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This Week In Petroleum EIA Home > Petroleum > This Week In Petroleum |
Released on September 1, 2004
(Next Release on September 9, 2004)
Roller Coaster
One of the summer joys for many is taking a ride on a roller coaster. Crude oil traders have had a similar experience this August. The near-month futures price for light, sweet crude oil on the New York Mercantile Exchange (NYMEX) was just under $43 per barrel on August 4. The price then rose to an intraday high of over $49 per barrel on August 20, only to drop back to about $42 per barrel by the end of August. These daily price fluctuations have caused some to change their near-term outlook for crude oil prices, by first raising their forecasts, and now lowering them.
In general, despite the sharp variations in recent days, crude oil prices continue to reflect the effects of strong global demand growth and very high levels of worldwide capacity utilization. While high crude oil and product prices may have some dampening effect on global oil demand, it still is expected to show significant growth this year. Strong demand is putting increased pressure on oil suppliers to keep up, with total oil production running around 99 percent of estimated capacity. Any industry, in which production is running at 99 percent of capacity to meet demand, is likely to experience price pressure, and there is no reason to expect that crude oil markets would not reflect these same fundamental economic forces. In addition, there remain concerns about the potential for supply disruptions in several key oil producing countries. With limited spare capacity to make up for any potential losses, prices have been somewhat higher than historical relationships between prices and inventory levels would suggest, and EIA expects that this will continue through 2005 given current projections for demand and supply growth. EIA, which revises its outlook on a monthly cycle, will provide updated oil price projections with the next edition of the Short-Term Energy Outlook on September 8.
Of course, most consumers are not out buying crude oil, but instead are purchasing products made from crude oil (e.g., gasoline and heating oil) or products in which oil prices impact the cost (e.g., shipping costs and petrochemicals used in plastics). But the major crude oil price-related product purchased by consumers is gasoline. While crude oil prices exhibited a roller coaster path in August, retail gasoline prices showed remarkably little change from week-to-week this past month. Typically, there is a relationship between crude oil prices, as reflected in spot gasoline prices, and retail gasoline prices, with a two to four week lag between the two prices (see “Gasoline Price Pass-through” report). When there is a break from the typical relationship, it is usually due to factors in gasoline markets other than crude oil price pressures (e.g., a major refinery or pipeline problem). In that instance, retail gasoline prices would be expected to increase while crude oil prices remained relatively flat. However, in August, we saw crude oil prices move up and then down, while gasoline prices remained relatively stable. This is highly unusual.
But there is an explanation for this atypical relationship between gasoline and crude oil prices this past month. The high gasoline prices this past spring provided strong incentives (in the form of very high margins above crude oil costs) to gasoline suppliers to maximize supply, through high production levels from domestic refineries, as well as large amounts of gasoline arriving from foreign sources. This surge in supply this summer resulted in inventories rebuilding from relatively low levels in early summer to above average levels by the end of summer (see Figure 4 in the Weekly Petroleum Status Report). Thus, just as crude oil prices were rising to near $50 per barrel, gasoline supplies were more than sufficient to get through the end of the peak summer driving season (through Labor Day), the high margins fell sharply, and, as a result, retail gasoline prices did not rise along with the recent rise in crude oil prices. In addition, the latest rise in crude oil prices was followed quickly by a significant drop, making it unlikely that retail gasoline prices will visibly reflect the impact of the crude oil price spike. Thus, while crude oil traders were taking a roller coaster ride in August, U.S. gasoline consumers, for the most part, were simply taking a drive through the rolling hills of the countryside.
Retail Gasoline Prices Decrease By 1.8 Cents
The U.S. average retail price for regular gasoline fell by 1.8 cents per gallon from the previous week to reach 186.6 cents per gallon as of August 30, 12.0 cents higher than this time last year. Retail regular gasoline prices rose on the West Coast by 4.0 cents to reach 206.0 cents per gallon, which is 1.4 cents higher than last year. Prices in California also rose by 4.9 cents to 210.0 cents per gallon, which is the same price as this time last year.
Retail diesel fuel prices fell 0.3 cent this week to a national average of 187.1 cents per gallon, which is 37.0 cents per gallon higher than a year ago. The Rocky Mountains saw an increase of 1.9 cents per gallon to 191.5 cents per gallon. California prices remained the highest, falling 0.5 cent to average 214.8 cents per gallon.
August Propane Build Sets Record
Preliminary estimates show the August build in U.S. inventories of propane set a record 8.4 million barrels for the month, pushing inventories up to 57.5 million barrels as of August 27, 2004. With last week’s robust 2.7-million-barrel gain, the nation's primary supply of propane moved to a level that is within the lower boundary of the average range for the first time since April 2004. The record August stockbuild also positioned propane inventories to within easy striking distance of the 60-million-barrel comfort level many industry observers believe to be the minimum for meeting normal winter demand. Imports continued to play a major role in boosting regional inventories higher last week, with inventories in the Gulf Coast region up by 1.4 million barrels, while Midwest inventories during this same period posted a 0.7-million-barrel gain. East Coast inventories showed strong gains totaling 0.4 million barrels last week, while the combined Rocky Mountain/West Coast regions gained a more modest 0.1 million barrels. As of last week, all regional inventories remain within their respective average ranges for the first time since May 2004. Propylene non-fuel use inventories fell by 0.4 million barrels last week to 2.5 million barrels, a level accounting for only 4.3 percent of total propane/propylene inventories.
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-1.8
12.0
