Released on July 8, 2004
(Next Release on July 14, 2004)

Turning Corners
On June 15, EIA Administrator Guy Caruso testified before the Senate Energy and Natural Resources Committee that, “ … petroleum markets have turned the corner and that gasoline prices should continue to ease over the next weeks.” At the time he spoke those words, gasoline prices had declined already by nearly 8 cents per gallon from their peak price of 206.4 cents per gallon set on May 24. Since his testimony, gasoline prices have fallen an additional 9 cents per gallon, and are currently just below $1.90 per gallon. The question now, however, is whether this movement reflects an uninterrupted downward trend, or whether that pattern may yet see another, perhaps limited, upward fluctuation this summer.

Fortunately, there are some clues to help us answer this question intelligently. Spot gasoline prices (the price at which refiners sell their gasoline into various regional markets) are a very good leading indicator of the average retail price. EIA has developed a model that uses the spot price of gasoline in various parts of the country as a base to help forecast what retail prices will likely do over the next few weeks. This model has an extraordinary track record in accurately predicting the U.S. average retail price for regular gasoline, particularly for the upcoming week. Thus, monitoring the latest spot prices can provide a great deal of insight into the future path of retail prices.

At the time of Administrator Caruso’s June 15 testimony, the average spot price had fallen from 149.4 cents per gallon to 116.8 cents per gallon, a substantial drop. The average spot price fell even further the day after his testimony, reaching 114.7 cents per gallon. However, since then, spot prices have once again started to increase, and as of July 6, averaged 129.7 cents per gallon. While this indicates that retail prices are likely to increase in coming weeks, the timing is difficult to accurately assess, particularly shortly after the spot price trend has reversed. This explains why Administrator Caruso testified that, “… we could see increasing potential for higher prices …” before the House Government Reform Committee on July 7.

Other signs point to the potential for retail prices to firm, particularly in July and August. Even with total gasoline inventories rising by 1.0 million barrels last week, on the strength of the second highest weekly average ever for imports, gasoline inventories remain below the lower end of the average range for the end of June and early July. This means there is limited flexibility in the system to respond to any infrastructure problems that might arise to reduce gasoline supplies over the peak of the demand season. In addition, last week’s inventory build was due to a large increase in gasoline blending components, as finished gasoline inventories dropped almost the expected 1 million barrels, adding to the sharp climb to nearly 9.4 million barrels per day in calculated demand, right on schedule with the onset of peak summer driving.

Another sign pointing to the possibility of higher retail prices in the future is the price of crude oil. Crude oil prices typically represent 40 to 45 percent of the retail price of gasoline. The near-month futures price of West Texas Intermediate, which had risen above $42 per barrel on June 1, dropped to $35.66 as of June 29. This drop was a significant factor behind the spot gasoline price decline. However, since June 29, crude oil prices have started to increase again, rising above $39 per barrel on July 6 and July 7. Should crude oil prices remain closer to $40 per barrel than to $35 per barrel, retail prices may not drop much further than current levels.

Thus, whether the rest of this summer is marked by a serpentine gasoline price path or a relatively flat one remains to be seen. But what seems clear to EIA is that retail prices are likely to remain closer to $2 per gallon than $1.50 per gallon for some time to come.

Retail Gasoline Prices Fall by 2.6 Cents
The U.S. average retail price for regular gasoline decreased by 2.6 cents per gallon from the previous week to reach 189.5 cents per gallon as of July 5, 40.6 cents higher than this time last year. This is the sixth week in a row that prices have decreased. Retail regular gasoline prices were down throughout the country last week, with the West Coast seeing the largest decrease of 3.9 cents to hit 213.6 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 3.3 cents to 220.4 cents per gallon.

Retail diesel fuel prices gained 1.6 cents this week to a national average of 171.6 cents per gallon, which is 28.8 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 an increase of 4.1 cents to hit 201.0 cents per gallon. California prices gained 4.2 cents to 207.6 cents per gallon, marking the fourteenth week California average diesel retail prices have topped $2 per gallon.

June Propane Build Falls Short of Monthly Average
Propane stockholders added about one-third less volume of propane to primary inventories during June 2004, compared with 8.5 million barrels averaged for the month over the past 5 years. With last week's 1.3-million-barrel gain, U.S. inventories of propane totaled an estimated 43.6 million barrels as of July 2, 2004. Moreover, the first half of the traditional build season that occurs from April through September, totaled 15.7 million barrels, a level far below the 5-year average for this period totaling 21.6 million barrels. Like distillate fuel markets, the below-average stockbuild so far this season suggests primary stockholders may not be able to catch up and reach the 5-year average build prior to the start of the heating season in October. Weekly builds were reported in all the major regions last week, with the Midwest posting the largest gain at 0.8 million, boosted in part by strong imports. Imports also contributed to boost Gulf Coast inventories higher last week with a weekly 0.5-million-barrel increase, while in the East Coast, inventories continued to climb with a 0.1-million-barrel gain during this same period. The combined Mountain/West Coast regions remained flat last week at 1.7 million barrels. As of July 2, 2004, U.S. inventories of propane remain slightly below the lower boundary of the average range for this time of year, while regional inventories remain mixed, with East Coast and Midwest inventories within their respective average ranges while the Gulf Coast continues to track below the average range. Propylene non-fuel use inventories rose by 0.1 million barrels to 2.5 million barrels last week, accounting for a 5.7 percent share of total propane/propylene inventories.

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