Released on April 26, 2006
(Next Release on May 3, 2006)

Understanding Gasoline Inventories
With the dramatic drop in total gasoline inventories over the last few weeks (see Figure 4 in the Weekly Petroleum Status Report (WPSR) or put your mouse on the word “Gasoline” in the stock chart to the left of this report), some analysts may be wondering if EIA is picking up all gasoline inventories during this transition from Methyl Tertiary Butyl Ether (MTBE) reformulated gasoline (RFG) to ethanol RFG, since ethanol is not blended into the gasoline mixture until just before the gasoline gets shipped to the retail stations. Other analysts wonder if the drop is related to terminals getting rid of their winter-grade gasoline to make room for the summer-grade gasoline. And others are still just a little unsure about the difference between Reformulated Blendstock for Oxygenate Blending (RBOB), the base gasoline that needs to be blended with some type of oxygenate to be turned into finished RFG, and finished RFG itself. This week’s commentary reviews EIA’s methods and terminology and provides some analysis regarding the “story” being told by gasoline inventories.

EIA reports petroleum inventories only at the “primary” level, which includes refineries, pipelines, and terminals, but excludes retail stations and consumer-level storage. EIA provides inventory level information both for finished gasoline (gasoline ready to be used in vehicles) and blending components (gasoline blendstock that still needs something added to it to become finished gasoline). Because gasoline blendstock can, in most cases, be quickly blended into finished gasoline, most gasoline market analysts prefer following total gasoline inventories, as shown in the chart linked at the top of this report.

But, sometimes, there are interesting stories buried in the breakdown of total gasoline inventories. In EIA’s terminology, RBOB that is intended to be blended with MTBE is listed as RBOB with ether, while RBOB that is intended to be blended with ethanol is listed as RBOB with alcohol. Many analysts have been watching the changes in finished RFG and RBOB with alcohol stock levels (see the chart below). With much of the East Coast (and parts of Texas) converting from using MTBE RFG to ethanol RFG, we have seen a shift taking place between finished RFG and RBOB with alcohol, as the graph below indicates. Terminals have been reducing their inventories of finished RFG, which is most likely winter grade gasoline, in order to make room for RBOB with alcohol. As the anticipated phase-out of MTBE progresses, finished RFG inventories are expected to virtually disappear. The chart below confirms what many analysts expected to see during the transition.

But analysts have also wondered if EIA’s total gasoline inventories are fully reflecting the transition to ethanol RFG, since ethanol is blended with RBOB further down the supply chain, and EIA does not collect ethanol inventories except on a monthly basis. When MTBE was blended into the gasoline at the refinery level and then shipped via pipeline, it was included in both finished and total gasoline inventories because it was already co-mingled with the gasoline. However, prior to ethanol being blended with RBOB, only the RBOB is included in total gasoline inventories, while the ethanol is included in the “other oils” category. Although EIA only collects data on actual inventory levels for ethanol on a monthly basis, it is implicitly included in EIA’s estimate of weekly “other oils” inventory levels.

Though excluded from gasoline inventory levels, ethanol is included in weekly and monthly finished gasoline production when ethanol is blended with RBOB. EIA accounts for the ethanol in the gasoline balance by including it in finished gasoline production in one of two ways. First, ethanol is reported as input by blending terminals (EIA collects data from gasoline blending terminals on both weekly and monthly surveys) and there is a corresponding production volume reported for finished motor gasoline. Second, because typically not all ethanol blending is currently being reported, there is an adjustment that takes implied demand for fuel ethanol and motor gasoline blending components and transfers these volumes to production of finished motor gasoline. During major fuel specification transitions, there are often problems with getting everyone reporting accurately on the correct forms, and EIA is taking measures to improve the reporting of ethanol blending. Thus, while total gasoline inventories will be lower than they would otherwise be since ethanol is not included in the gasoline inventory category, all else being equal, the weekly gasoline balance does reflect EIA’s best representation of current gasoline market conditions, since finished gasoline production volumes include ethanol RFG once it has been blended.

U.S. Average Retail Gasoline Adds Another 13 Cents
The U.S. average retail price for regular gasoline increased by 13.1 cents last week, rising to 291.4 cents per gallon as of April 24, which is 67.8 cents higher than last year. Prices rose for the fourth week in a row, reaching their highest level since October 3, 2005. Prices were up throughout the country, with the West Coast seeing the largest increase of 16.6 cents to reach 300.9 cents per gallon, the highest regional price in the Nation. California prices were up 17.2 cents to 306.8 cents per gallon. Prices on the East Coast gained 14.1 cents to hit 294.2 cents per gallon, while Midwest prices were up 11.5 cents to 287.0 cents per gallon. The Rocky Mountains had the lowest regional price, increasing 14.5 cents 271.0 cents per gallon.

Retail diesel fuel prices increased by 11.1 cents to reach 287.6 cents per gallon as of April 24, which is 58.7 cents higher than last year. Prices were up throughout the country, with the Rocky Mountains seeing the largest regional increase of 14.7 cents to 290.3 cents per gallon. The Gulf Coast had the lowest regional price in the country, gaining 9.2 cents to 281.7 cents per gallon. West Coast prices were still the highest regional prices in the Nation, adding another 14.5 cents to 302.6 cents per gallon. California prices were even higher, increasing 17.0 cents to 310.3 cents per gallon.

Propane Inventories Post Strong Gains
Strong inventory gains were posted across all the major propane market regions last week, with inventories climbing by 2.4 million barrels to an estimated 32.9 million barrels as of April 21, 2006. Weekly gains in both production and imports of propane combined to boost propane inventories higher last week. Regionally, East Coast inventories edged higher by 0.3 million barrels last week; Midwest inventories gained 0.7 million barrels; while Gulf Coast inventories reported the largest weekly rise with 1.4 million barrels during this same time. The combined Rocky Mountain/West Coast regions remained unchanged last week. Propylene non-fuel use inventories reported a 0.4-million-barrel decline last week that lowered the share of this product to 8.8 percent of total propane/propylene inventories compared with the prior week’s share of 10.8 percent.

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