Released on June 15, 2005
(Next Release on June 22, 2005)

Crude Summer
In 1984, the pop music group Bananarama had a hit with a song called “Cruel Summer,” and the pop group Ace of Base had an even bigger hit with it in 1998. But with crude oil seemingly the key to gasoline markets this summer, it looks like it will be a “crude summer” for motorists.

As noted in last week’s This Week In Petroleum, crude oil costs make up about half of the cost of a gallon of gasoline at the pump. Thus, crude oil prices are always a key factor in determining the future of gasoline prices. But with gasoline inventories relatively comfortable on an absolute basis compared to historical data (although much less so on a days of supply basis which also takes account of demand growth), the path crude oil prices take for the remainder of the summer will likely have a large impact on the direction of gasoline prices.

Even as OPEC met in Vienna today and agreed to increase their production ceiling by a total of 0.5 million barrels to 28 million barrels per day, there are a lot of uncertainties surrounding the near-term path of crude oil prices. Some analysts look at U.S. crude oil inventories, which have been above the average range for several weeks now, and see a market with plenty of crude oil available. These analysts see speculation and a shortage of global refinery capacity as the main culprits behind the high prices seen this year. This camp would see prices declining significantly later this year after the peak refining season ends, especially if the “speculation bubble” bursts. Concerns about supplies being extremely tight this upcoming winter are unfounded to these analysts, as they expect non-OPEC production to increase significantly between now and the end of the year, adding enough supply to meet the expected increase in demand without much additional oil needed from OPEC countries. These analysts also look for high prices to ultimately slow demand growth; putting downward pressure on prices. Should these analysts be correct, U.S. retail gasoline prices could fall along with any significant decline in crude oil prices.

However, there are other analysts who do not envision a substantial increase in non-OPEC supplies or a dramatic slowdown in global oil demand growth in 2005 or even 2006. Without significant increases in non-OPEC production or a slowdown in demand growth, these analysts forecast that when product demand peaks during the winter, the currently tight oil market will get even tighter and crude oil prices may once again test historical highs (in nominal terms). Concerns about weather, both on the supply side from the possible impact of hurricanes later this summer, to cold weather this winter increasing demand, also are key factors to these analysts. In fact, the first storm of the season, Tropical Storm Arlene, was fairly mild and did not impact oil and natural gas production significantly in the Gulf of Mexico, yet was one of the factors that caused prices to rise over the last few days. With markets as tight globally as they currently are, even a relatively mild tropical storm can have an impact on prices. Analysts with this view of the market see relatively low inventories in Asia counterbalancing ample crude oil inventories in the United States, and wonder what another storm like last year’s Hurricane Ivan might do to prices this year, should one of that magnitude and location occur again. If these analysts are correct about the near-term path of crude oil prices, this summer may turn into a cruel one for U.S. consumers after all. Which path crude oil prices take over the next several weeks will have a large influence on gasoline prices for the remainder of the summer.

U.S. Average Retail Gasoline Price Increases Again
The U.S. average retail price for regular gasoline increased this week by 1.4 cents from the previous week to 213.0 cents per gallon as of June 13, 14.5 cents higher than this time last year. This is the second week in a row that prices have increased. Prices were up throughout most of the country, with the Midwest seeing the largest regional increase of 3.2 cents to reach 208.2 cents per gallon. East Coast prices rose by 1.8 cents to 212.5 cents per gallon while West Coast prices fell 2.1 cents to 230.6 cents per gallon. California prices saw a decrease of 2.7 cents to 233.3 cents per gallon, which is 4.4 cents higher than this time last year.

Retail diesel fuel prices were up 4.2 cents last week to 227.6 cents per gallon. Prices were up throughout the country, with the Midwest seeing the largest regional increase of 5.0 cents to 224.8 cents per gallon. California prices, the highest in the nation, rose by 3.6 cents to 245.7 cents per gallon.

Propane Stockbuild Resumes Momentum
Following the prior week’s rather lackluster stockbuild, primary stockholders bounced back last week with a 2.5-million-barrel gain that put U.S. inventories of propane at an estimated 46.1 million barrels as of June 10, 2005. Moreover, with last week’s stock gain, U.S. inventories remain more than 6 million barrels ahead of last year at this same time, based on comparable weekly data (more than 9 million barrels based on revised monthly data). Most regions reported higher inventories, with the exception of the East Coast, where inventories remained unchanged. Combined with the prior week’s small stockdraw, the East Coast region remains at the lower boundary of the average range for this time of year. However, during this same period, the Midwest and Gulf Coast regions reported more robust gains that totaled 0.8 million barrels and 1.6 million barrels, respectively. The combined Rocky Mountain/West Coast regions continued their seasonal build with a 0.1-million-barrel gain. Propylene non-fuel use inventories also inched higher by 0.1 million barrels last week to account for a 10.4 percent share of total propane/propylene inventories, compared with a slightly higher share of 10.8 for the prior week.

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.