Released on July 6, 2006
(Next Release on July 12, 2006)

Reliance on Others
With our country celebrating our independence earlier this week, we are reminded that many Americans find a lot of virtue in not depending on others. However, just as in the U.S. crude oil market, the U.S. gasoline market depends on imports as a major source of supply, without which gasoline prices would likely be even higher than current levels.

As shown in the chart below, total U.S. gasoline imports (TOT) averaged over 1.2 million barrels per day in April 2006, significantly more than the nearly 800,000 barrels per day averaged 5 years earlier and more than double the nearly 600,000 barrels per day averaged 10 years ago. Beyond the growth in imports itself, there have been interesting developments in what is being imported and from where it comes. For example, the chart shows that the growth in imports has been concentrated in gasoline blending components (BC), rather than finished gasoline (FIN). Finished gasoline is gasoline that can be used in vehicles, with no additional processing required. Gasoline blending components, also called blendstocks, include individual components such as alkylates and reformate, but can also refer to gasoline that is all but finished, requiring some other ingredient to be added to meet the specifications for finished gasoline sold in various markets in the United States. For example, currently, just about every area in the United States that uses reformulated gasoline (RFG) is using a blending component called Reformulated Blendstock for Oxygenate Blending (RBOB) to which ethanol is added to create the finished RFG.

As gasoline specifications have changed over the last decade, it has become more economical for both foreign refiners and U.S. wholesalers to trade gasoline that may not quite meet U.S. specifications (gasoline blending components) and have U.S. wholesalers do the necessary blending to turn it into finished gasoline. This enables foreign refiners to continue to supply the large U.S. gasoline market without making major capital investments in their refineries that would be necessary to meet U.S. finished gasoline specifications, thus keeping their costs down, and keeping the cost lower here in the United States than it would be otherwise.

Turning to the issue of where our gasoline imports are sourced, the chart shows that the bulk of increased volumes have come from European countries. This increased dependence on European gasoline supplies has tied the European and U.S. gasoline markets closer together. When prices rise here in the United States, and European refiners have excess gasoline supplies on hand, the flow towards the United States increases dramatically. However, should the European gasoline market tighten up for almost any reason (i.e., increased demand and/or decreased supply within Europe), European gasoline exports will diminish, potentially causing a drop in gasoline supply here in the United States, which would likely lead to higher retail prices. This is why many U.S. gasoline analysts closely watch the weekly data on gasoline imports. While companies do not report the source of their product imports (such as gasoline) on the weekly survey forms, it is presumed that any significant rise or fall in gasoline imports is most likely related to changing conditions in European gasoline markets.

The data for the week ending June 30 illustrate the impact gasoline imports can have on U.S. gasoline markets. Spot prices of gasoline rose earlier this week on expectations of a significant drop in total gasoline inventories. However, with total gasoline imports rising from under 1 million barrels per day for the week ending June 23 to nearly 1.3 million barrels for the week ending June 30, total gasoline inventories actually rose slightly. This increase in gasoline imports was sufficient to keep inventories from falling, and as a result, likely kept spot prices from rising even further than they would have without the additional gasoline supply. Sometimes, getting help from others can be a good thing.

U.S. Average Retail Gasoline Prices Gain 6.5 Cents
The U.S. average retail price for regular gasoline increased by 6.5 cents last week to reach 293.4 cents per gallon as of July 3, which is 70.8 cents higher than last year. Prices rose for the first time in three weeks, with the Midwest experiencing the largest price increase of 9.2 cents to 291.3 cents per gallon. West Coast prices remained the highest in the nation, gaining 1.3 cents to 310.8 cents per gallon. California prices added 2.6 cents to 318.9 cents per gallon. East Coast prices gained 7.0 cents to 292.4 cents per gallon.

Retail diesel fuel prices rose 3.1 cents to reach 289.8 cents per gallon as of July 3, which is 55.0 cents higher than last year. Prices were mixed throughout the country, with the Rocky Mountains and West Coast seeing decreases of 0.2 cent and 1.2 cents, respectively. West Coast prices remained the highest in the nation at 305.6 cents per gallon. The Midwest saw the largest PADD-level increase of 6.8 cents to 288.7 cents per gallon.

June Propane Build Below Average
For the second consecutive month, propane stockholders fell short of achieving the average monthly stockbuild, with inventories rising about 7.4 million barrels during June 2006. The most recent 5-year average build for June is 8.6 million barrels. Moreover, since the start of the seasonal build season (April through September), propane stockholders have surpassed the most recent 5-year average monthly build only during April 2006.

Last week, U.S. inventories of propane rose by 1.9 million barrels to reach an estimated 48.6 million barrels as of June 30, a level that continues to track near the lower boundary of the average range for this time of year. While East Coast inventories remained flat last week, inventories elsewhere rose by 0.6 million barrels in the Midwest and by 0.9 million barrels in the Gulf Coast regions. The combined Rocky Mountain/West Coast regions also reported gains last week that totaled 0.4 million barrels. Propylene non-fuel use inventories fell by 0.1 million barrels last week and accounted for a smaller 6.6 percent share of total propane/propylene inventories, down from the prior week’s 7.1 percent share.

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