Released on June 8, 2005
(Next Release on June 15, 2005)

The Near-Term vs. the Short-Term
After peaking during early April, U.S. retail gasoline prices fell through the month of May. However, over the past week, they rose by 1.9 cents per gallon, causing some industry analysts to speculate that we may have already seen the lowest prices of the summer. With the release of the June issue of the EIA’s Short-Term Energy Outlook (STEO) showing retail gasoline prices projected to follow a monthly path with prices edging slightly lower from their spring peak through July and August, the current rise in weekly prices may not be indicative of what to expect over the rest of the summer. To reach the average June price of $2.16 per gallon forecast in the STEO, prices would need to rise from the current price of $2.12 per gallon over the next few weeks. However, if EIA’s assumptions for crude oil prices and refinery margins are correct, retail prices may stabilize and even decline slightly in July and into August. In order to try and make sense of gasoline prices this summer, it is important to understand the factors that cause retail prices to go up or down.

Of course, changes in crude oil prices are a major determinant affecting retail gasoline prices. With crude oil costs representing about half of the price of gasoline at the retail level, changes in crude oil prices are often reflected at the pump with a two to four week lag as these prices work their way through the distribution system. Thus, just as the country was gearing up for the start of the peak driving season beginning with the Memorial Day weekend, retail gasoline prices were actually falling throughout the month of May, reflecting the drop that had been seen earlier in crude oil prices. In addition, gasoline inventories were near the upper end of the average range in absolute terms. In response to these factors, the national average price of regular gasoline fell by 18.3 cents per gallon from its $2.28 per gallon peak between April 11 and May 30.

The price of West Texas Intermediate (WTI) crude oil plummeted by more than $10 per barrel between April 1 and May 18, 2005, as refinery maintenance projects (that delayed refinery processing of crude oil, thus reducing the demand for crude oil) and the heavy stream of imports, combined to balloon crude oil inventories to their highest level in several years on an absolute basis. But as the price of WTI dipped below $47 per barrel on May 18, oil market traders and analysts began to focus more on the adequacy of diesel fuel and heating oil supplies, putting upward pressure on WTI crude oil prices. In addition, apparent strong buying from customers in Asia for Middle Eastern crude oil and a substantial increase in U.S. refinery inputs provided renewed strength to crude oil markets. Consequently, after bottoming out on May 18, WTI crude oil prices turned upward again, with WTI crude oil prices closing at around $55 per barrel in recent days. Another factor that may be having some impact on crude oil prices is related to the start of the Atlantic hurricane season on June 1. Several leading hurricane watchers are forecasting an above-average season of tropical storms in 2005. The devastation caused by Hurricane Ivan last year to Gulf of Mexico oil platforms and other petroleum infrastructure demonstrated the impact a major hurricane could have on oil markets. With very little spare production capacity available globally, the potential for damage to petroleum infrastructure may be a major concern to some oil market participants.

In general, with U.S. refinery utilization running at high levels, any major refinery outage or pipeline disruption or sudden change in petroleum product stocking patterns, enhances the near-term price volatility of crude oil and petroleum products. This volatility will tend to be quite noticeable on a daily or weekly basis, but may be less visible on a monthly basis. While EIA’s current short-term forecast reflects a relatively stable price pattern on a monthly basis, averaging $2.15 per gallon during the third quarter of this year, the 95-percent confidence range extends 15 to 20 cents above or below the baseline projection. Thus, while EIA's general expectation is that the average gasoline price for the rest of the summer will be slightly above this week's price level, we explicitly recognize the potential for considerable volatility in gasoline prices this summer.

U.S. Average Retail Gasoline Price Rises by 2 Cents
The U.S. average retail price for regular gasoline increased this week by 1.9 cents from the previous week to 211.6 cents per gallon as of June 6, 8.2 cents higher than this time last year. As mentioned above, this is the first time in eight weeks prices have increased. Prices were mixed throughout the country, with the Midwest seeing the largest regional increase of 4.9 cents to reach 205.0 cents per gallon. East Coast prices rose by 1.3 cents to 210.7 cents per gallon while West Coast prices fell 3.0 cents to 232.7 cents per gallon. California prices saw a decrease of 3.1 cents to 236.0 cents per gallon, which is 4.4 cents higher than this time last year.

Retail diesel fuel prices were up 7.4 cents last week to 223.4 cents per gallon. Prices were up throughout the country, with the Gulf Coast seeing the largest regional increase of 9.6 cents to 221.3 cents per gallon. California prices rose by 5.4 cents to 242.1 cents per gallon.

Propane Inventories Post Moderate Build
The seasonal stockbuild in propane inventories moderated somewhat last week from the more robust pace of the past few weeks with a 1.4-million-barrel gain, placing the nation’s primary stockpile of propane inventories at an estimated 43.6 million barrels as of June 3, 2005. Despite the overall modest gains, inventory activity was mixed, with Midwest gains relatively lackluster at 0.2 million barrels while the East Coast reported a 0.1-million-barrel decline during this same period. However, the combined Rocky Mountain/West Coast regions reported an unexpected 0.3-million-barrel increase last week, while the Gulf Coast region benefited from a sharp rise in imports to post the largest weekly regional gain that totaled 1.0 million barrels. For this time of year, U.S. inventories of propane remain near the upper boundary of the average range, while regional inventories in the Midwest and Gulf Coast regions continue to track near the upper boundaries of their respective average ranges as well. In contrast, East Coast inventories remain at the lower boundary of the average range for this time of year. Propylene non-fuel use inventories swung lower by 0.1 million barrels last week to account for a smaller 10.8 percent share of total propane/propylene inventories, down from the prior week’s 11.4 percent share.

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