Released on August 24, 2005
(Next Release on August 31, 2005)

Good News and Bad News
When it comes to the U.S. crude oil market, and more specifically to prices and inventories, it’s a “Good News, Bad News” situation. In order to end on a hopeful note, let’s start with the bad news.

The bad news is that crude oil prices remain very high, despite growing inventories. U.S. commercial crude oil inventories (excluding the Strategic Petroleum Reserve) increased by nearly 5 million barrels over the past 3 weeks. While this may not appear to be a substantial build, it comes at a time when crude oil inventories typically decline, as refiners use more crude to make gasoline needed for current demand and heating oil as they stock up for the winter. Thus, any crude oil inventory build during the month of August, much less one of 5 million barrels over a 3-week period, might lead one to expect prices would drop, as the counter-seasonal build would indicate an abundance of supply. Yet, the price for West Texas Intermediate (WTI) crude oil has risen by $5 per barrel! If prices don’t fall under these conditions, what will make them fall?

A good place to start is understanding why crude oil inventories have grown relative to normal patterns. Over the most recent 4-week period, crude oil inputs to refineries (refinery runs) are down over 300,000 barrels per day from the same period a year ago. This, while crude oil imports over the same 4-week period are up over 300,000 barrels per day from year-ago levels! It appears that refiners are importing crude oil, but putting it in inventories rather than running it through their refineries at rates that might be expected. As the chart below shows, there is clearly economic incentive for refiners to be running significantly higher quantities, as refinery margins for gasoline and diesel fuel (the difference between the spot price of these products and the price of WTI crude oil) are relatively high. This would imply that one of the reasons inventories are increasing substantially relative to normal patterns is that refineries are having more problems than may be known. As a result, we see an increase in crude oil inventories, even as strong product demand (gasoline demand over the most recent 4-week period is up 1.6 percent over the comparable year-ago period, while distillate fuel is up 4.3 percent) is helping to keep prices high.

Now, here is the good news. If, indeed, refiners are having difficulty processing more crude oil, this is likely to be temporary, and as these problems are corrected, their ability to refine more crude oil should increase. Often, U.S. total petroleum product demand peaks in the heart of winter, as heating oil demand surges. But refiners typically peak their runs in the summer, as they produce gasoline to meet peak demand for that product, while also producing heating oil to build up supplies for the winter. And, even though refiners have not produced as much recently as might have been expected, distillate fuel (which includes both diesel fuel and heating oil) inventories, measured in absolute terms, are above the average range for this time of year. Moreover, refiners will be able to draw from crude oil inventories that are currently well above the average range should there be a need to produce extra heating oil this upcoming winter. Thus, while crude oil prices are high now, the recent counter-seasonal build in crude oil inventories should keep prices from being as high this coming winter as they might be without this extra crude oil inventory.

U.S. Average Retail Gasoline Increases by 6 Cents
The U.S. average retail price for regular gasoline increased by 6.2 cents to 261.2 cents per gallon, topping a new nominal high for three weeks running. This is 72.8 cents higher than this time last year. Prices were up throughout the country, with the Rocky Mountain region seeing the largest increase of 10.6 cents to 254.6 cents per gallon, but remaining the lowest regional price in the country. The highest regional price remained on the West Coast, where prices gained 4.2 cents to 271.1 cents per gallon. The average price in California gained 3.4 cents to 275.0 cents per gallon.

Retail diesel fuel prices also reached another all-time nominal high for the second week in a row, gaining 2.1 cents to reach 258.8 cents per gallon. This marks the first time that retail gasoline prices have been higher than on-highway diesel prices since August 23, 2004. Prices were up throughout the country, with the Rocky Mountain region seeing the largest regional increase of 6.4 cents to 267.9 cents per gallon. The West Coast had the highest regional price, up 0.6 cent to 289.7 cents per gallon, and California prices lost 0.5 cent to 303.7 cents per gallon. Gulf Coast prices were the lowest in the nation, increasing 3.1 cents to average 251.2 cents per gallon.

Propane Build Continues to Lag August Average
Despite the upsurge in imports last week, U.S. inventories of propane continued to lag the 5-year average build for August with a modest 0.2-million-barrel gain that put inventories of propane at an estimated 65.5 million barrels as of August 19, 2005. With only about a week remaining in the month, propane stockholders so far have managed to add slightly more than half the average build for August, potentially setting the stage for the first below average monthly build this season. However, U.S. inventories of propane continue to track near the upper boundary of the average range for this time of year.

Regional activity was mixed last week with East Coast inventories unchanged despite the strong surge in imports. During this same time, Midwest inventories gained 1.0 million barrels, while the normally robust Gulf Coast region reported a loss for the week of 0.8 million barrels. The combined Rocky Mountain/West Coast regions remained flat last week, while propylene non-fuel use inventories plunged lower by 0.5 million barrels, accounting for a 7.2 percent share of total propane/propylene inventories, compared with an 8.0 percent share from 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.