Released on August 11, 2004
(Next Release on August 18, 2004)

The Quest for Gold
As athletes from all over the world gather in Athens, Greece on a quest for gold medals in the Summer Olympics, so too are people across the globe searching for “black gold,” more commonly known as crude oil. With the price of West Texas Intermediate (WTI) crude oil hovering around $45 per barrel and the OPEC Basket price near $40 per barrel in recent days, one might excuse those who might be confused between real gold and “black gold.”

Many analysts are questioning how long can crude oil prices stay at these historically high levels (not adjusted for inflation). Yesterday, the Energy Information Administration (EIA) released its latest Short-Term Energy Outlook, which forecasts that the average price of WTI could remain at or above $38 per barrel for the foreseeable future. While even $38 per barrel represents a decline from current prices, this forecast, especially for 2005, is higher than many other analysts are projecting.

In looking ahead, EIA estimates that global demand will continue to grow at 2 million barrels per day or more in 2004 and 2005, and that supplies will struggle to keep up with this demand growth. With global oil production already very close to near-term capacity, the world will be dependent on additional capacity growth, particularly in OPEC, just to keep supplies sufficient to meet current demand, much less build global inventories back to normal levels. With global production near its full capacity, and with worries about oil production curtailments in various parts of the world (e.g., Iraq, Venezuela, Nigeria, and Russia), clearly the combination of extreme tight fundamentals and upside price risk perceptions have pushed WTI prices past $40 per barrel. In a market that is concerned about where future barrels will come from to meet expected demand growth, any news about oil supplies or even the potential for oil supply reductions can have exaggerated impacts on daily prices. Thus, news about whether or not Yukos, the large Russian oil company, will be allowed to export oil in the future due to a disputed tax bill, has moved prices significantly one way or the other in recent days. Likewise, news about the status of Iraqi oil exports, while always a concern to the market, is of heightened interest in today’s tight market. On Sunday, in Venezuela, there will be a referendum on whether to recall President Chavez, and with Venezuela a major oil producer and member of OPEC, news about the outcome of this vote may also drive markets early next week. But one needs to be careful about putting too much emphasis on these daily news events, and instead should judge the longer-term implications of such events. When EIA looks towards the foreseeable future, we see a global oil market in which production capacity, both upstream and downstream, is nearing its limits, while demand growth continues to be strong, which should keep inventories relatively low for some time to come. The good news is that with crude oil prices at such high levels, producers will be encouraged to add production capacity where possible. Additionally, it appears that crude oil imports from Saudi Arabia have surged recently, and should help to build inventories in the coming weeks. Increases in both production capacity and inventories should both take some pressure off crude oil prices in the future. Under such a scenario, the quest to acquire “black gold” may not end as quickly as the Summer Olympics.

Retail Gasoline Prices Decrease 1.1 Cents
The U.S. average retail price for regular gasoline decreased by 1.1 cents per gallon from the previous week to reach 187.7 cents per gallon as of August 9, 30.6 cents higher than this time last year. This is the ninth time prices have decreased in the last eleven weeks. However, with record high crude oil prices in recent days, the decline could be short-lived. Retail regular gasoline prices were mixed this past week, with the Midwest seeing an increase of 0.2 cent to hit 184.6 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, despite California prices falling by 3.6 cents to 209.2 cents per gallon and West Coast prices falling by 2.7 cents to 203.5 cents per gallon.

Retail diesel fuel prices gained 3.4 cents this week to a national average of 181.4 cents per gallon, which is 32.2 cents per gallon higher than a year ago. The largest increase for retail diesel prices last week was in the Midwest, which saw an increase of 4.3 cents to hit 178.1 cents per gallon. California prices lost 0.2 cent to average 211.3 cents per gallon.

Propane Inventories Surge Higher
Following one of the most lackluster build seasons in recent years, U.S. inventories of propane surged higher last week by 2.4 million barrels. This pushed U.S. propane inventories to an estimated 51.5 million barrels for the week ending August 4, 2004, a level that now tracks near the lower boundary of the average range for this period. Regional increases were reported across all regions, with the largest measuring 1.4 million barrels reported in the Gulf Coast, followed by the Midwest with a weekly gain of 0.6 million barrels. East Coast and the combined Rocky Mountain/West Coast regions reported respective gains of 0.2 million barrels and 0.1 million barrels. Propylene non-fuel use inventories climbed 0.1 million barrels last week to 2.8 million barrels, accounting for a slightly less 5.4 percent share of total propane/propylene inventories, compared with the prior week's 5.5 percent share.

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