Released on August 18, 2004
(Next Release on August 25, 2004)

Turnaround
With only a few weeks remaining in the peak summer driving season that typically spans the period between the Memorial Day and Labor Day holidays, analysts’ expectations of a summer gasoline supply crunch following a tight spring never materialized. The dramatic turnaround in gasoline markets that went from record high retail gasoline prices and below average inventories at the beginning of the driving season to a level of lower retail gasoline prices and higher inventories near the end of the peak summer driving season, was a major surprise to many industry analysts, who expected gasoline markets to continue to tighten over the summer in the face of strong U.S. demand for gasoline, the potential for crude production disruptions, and strong oil demand growth, particularly in China.

Earlier expectations for a potential bumpy road for summer gasoline markets were well reasoned based on gasoline and other petroleum market conditions in early spring. At the start of the year, both crude oil and gasoline inventories were tracking at levels either near or below the lower end of their respective average ranges. Following a period of refinery maintenance programs in late winter, industry expectations were for inventories of gasoline to start building, as is customary for this time of year, in anticipation of the impending peak summer demand for gasoline. Following a relatively mild winter that was buoyed by a strongly rebounding U.S. economy, gasoline demand surged uncharacteristically during the first six months of the year, reaching a level nearly 2.3 percent above the same period last year, although it must be noted that year-ago gasoline demand levels were abnormally low, which were partially attributable to rainy weather. But the surge in gasoline demand also contributed to the sharp rise in retail gasoline prices during this same period, rising from 151.0 cents per gallon on January 5, to an all-time high (not adjusted for inflation) of 206.4 cents per gallon on May 24, only one week before the traditional start of the summer driving season. Petroleum refiners accordingly rushed to take advantage of the strong gasoline markets with higher production. Early in the year, gasoline imports volumes were low relative to 2003. This may have been due to high world demand increasing transportation costs and competition for available volumes as well as gasoline specification changes in the United States. With the entire country moving to lower sulfur gasoline under the first stage of the Tier 2 emission standards, and New York and Connecticut eliminating the gasoline blending component Methyl Tertiary Butyl Ether (MTBE), some import sources can no longer make U.S. quality gasoline, and other import sources may have been slow to respond to the new specifications. Even though total gasoline imports were almost 3 percent lower on average over the first 6 months of the year compared to 2003, July imports, based on weekly data, rebounded to levels 13 percent higher than year-ago levels.

The key month for U.S. gasoline markets was July, when refiners continued to maximize gasoline production beyond the normal period where they would either start to shift their production slates to increase output of winter heating fuels, including distillate fuel oil, or at least scale back gasoline production and rely more on inventories. Although retail gasoline prices remained persistently high over the course of the summer driving season, they have slowly retreated from their all-time high set in late May 2004. High gasoline prices may have helped to soften gasoline demand, which by July 30, (based on a four-week average) was below the prior year level for the first time since late January 2004. Coupled with a late summer surge in gasoline imports, gasoline inventories continued to build unseasonably through July 2004. By August 13, 2004, gasoline inventories stood at 205.7 million barrels, a level that now tracks near the upper boundary of the average range for this time of year. Correspondingly, retail gasoline prices are down 18.9 cents per gallon from the record 206.4 cents per gallon set at the beginning of the summer driving season. With crude oil prices recently setting new records (not adjusted for inflation) at more than $45 per barrel, there is pressure on gasoline prices to rise in the coming weeks, except that gasoline demand typically falls significantly after Labor Day. As a result, gasoline prices might not decline as much in September as they would have if crude oil prices now were not at such lofty levels.

Retail Gasoline Prices Decrease 0.2 Cent
The U.S. average retail price for regular gasoline decreased by 0.2 cent per gallon from the previous week to reach 187.5 cents per gallon as of August 16, 24.8 cents higher than this time last year. This is the tenth time prices have decreased in the last twelve weeks. However, with crude oil prices staying at record levels, there will be upward pressure on retail gasoline prices in coming weeks. Retail regular gasoline prices were mixed this past week, with the Midwest seeing an increase of 1.5 cents to hit 186.1 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, despite California prices falling by 3.7 cents to 205.5 cents per gallon and West Coast prices falling by 2.6 cents to 200.9 cents per gallon.

Retail diesel fuel prices gained 1.1 cents this week to a national average of 182.5 cents per gallon, which is 32.7 cents per gallon higher than a year ago. The largest increase for retail diesel prices last week was in New England, which saw an increase of 2.1 cents to hit 191.0 cents per gallon. California prices were flat at 211.3 cents per gallon.

Propane Posts Moderate Weekly Build
While U.S. inventories of propane continued higher last week, the momentum from the robust 2.4 million barrels added to primary inventories during the first week of August, slowed to only 1.5 million barrels during the second week. With week ending August 13, 2004, U.S. inventories of propane stood at an estimated 53.0 million barrels, a level that remains 4.4 million barrels below the same period last year. However, the August stockbuild has the potential to surpass the 5-year average for this month, which would be the only month for this to occur since the start of the 2004 build season. The first two weeks of August has shown propane inventories building by 3.9 million barrels, a level accounting for about 85 percent of the 4.6 million barrels averaged over the most recent 5-year period. The Gulf Coast region reported a strong 1.5-million-barrel increase last week, reversing a period of rather weak gains over the past several weeks. The Midwest region added 0.4 million barrels last week, while inventories in the East Coast reported a 0.3 million barrel loss during this same time. During this same period, the combined Rocky Mountain/West Coast regions continued higher with a 0.2 million barrel gain. Propylene non-fuel use inventories moved slightly lower by 0.1 million barrels last week, accounting for a smaller 5.1 percent share of total propane/propylene inventories, compared with the prior week’s 5.4 percent share.

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