Released on June 16, 2004
(Next Release on June 23, 2004)

It’s Like Predicting the Weather
Summer conjures up thoughts of baseball, the beach, and afternoon thunderstorms that seem to come out of nowhere. During the summer, daily weather forecasts for many parts of the country routinely warn of a “chance of isolated thunderstorms, some of which may be severe.” Even with the latest technology, these storms, and their exact locations, are impossible to predict too far in advance. This might also describe the art of predicting gasoline prices this summer.

EIA’s Administrator, Guy Caruso, testified before the U. S. Senate Energy Subcommittee yesterday (June 15), saying that, “absent major disruptions, oil and gasoline markets may be turning a corner." With 3 consecutive weeks of declining retail gasoline prices, including nearly a nickel drop this past week (see gasoline price section below), it certainly does look like retail prices have “turned the corner” and are now trending down, after rising almost every week for the first 5 months of the year. However, one should not lose sight of the first part of the above quote by the EIA Administrator. The summer has just begun, and uncertainties abound in oil and gasoline markets. With inventories relatively low, especially when accounting for increased demand this year, both markets are still vulnerable to dislocations and a return to higher prices.

In crude oil markets, some of the uncertainties surround continued unrest in many of the key producing regions. As of today, it appears that oil exports from Iraq have completely halted as repairs are underway on pipelines leading to the Southern port from which most of Iraq’s oil is exported. Attacks in Saudi Arabia, while not specifically targeted on oil facilities, still generate nervousness among oil traders, particularly given that most of the world’s remaining spare capacity is located there. In addition, while the decision to hold a Presidential recall referendum in Venezuela has temporarily calmed worries about the possibility of a stoppage in that country’s oil production or exports, these worries could return closer to the mid-August scheduled date for the vote. Likewise, the early termination of a strike in Nigeria temporarily reduced fears of a reduction in that OPEC country’s production, but concerns may return as well. All of these factors, and more, can easily shift the trend of declining oil prices seen over the last couple of weeks. And, should Saudi Arabia decide to prematurely trim its recent surge in production, oil prices could begin to rise as well.

U.S. gasoline markets also remain vulnerable to major disruptions in our own oil infrastructure, namely, refineries and pipelines. With gasoline inventories just below the bottom end of the average range for this time of year, little flexibility exists in the U.S. gasoline market to respond to any major unexpected refinery outages or pipeline disruptions. Additionally, should gasoline demand growth rates return to 2 to 3 percent over the rest of the summer, inventories would be even more stretched than they would be otherwise.

While EIA expects gasoline prices to continue to drop significantly over the next couple of weeks, it is difficult to predict what will happen over the remainder of the season. As Administrator Caruso said during the question and answer period at the Senate subcommittee hearing yesterday, EIA is “prudently optimistic” that gasoline prices will continue to fall. But just as the weatherman can be fooled by an unexpected storm that may appear on a humid summer afternoon, so, too, can unanticipated problems affect EIA’s “prudently optimistic” forecast for retail gasoline prices this summer.

Retail Gasoline Prices Drop 5 Cents
The U.S. average retail price for regular gasoline decreased by 4.9 cents per gallon as of June 14 to reach 198.5 cents per gallon, 46.7 cents higher than this time last year. This is the third week in a row that prices have dropped, and the first time in 5 weeks that prices have averaged under $2 per gallon. EIA believes that prices will continue to soften in coming weeks, but we do not expect prices to return to the level prior to this spring’s run-up. Retail regular gasoline prices were down throughout the country last week, with the Midwest seeing the largest decrease of 9.3 cents to hit 188.2 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 2.7 cents to 228.9 cents per gallon. Prices on the West Coast lost 3.3 cents to hit 224.3 cents per gallon, which is 50.4 cents higher than this time last year. Prices in New England and the Central Atlantic also remained above $2 per gallon (208.8 and 206.0 cents per gallon, respectively), despite price decreases around 2 cents.

Retail diesel fuel prices decreased for the fourth week in a row by 2.3 cents per gallon as of June 14 to a national average of 171.1 cents per gallon, which is 27.9 cents per gallon higher than a year ago. Retail diesel prices were down last week, with the West Coast seeing a decrease of 6.5 cents to hit 199.8 cents per gallon. California prices lost 7.0 cents to 205.1 cents per gallon, marking the eleventh week California average diesel retail prices have topped $2 per gallon.

Strong Propane Build Continues
On the heels of last week's robust gain, primary inventories of propane continued sharply higher last week with a 2.0-million-barrel build that put U.S. inventories of propane at an estimated 40.0 million barrels as of June 11, 2004. The June stockbuild so far has totaled 4.6 million barrels, a level surpassing the entire May stockbuild that measured a mediocre 4.2 million barrels. Strong imports over the past several weeks have contributed to the robust builds seen so far during June, although import levels are typically high during the early stages of the build season. The Gulf Coast region led with the highest weekly gain of 0.9 million barrels, followed with a 0.8-million-barrel increase in the Midwest region. East Coast inventories managed a 0.3-million-barrel gain while the combined Mountain/West Coast regions remained unchanged during this same period. With respect to normal ranges, no major changes occurred last week, with U.S. inventories continuing to hover near the lower boundary of the normal range, while the East Coast and Midwest regions continued within their respective normal ranges. Meanwhile, Gulf Coast inventories remained slightly below the normal range for this time of year. Propylene non-fuel use inventories continued lower for the third consecutive week to 2.5 million barrels, accounting for a smaller 6.3 percent share of total propane/propylene inventories, compared with last week's 7.1 percent share.

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