Released on September 12, 2007
(Next Release on September 19, 2007)

Pump Up the Volume
In 1987, M/A/R/R/S released a single called "Pump Up the Volume" that became a dance music hit, reaching #1 in the United Kingdom and #13 in the United States. Yesterday, the Organization of Petroleum Exporting Countries (OPEC) decided to follow the lead on that song, announcing plans to increase production by 500,000 barrels per day effective November 1. The move reverses OPEC members' recent statements indicating the group planned to hold production steady. OPEC's September 11 press release noted that while there had been a build-up in global crude oil inventory levels, ongoing tightness in U.S. products markets and the high-demand winter season necessitated keeping the market adequately supplied. OPEC agreed to reassess the market situation at its 146th (Extraordinary) Meeting on December 5, 2007, and could also review the market situation at an oil summit convening OPEC's heads of state November 17-18, 2007 in Riyadh.

A year ago, when OPEC met on September 11, 2006, their assessment was that continued inventory build-up to above the 5-year average combined with expected strong growth in non-OPEC supply and falling prices had signaled a clear imbalance between supply and demand. That assessment led to OPEC's decision the following month to cut production.

Recent global oil market indicators have now led OPEC to a different assessment of the situation. OPEC production cuts over the past year, targeted at 1.7 million barrels per day from a base production level of 27.5 million barrels per day (excluding Angola and Iraq), have firmed oil markets. Although OPEC did not achieve total compliance, there was enough production restraint to reverse the downward price trend that began a year ago. Actual OPEC crude oil production during the second quarter of 2007 was 1 million barrels per day lower than third quarter 2006 levels (Short-Term Energy Outlook). Further, OPEC's fears about non-OPEC production growth did not materialize. Although OPEC was concerned that the rebound in non-OPEC supply in 2007 would be at its highest level since 1984 (1.5 million barrels per day) in 2007, EIA projects that the non-OPEC supply increase will actually be about 0.6 million barrels per day in 2007.

OPEC's announcement signals an attempt by OPEC to provide enough supplies to prevent a sharp increase in prices, but is unlikely to alter the overall tight market situation. Many analysts, including EIA's September Short-Term Energy Outlook, project that OPEC would increase its crude oil production in the fourth quarter of 2007 regardless of any formal announcement. The initial reaction to the announcement was that WTI oil futures prices closed on Tuesday at $78.23 per barrel, up $0.74 from Monday's level, surpassing the previous all-time high settlement price of $78.21 per barrel reached on July 31, 2007. The market fundamentals, characterized by rising demand for OPEC oil and fairly low surplus capacity, should keep markets firm even with the planned increase in OPEC production, leaving the market vulnerable to supply disruptions.

OPEC will likely continue to add supply gradually to the market in an attempt to avoid a sharp price rise. It will be critical to monitor OPEC production levels over the winter months, especially the Middle East countries that have accounted for most of the production cuts over the past year and hold two thirds of surplus production capacity - Saudi Arabia, Kuwait, and the United Arab Emirates. With the bulk of the world's surplus capacity, Saudi Arabian production decisions will be a key indicator of market direction. If demand continues to grow and OPEC raises output moderately, the resultant reduction in surplus capacity should keep markets tight. The alternative scenario of increasing surplus capacity and downward pressure on oil prices over the coming year would seem to require a significant and sustained drop in oil demand driven by a downturn in economic activity. While this cannot be ruled out, it is hardly an attractive prospect.

Retail Gasoline and Diesel Prices Increase
The U.S. average retail price for regular gasoline increased 2.2 cents last week to rise to 281.8 cents per gallon as of September 10, 2007, 20.0 cents higher than last year. Retail regular gasoline prices were up throughout all of the major regions last week, with the Midwest moving up by 0.6 cent to reach 297.9 cents per gallon, the highest in the country and 53.1 cents per gallon over last year. East Coast prices grew by 2.1 cents to 273.0 cents per gallon. Prices for the Gulf Coast gained 3.6 cents, settling at 269.3 cents per gallon, the lowest regional price. The Rocky Mountain region price rose to 283.6 cents per gallon, up 1.5 cents this week but 4.8 cents per gallon lower than last year. West Coast prices strengthened 4.4 cents to 281.6 cents per gallon. The average price for regular grade in California was up 4.8 cents to 283.9 cents per gallon, 11.0 cents per gallon lower than the previous year.

Retail diesel prices climbed to 292.4 cents per gallon, 3.1 cents more than last week, and 6.7 cents per gallon higher than this time last year. Prices rose in all regions of the country. The largest increase, 4.5 cents, occurred on the East Coast where prices settled at 291.2 cents per gallon. In the Midwest, prices rose 3.2 cents to 294.2 cents per gallon, while the Gulf Coast increased 2.9 cents to 286.5 cents per gallon. The Rocky Mountain region price increased 1.6 cents to 295.5 cents per gallon. The West Coast price grew by 1.0 cent to 298.2 cents per gallon. California prices went up a cent, settling at 299.5 cents per gallon, 13.0 cents per gallon lower than a year ago.

Propane Inventories Rebound Higher
The sluggish build in propane inventories recently was ended this week with inventories rebounding higher by 2.2 million barrels, an increase that put the nation's primary supply of propane at an estimated 57.4 million barrels as of September 7, 2007. Higher production and imports accounted for the weekly stockbuild. Strong imports into the Gulf Coast raised the regions inventories by 1.4 million barrels last week, while the Midwest reported inventories up by 1.0 million barrels during this same period. East Coast inventories moved down by 0.2 million barrels, while the combined Rocky Mountain/West Coast region remained relatively unchanged. Propylene non-fuel use inventories also remained relatively unchanged last week although its share to total propane/propylene fell slightly to 4.7 percent from the prior week's 4.9 percent share.

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.