Financial Options

Wednesday's petroleum status report from the Energy Information Administration offered some hope of relief on gas prices: gasoline production increased to over 8.9 million barrels per day, refinery activity generally increased to 89% of capacity and 15.3 million barrels input per day, gasoline inventories increased by 400,000 barrels, crude inventories increased by 5.6 million barrels and total petroleum inventories increased by 6.3 million barrels. Inventories of distillate fuels also continued to increase. On the downside, gasoline use continued at a record pace 1% above the same 4-week period in 2006, however distillate fuel demand by comparison was up 5.2%.

This Week in Petroleum takes a look at the near record gasoline prices and makes the standard excuse - «fall short of the price of gasoline in March 1981, however, if adjusted for inflation. Retail prices that month were equivalent to a current price of over $3.22 per gallon after adjusting for inflation.» What they fail to note is that in March 1981, the US economy was in turmoil with a serious inflation problem, the US was more dependent on Middle East oil and the Middle East was also in serious turmoil less than two months after the release of US hostages held for over 400 days by Iran. Holding March 1981 as an inflation adjusted yardstick and finding that we are even close indicates that there is something seriously amiss.

gas,gasoline,prices,oil,petroleum,crude,inventories

This Week in Petroleum: May 9, 2007

Chasing Records
Yesterday, Barry Bonds hit another home run and now stands just 10 home runs shy of Hank Aaron’s career home run mark of 755. With Barry Bonds chasing this revered record in Major League Baseball, he makes news every time he hits another home run, even if he does so in a loss, as was the case yesterday. One of the most visible records in gasoline markets is the U.S. average retail price for regular gasoline. At $3.054 per gallon on EIA’s latest weekly retail price survey (May 7), this price is just a penny-and-a-half shy of the all-time record (in nominal dollars) of $3.069 per gallon set on September 5, 2005, about a week after Hurricane Katrina ravaged Gulf Coast oil production and refineries. Both of these prices, however, fall short of the price of gasoline in March 1981, however, if adjusted for inflation. Retail prices that month were equivalent to a current price of over $3.22 per gallon after adjusting for inflation (see http://www.eia.doe.gov/emeu/steo/pub/fsheets/petroleumprices.xls).

This is the third year in a row that the average U.S. retail price for regular gasoline has reached $3 per gallon at least once (besides the record set in 2005, it also reached $3 per gallon or higher during four consecutive weeks in 2006; see http://tonto.eia.doe.gov/dnav/pet/hist/mg_rt_usw.htm). EIA has reported repeatedly in recent weeks on the causes of the price increase. Demand has been outpacing supply, causing gasoline inventories to drop from well above the average range to well below it (see http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/ weekly_petroleum_status_report/current/pdf/figure04.pdf). With gasoline inventories having ended their streak of consecutive declines last week, the question becomes how quickly, and to what degree, will gasoline prices soften.

According to EIA’s Short-Term Energy Outlook, released yesterday, high prices are expected to encourage production of gasoline domestically and continue to attract imports. This, in fact, occurred during the week ending May 4, with gasoline production over 8.9 million barrels per day and total gasoline imports above 1.2 million barrels per day. At the same time, the four-week average for gasoline demand is now just 1.0 percent above year-ago levels, reflecting some slowing of demand growth from the typical trend in recent years. Increasing supply and slowing demand growth is expected to reduce prices slightly over the next several weeks. EIA projects a U.S. average retail price in the $2.90s during June and July, after averaging above $3.00 per gallon in May. This projection assumes no significant unplanned refinery outages or crude oil production losses.

Prices could rise back again above $3 per gallon in August, should demand at the end of summer surge, as it often does. Whether gasoline prices set a new record (in nominal dollars) next week is still in doubt. What is clearer is that gasoline prices are expected to remain at or close to $3 per gallon for much of the summer. Although many oil market analysts have talked about the potential for retail gasoline prices reaching $4 per gallon this summer, EIA does not expect the U.S. average price to get anywhere close to that level as long as the oil infrastructure remains largely unaffected this summer. This year is certainly shaping up to be one in which consumers will likely see high gasoline prices throughout the summer months.

