’s the fourth week in a row the national average price has been over $2. Prior to this late spring price run-up, inflation-adjusted prices had not been in this range since the fall of 1985. Retail regular gasoline prices were mostly down last week, with the Midwest seeing the largest decrease of 2.5 cents to hit 197.5 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 1.1 cents to 231.6 cents per gallon. Prices on the West Coast lost 1.5 cents to hit 227.6 cents per gallon, which is 61.9 cents higher than this time last year. Prices in New England actually rose by 0.2 cent to hit 210.9 cents per gallon.

Retail diesel fuel prices decreased for the third week in a row by 1.2 cents per gallon as of June 7 to a national average of 173.4 cents per gallon, which is 31.2 cents per gallon higher than a year ago. Retail diesel prices were mostly down last week, with the West Coast seeing a decrease of 4.2 cents to hit 206.3 cents per gallon. California prices lost 6.5 cents to 212.1 cents per gallon, marking the tenth week California average diesel retail prices have topped $2 per gallon.

Propane Inventories Sharply Higher
Since the end of the winter heating season, U.S. propane inventories have built by less than would normally be expected during this period. However, last week, U.S. inventories of propane broke from this pattern with the largest weekly build of the season that totaled 2.6 million barrels, positioning primary inventories of propane at an estimated 38.0 million barrels as of June 4, 2004. Regional inventories were higher across all regions that included a 0.9-million-barrel gain in the Gulf Coast, followed with 0.8-million-barrel increase in East Coast. The boost in East Coast inventories last week was due to a large import cargo into the New England area. Midwest inventories gained 0.5 million barrels last week, while the combined Mountain and West Coast regions showed an increase of 0.4 million barrels during this same time. Propylene non-fuel use inventories slipped to 2.7 million barrels over the week to account for a smaller 7.1 percent share of total propane/propylene inventories.