Released on September 24, 2008
(Next Release on October 1, 2008)

Looking Beyond the Short Run
It has been 12 days since Hurricane Ike made landfall. As of yesterday, more than 850 thousand barrels per day of crude oil production from the Gulf of Mexico and about 1.7 million barrels per day of refinery capacity were still shut down. To date, about 27 million barrels of crude oil production from the Gulf of Mexico have been shut in due to Hurricanes Gustav and Ike. As of September 19, about 46 million barrels of refined product have not been produced due to refineries being shut down or running at reduced levels for lack of crude oil. Because of port closures and pipeline outages, crude oil flows through the petroleum system were curtailed over the last few weeks and it may take a while longer to get flows moving again at normal rates throughout the entire system.

While Hurricanes Gustav and Ike did not cause the degree of damage to refineries and other petroleum infrastructure sustained during Katrina and Rita, refineries have been slow to return to operation due to lack of power. With refineries unable to fill pipelines that move product into the Midwest and East Coast, inventories have been dropping, and spot shortages, mainly of gasoline, are occurring, even with increasing imports arriving to help fill the gap. While the restoration of electrical power to refineries has progressed rapidly, it still takes time to bring refineries back online (assuming no mechanical problems occur) and even longer before they reach normal production levels.

Given these circumstances, gasoline inventories have declined to record low levels. At 179 million barrels, total motor gasoline inventories stand at the lowest level since 1967, based on monthly EIA data. Continuing reports of spot shortages of gasoline at some retail outlets where supplies have been most disrupted can be expected over the next several weeks. Distillate inventories and supplies are in better shape, but tight nonetheless. They remain within the lower part of the EIA-defined “normal” range for this time of year.

The steady return of refinery capacity with 7 of the 15 Gulf Coast refineries shut down by the hurricanes having restarted operations, and a several hundred thousand barrels-per-day jump in gasoline imports over average levels seen prior to the hurricanes as U.S. wholesale (spot) prices have moved to sufficient premiums to European and other markets to attract extra shipments are both important positive developments. Even with Monday’s crude oil and product price spikes related to the turmoil in the financial markets, spot gasoline prices were down about 65 cents per gallon from the peak levels of last July, and retail prices resumed their decline by dropping almost 12 cents per gallon from last week to $3.718 on Monday, September 22, according to EIA's retail survey. The most recent weekly declines occurred across the board with all regions showing marked declines, including the Midwest and Gulf Coast regions, which saw retail prices fall by 19 and 8 cents, respectively, following the large jumps of the previous week. While gasoline markets could be volatile over the next couple of weeks, especially in parts of the Lower Atlantic and Midwest that get their supply almost entirely via pipelines from the Gulf of Mexico, the supply situation is expected to improve once more refinery capacity comes back online and pipeline flows return to normal rates. Given normal supply rates and continued weakness in motor gasoline consumption, retail prices may continue to decline to the $3.50-per-gallon level, if not lower, by the end of the year, assuming no further supply disruptions.

U.S. Diesel Price Drops Below $4 per Gallon
Unlike last week when gasoline prices in the West dropped while prices east of the Rocky Mountains – propelled by temporary storm-related conditions – jumped up, prices this week dropped in all regions. The U.S. average price sank 11.7 cents to 371.8 cents per gallon – nearly 40 cents below the all-time high set on July 7. The average price on the East Coast retreated 8.8 cents to 372.1 cents per gallon. Although the price plummeted 19.2 cents to 375.4 cents per gallon in the Midwest, the price remained the highest of any region. The price on the Gulf Coast slipped 7.9 cents to 367.8 cents per gallon. The price in the Rocky Mountains fell for the ninth consecutive week, plunging 10.3 cents to 365.1 cents per gallon, remaining the lowest average price among the five regions. Dropping for the thirteenth consecutive week, the price on the West Coast tumbled another 7.7 cents to hit 369.3 cents per gallon. The price in California dropped 7.9 cents to 372.5 cents per gallon.

Diesel prices continued their downward slide, falling throughout the U.S. as the average U.S. retail diesel price slipped 6.5 cents to drop below $4 a gallon for the first time since April 7. At 395.8 cents per gallon, the national average price reflected a cumulative drop of more than 80 cents from the all-time high set on July 14. Despite the East Coast price slipping 6.1 cents to 402.1 cents per gallon, it was the only region where the average price remained above $4 a gallon. In the Midwest, the price dropped 4.2 cents to 393.1 cents per gallon. The average price in the Gulf Coast slumped another 8.7 cents to become the lowest in the Nation at 392.4 cents per gallon. The price in the Rocky Mountains dropped 7.7 cents to 396.4 cents per gallon. In the West Coast, the average price plunged 11.3 cents to 394.3 cents per gallon – falling below $4 for the first time since March 10. The average price in California declined 10.2 cents to 395.1 cents per gallon.

Weekly Propane Build Nearly Flat
The aftermath of Hurricane Ike may have caught up with Gulf Coast propane operations as evidenced by the sharp drop in production and the mediocre build that measured 110 thousand barrels last week. As of September 19, 2008, propane inventories stood at an estimated 55.6 million barrels, about 3.3 million barrels below the same time last year. With only a few weeks remaining in the traditional build season, the Nation’s stockpile of propane heading into the winter heating season may be one of the lowest in over a decade. While Midwest inventories gained about 0.4 million barrels last week, Gulf Coast inventories had a near offsetting loss of 0.3 million barrel despite sharply higher imports. East Coast inventories and the combined Rocky Mountain/West Coast region remained relatively unchanged last week. Propylene non-fuel use inventories slipped lower by 0.1 million barrels last week to account for a 5.6 percent share of total propane/propylene inventories, down from a 5.8 percent share reported during the prior week.

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