Released on March 23, 2005
(Next Release on March 30, 2005)

Looking Ahead
With the first day of spring 2005 now in the past (although for many in the United States, the weather is far from spring-like), people are beginning to look forward to warmer weather and vacations. So, too, are oil analysts, as they look into the near future and see strong demand keeping supplies tighter than they might appear at first glance.

A question that many of us at the Energy Information Administration are asked is: Why are prices so high when inventories are high? A good start on the answer to this question may depend on the response to a closely related one: Are inventories really high? Inventories for crude oil and gasoline look relatively high in terms of absolute levels (see Figure 3 and Figure 4 in the Weekly Petroleum Status Report). These figures show that gasoline inventories are currently above the average range, while crude oil inventories are close to the upper end of their average range. However, if instead of measuring inventories on an absolute basis, we measure them on a forward cover basis, which accounts for expected usage, we see a different picture. Because inventories represent the amount of immediately available local supply, a measure that accounts for expected usage may reflect the adequacy of stocks to provide a buffer against unexpected events better than an absolute measure in a market where oil demand has recently increased significantly, and where further strong demand growth is projected.

Simply put, forward days cover is calculated by taking current inventory levels and dividing by demand in the following month. For example, to calculate forward gasoline stock cover for the end of December, one would take total gasoline inventories at the end of December and divide by the demand in January. (For the purposes of this analysis, EIA’s forecast of demand for April 2005 in the March edition of our Short-Term Energy Outlook was used to calculate forward cover for inventories as of March 18, 2005. Also, as a proxy for crude oil demand, crude oil refinery inputs were used.)

While EIA does not routinely graphically display inventories on a forward cover basis in its publications, this edition of This Week In Petroleum includes forward cover charts for crude oil, gasoline, and distillate fuel that begin at the end of December 1999. These charts use monthly data through 2004 and then use weekly data to estimate January and February 2005. Forward cover as of March 18, 2005 is the last point included on each of the charts. Comparing these charts to the charts showing absolute inventory levels in the Weekly Petroleum Status Report, they show a rather different picture of current inventory levels, particularly for crude oil and gasoline. For example, looking at crude oil inventories on a forward cover basis, U.S. crude oil inventories have been near the bottom of the average range for many months now, and only recently rose to near the middle of the average range. However, they have started to drop recently, and are certainly not near the upper end of the average range. There is an even larger divergence between the trends for absolute and forward cover measures for gasoline inventories. On a forward cover basis, gasoline inventories have remained within the average range, and are now in the middle of the average range, as opposed to well above the average range on an absolute basis. This is because the growth in gasoline demand has been strong and cuts into some of the increase seen in gasoline inventories. Looking at distillate fuel inventories on a forward cover basis shows only a slightly different graphical display, as inventories appear relatively low on both an absolute (see Figure 5 in the Weekly Petroleum Status Report ) and a forward cover basis. However, with winter all but over in most parts of the United States, distillate fuel inventories are less of a concern now.

With most oil market analysts expecting demand to continue to grow at a robust pace the remainder of the year (EIA expects global demand to increase by 2.1 million barrels per day in 2005), inventories will need to remain at above average levels on an absolute level basis just to keep forward cover from becoming relatively low, particularly for crude oil and gasoline. In the case of oil markets, looking ahead can help explain why current prices are so high, given current inventory levels.

U.S. Average Retail Gasoline Price Gains 5 Cents
The U.S. average retail price for regular gasoline increased this week by 5.3 cents from the previous week to reach 210.9 cents per gallon as of March 21, 36.6 cents higher than this time last year, and the highest price ever recorded (not adjusted for inflation). Prices were up across all regions, with the Midwest seeing the largest gain of 6.3 cents to reach 211.7 cents per gallon. The West Coast posted the highest regional price of 225.8 cents per gallon, up 3.0 cents from the previous week and 25.4 cents higher than last year. Prices in California gained 2.5 cents to 231.2 cents per gallon. Retail prices on the East Coast gained 5.4 cents to 207.0 cents per gallon, which is 35.0 cents higher than last year.

Retail diesel fuel prices gained 5.0 cents last week to 224.4 cents per gallon, the highest price ever recorded (not adjusted for inflation). Prices were up throughout most of the country, with the East Coast seeing the largest regional increase of 4.8 cents to 224.5 cents per gallon. Prices on the West Coast fell 2.9 cents to average 247.1 cents per gallon, remaining the highest regional average in the country, and 67.6 cents per gallon higher than last year. Average diesel fuel prices in California increased by 6.4 cents to reach 248.2 cents per gallon, which is 62.8 cents higher than this time last year.

Propane Continues Late Season Draw
Propane’s late season stockdraw continued last week with a 1.8-million-barrel decline that moved U.S. inventories of propane down to 27.3 million barrels as of March 18, 2005. At roughly the mid-point for March 2005, U.S. inventories of propane have declined by more than 5.2 million barrels, a level well above the most recent 5-year average for this month of 0.5 million barrels. The record stockdraw for March occurred during 1999, when inventories reported a monthly stockdraw of 7.4 million barrels. Inventories moved lower across all of the major propane consuming regions last week, including the East Coast with a 0.2-millon-barrel draw, followed with a 0.4-million-barrel decline in the Midwest. During this same period, Gulf Coast inventories reported the largest weekly decline that totaled 1.2 million barrels. The combined Rocky Mountain/West Coast regions were the only exception with inventories remaining unchanged during this same time. Propylene non-fuel use inventories inched higher by 0.1 million barrels last week to account for a 15.0 percent share of total propane/propylene inventories.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.