Gasoline Prices Continue Upward While Diesel Prices Fall
Gasoline prices rose sharply for the second consecutive week, increasing 8.3 cents to 305.4 cents per gallon for the week of May 7, 2007. Prices are 14.5 cents per gallon higher than at this time last year. All regions reported price increases. East Coast prices were up 4.1 cents to 295.8 cents per gallon. The largest increase was in the Midwest, where prices jumped 14.9 cents to 307.4 cents per gallon. Prices for the Gulf Coast rose 1.7 cents to 287.0 cents per gallon, while Rocky Mountain prices increased 13.3 cents to 309.0 cents per gallon. West Coast prices were up 9.6 cents to 337.3 cents per gallon. The average price for regular grade in California was up 10.2 cents to reach a record price of 346.1 cents per gallon, 12.9 cents per gallon above last year's price.

Retail diesel prices fell for the third consecutive week, decreasing 1.9 cents to 279.2 cents per gallon. Prices are 10.5 cents per gallon lower than at this time last year. East Coast prices fell 1.9 cents to 278.1 cents per gallon. In the Midwest, prices were down 2.1 cents to 275.4 cents per gallon, while the Gulf Coast saw a decrease of 2.2 cents to 274.4 cents per gallon. The only region to see an increase in price was the Rocky Mountains, where prices were up 0.7 cent to 299.5 cents per gallon. Prices on the West Coast saw a decrease of 1.7 cents to 293.5 cents per gallon, while California prices fell 1.3 cents to 297.4 cents per gallon, 27.0 cents per gallon lower than at this time last year.

Propane Reports Modest Build
Propane stockholders reported that inventories grew by a modest 0.8 million barrels last week, moving the nation’s primary supply of propane up to an estimated 28.7 million barrels as of May 4, 2007. With last week’s modest gain, total propane inventories continue to track just below the lower limit of the average range for this time of year. Regionally, only the Gulf Coast reported inventory gains that totaled 1.2 million barrels, while in the East Coast and Midwest, inventories showed respective declines of 0.1 million barrels and 0.4 million barrels. The combined Rocky Mountain/West Coast regions remained relatively unchanged last week. Propane non-fuel use inventories were also unchanged last week, but their share of total propane/propylene inventories fell to about 7.7 percent from 8.0 percent, compared with the prior week.

Summary of Weekly Petroleum Data for the Week Ending May 4, 2007

U.S. crude oil refinery inputs averaged 15.3 million barrels per day during the
week ending May 4, up 174,000 barrels per day from the previous week's average.
Refineries operated at 89.0 percent of their operable capacity last week.
Gasoline production increased compared to the previous week, averaging over 8.9
million barrels per day, while distillate fuel production also increased,
averaging 4.2 million barrels per day.

U.S. crude oil imports averaged 11.0 million barrels per day last week, up
727,000 barrels per day from the previous week. Over the last four weeks, crude
oil imports have averaged 10.3 million barrels per day, or 457,000 barrels per
day more than averaged over the same four-week period last year. Total motor
gasoline imports (including both finished gasoline and gasoline blending
components) last week averaged over 1.2 million barrels per day. Distillate fuel
imports averaged 327,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic
Petroleum Reserve) jumped by 5.6 million barrels compared to the previous week.
At 341.2 million barrels, U.S. crude oil inventories are just below the upper
end of the average range for this time of year. Total motor gasoline
inventories increased by 0.4 million barrels last week, but remain well below
the lower end of the average range. Distillate fuel inventories rose by 1.7
million barrels per day, and are at the upper end of the average range for this
time of year. Heating oil inventories (high-sulfur) fell slightly last week, but
diesel fuel inventories (the sum of ultra-low and low-sulfur) inventories
reported an increase. Propane/propylene inventories increased by 0.8 million
barrels last week. Total commercial petroleum inventories climbed by 6.3
million barrels last week, and are in the middle of the average range for this
time of year.

Total products supplied over the last four-week period has averaged nearly 20.9
million barrels per day, or 3.3 percent above the same period last year. Over
the last four weeks, motor gasoline demand has averaged nearly 9.3 million
barrels per day, or 1.0 percent above the same period last year. Distillate
fuel demand has averaged nearly 4.3 million barrels per day over the last four
weeks, up 5.2 percent compared to the same period last year. Jet fuel demand is
down 1.1 percent over the last four weeks compared to the same four-week period
last year.

Complete report with data tables [PDF file in popup window]