Released on May 11, 2005
(Next Release on May 18, 2005)

Yin-Yang
The ancient Chinese philosophical symbol yin-yang represents the understanding of the workings of the universe. This image may be illustrative as we think about the cycling of global crude oil inventories from region to region.

So far this year, oil demand growth has remained strong globally, with China and the United States vying for petroleum supplies. China’s demand growth has accelerated over the past two years, stretching OPEC production to near capacity levels, given that non-OPEC sources are pumping at capacity, if not nearing their peak.

With low spare capacity, the global supply chain is struggling to meet all needs evenly, resulting in a cycling of tightness from region to region, as price differentials attract imports into one area and out of another. As prices fall in the well-supplied area and rise in the less well-supplied area, the pattern is reversed and imports flow in another direction.

Crude oil inventories in the United States are at their highest levels since March 2002, with prices for West Texas Intermediate crude oil (WTI) remaining in contango (the condition where longer term futures contracts carry a higher price than shorter term contracts). This condition encourages inventory builds if the contango exceeds the costs of carrying the commodity for future delivery. So much stock building has taken place in the United States in recent weeks, that storage has reportedly tightened, contributing to a softening in U.S. crude prices, a deepening in the contango pattern, and a shift in import patterns.

At the same time, Brent, the benchmark crude oil for Europe, is also in contango and selling at higher prices relative to WTI than usually exists. With high U.S. stocks and additional freight costs, suppliers have little incentive to ship incremental crude oil across the Atlantic. As a result, European crude oil has also piled up, limiting operational storage.

While WTI and Brent are in contango, Malaysian Tapis remains in backwardation (the condition where prompt prices for a commodity are higher than the price for future delivery). This signals that the market is experiencing currently tight conditions and scrambling for prompt supplies, which is the case with thirsty Asia. Tapis is an Asia-Pacific benchmark, and in April it was selling at about a $6 premium to Brent. With limited storage capacity, Asia-Pacific refiners were willing to use tankers in transit as extra storage during the long passage to bring in much needed imports.

In April, Asian refiners were eager to supplement their staple Middle East crudes with attractively priced North Sea, Mediterranean, and West African cargoes. Functioning as swing buyers, Asian refiners appear to be pulling West African shipments in May at close to the peak levels seen in October 2004, although overflowing European storage may have created as much of a push situation for Atlantic Basin crudes as a pull from Asia. How these patterns change over time has direct implications for U.S. oil markets.

U.S. Average Retail Gasoline Price Falls 5 Cents
The U.S. average retail price for regular gasoline decreased this week by 4.9 cents from the previous week to 218.6 cents per gallon as of May 9, 24.5 cents higher than this time last year. This is the fourth week in a row that prices have decreased. Prices were down throughout the country, with the Midwest seeing the largest regional decrease of 8.1 cents to reach 207.5 cents per gallon. East Coast prices fell by 3.1 cents to 218.0 cents per gallon while West Coast prices fell 3.6 cents to 247.7 cents per gallon. California prices saw a decrease of 4.4 cents to 251.6 cents per gallon, which is 29.3 cents higher than this time last year.

Retail diesel fuel prices were down 3.5 cents last week to 222.7 cents per gallon. Prices were down throughout the country, with the Midwest and Rocky Mountains seeing decreases of 3.7 cents to 215.7 cents per gallon and 231.8 cents per gallon, respectively. The West Coast had the largest regional decrease of 4.9 cents to 248.1 cents per gallon.

Propane Inventories Continue Seasonal Climb
U.S. inventories of propane climbed higher by 1.5 million barrels last week to reach an estimated 34.7 million barrels as of May 6, 2005. Although slightly lower compared with the prior week’s gain, reflecting lower imports, inventories still maintained robust growth across most regions of the nation last week. Gulf Coast inventories led the way with a 0.7-million-barrel gain last week, followed by the Midwest, which posted a 0.6-million-barrel increase. In other regions, the East Coast remained flat, but the combined Rocky Mountain/West Coast regions posted a gain of 0.1 million barrels. Propylene non-fuel use inventories moved up by 0.1 million barrels last week to account for a slightly lower 13.5 percent of total propane/propylene inventories, compared with last week’s 13.9 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.