Released on June 30, 2004
(Next Release on July 8, 2004)

Gasoline Prices Are Declining, but for How Long?
EIA is used to receiving numerous inquiries from the media when retail gasoline prices are increasing, with most of the media asking why they are rising and how high they will eventually reach. But recently, following five weeks of declining prices, the media continues to contact EIA, with the questions now centering on why prices are declining and will the decline continue. As we have stated in recent editions of this publication, EIA expects retail prices to continue to fall over the next couple of weeks, but as we get further into July and especially into August, the situation is not as clear.

Just as retail gasoline prices rose on increasing crude oil prices and tightness in gasoline markets, the reverse helps explain why prices are declining. The near-month futures price for West Texas Intermediate (WTI) crude oil has declined by about $6 per barrel since June 1, with most of this decline occurring earlier in the month and again over the last couple of days. So why have crude oil prices dropped sharply? Increases in oil production by Saudi Arabia and other major oil producers have helped stemmed the tide of declining crude oil inventories, with U.S. crude oil inventories now well within the lower half of the normal range, as opposed to at the lower end or even below the range, where they were for much of 2003 and early 2004.

Likewise, just as gasoline markets were extremely tight earlier in the year, higher gasoline production has helped gasoline inventories stabilize somewhat. While they still remain below the average range for this time of year, gasoline production of 8.8 million barrels per day, as we saw for the week ending June 25, will help supply current demand, although it is not enough to build inventories for future demand. In addition, gasoline demand growth, which was running around 3 to 4 percent earlier in the year (due in large part to relatively weak demand last year in the spring, on still sluggish economic growth and a wet weather pattern in much of the country last year), demand growth lately has been running much lower, with demand growth less than 1 percent in recent weeks, albeit based on preliminary data.

But will these trends continue? Concerns about the global crude oil market remain, despite the recent decline in prices. There is very little excess oil production capacity available globally. Following Saudi Arabia's increase in oil production this month, global excess oil production capacity today is at its lowest point since 1991, just after the end of the Gulf War, both in absolute terms and in percentage of world oil supply (with the possible exception of the March 2003 to May 2003 period following the onset of the war with Iraq). This leaves little room for any prolonged, or for that matter, even perceived extended disruptions in supply. This was illustrated recently when Iraqi and Norwegian exports were disrupted for about a week following a pipeline explosion near the port of Basra and a strike by oil workers in Norway. Had these disruptions lasted for months, as opposed to days, there would likely not have been enough excess capacity available worldwide to make up for the total loss of exports, resulting in upward price pressure. It should be noted that spare capacity concerns are not likely to ease in the near- to mid-term, if global oil demand growth continues to surprise markets to the high side, with the International Energy Agency (IEA) and others continually revising their estimates upwards. Since capacity expansion involves substantial investment and long lead times, minimal spare capacity for the mid-term appears likely, barring a significant decline in oil demand growth.

As noted above, much has been made of the fact that gasoline demand, which had been growing by 3 to 4 percent earlier in the year, now appears to be growing 1.0 percent, or less, in recent weeks. Preliminary weekly statistics on May 2004 gasoline demand, in particular, have evoked concern that growth has slowed much more than expected, presumably due to the lagged effects of very high prices (in nominal terms). Yet, in part, it was weak demand in March and April 2003 that led to very strong growth rates in 2004. Even initial data for May 2004 shows gasoline demand just slightly below the trend seen over the last 5 years, and very close to expected ranges, based on various econometric models which account for strong growth in personal income, Gross Domestic Product, and vehicle miles traveled. Like recently released April data, final figures for May 2004 will likely fall well within expectations, based on historical tendencies. Preliminary June data also suggest that final data will show a slowing to the expected underlying growth rate of 1.5 to 2 percent. Regardless, if gasoline demand returns to trend in July and August, it may well reach 9.4 million barrels per day or higher, which would require not only continued strong domestic production, but also significant quantities of gasoline imports. Without both of these, strong inventory draws would be required to balance the market, yet with inventories already below the lower end of the normal range, how much further they can be drawn down is an open question.

While the answer to the question of how much lower retail gasoline prices will fall over the very-near term is much harder to answer, it appears that gasoline prices could fall to the mid $1.80s, or even lower (the national average retail price for regular gasoline is about $1.92 as of June 28). However, consumers should not expect retail prices to decline much further than indicated above, unless the situation improves significantly for crude oil and gasoline markets over the next couple of months.

Retail Gasoline Prices Fall by 1.6 Cents
The U.S. average retail price for regular gasoline decreased by 1.6 cents per gallon as of June 28 to reach 192.1 cents per gallon, 43.4 cents higher than this time last year. This is the fifth week in a row that prices have decreased. Retail regular gasoline prices were down throughout most of the country last week, with New England seeing the largest decrease of 3.8 cents to hit 201.3 cents per gallon. The Midwest was the only region to see a price increase, gaining 0.3 cent to reach 181.7 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 2.2 cents to 223.7 cents per gallon. Prices on the West Coast lost 2.5 cents to hit 217.5 cents per gallon, which is 43.0 cents higher than this time last year.

Retail diesel fuel prices stayed flat this week, remaining at a national average of 170.0 cents per gallon, which is 28.0 cents per gallon higher than a year ago. Retail diesel prices were mixed last week, with the West Coast seeing an increase of 1.0 cent to hit 196.9 cents per gallon. California prices gained 1.5 cents to 203.4 cents per gallon, marking the thirteenth week California average diesel retail prices have topped $2 per gallon.

Weekly Propane Build Continues to Slow
While the June stockbuild began the month with a robust 2.6-million-barrel gain for the week ending June 4th, each successive week since has shown a progressively lower weekly build. As such, the stockbuild for the week ending June 25, 2004 showed only a modest 1.1-million-barrel gain, placing U.S. inventories of propane at an estimated 42.3 million barrels, a level that remains about 2.0 million barrels below the same period last year. Although a portion of the weekly stockbuild for the first week of June actually occurred during the last few days of May, the June stockbuild will most likely fall short of the average June build that measured nearly 8.5 million barrels over the most recent 5-year period from 1999 through 2003. The sharp drop in weekly imports and the supposedly continued strong level of petrochemical feedstock demand for propane contributed to blunt the weekly stockbuild. Regional inventories were up in the Midwest by 1.0 million barrels, followed with the East Coast and combined Mountain/West Coast regions that reported similar gains of 0.1 million barrels. During this same period, Gulf Coast inventories remained unchanged with inventories ending the week at 18.7 million barrels, a level that remains below the average range for this time of year. Propylene non-fuel use inventories remained flat at 2.4 million barrels last week, accounting for a slightly lower 5.7 percent of total propane/propylene inventories, compared with the prior week's 5.8 percent share.

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