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U.S. ENERGY INFORMATION ADMINISTRATION EIA Analyzes Oil Markets for Clues to Changing Conditions
Unusual conditions in last year's petroleum markets prompted the Energy Information Administration (EIA) to undertake a broad analysis of rapid gasoline price runups, record low stock levels, rising petroleum imports, weak refining margins, high refining capacity utilization rates, and declining trading volume in futures markets. EIA released the results of that study today in Petroleum 1996: Issues and Trends. The report's findings include: Gasoline Prices: Retail prices rose rapidly in the spring of 1996, climbing 19 cents from $1.09 per gallon average in February to $1.28 average in May. EIA found the increase, which caused much public concern, to be due mainly to a rapid increase in crude oil prices on top of the normal increases in price seen during the beginning of the summer driving season. The dynamics were reversed this year: crude oil and gasoline prices fell this spring, as world petroleum production exceeded demand in first quarter -- just the opposite of the normal supply-demand pattern. Oil Supply: U.S. domestic crude oil production declined, on average, 3 percent per year since 1985. The Gulf of Mexico is the only U.S. region showing an increase in proved reserves over the last decade. Major oil companies are finding exploration and production opportunities outside the U.S. attractive as oil-prospective countries open their doors to private investment. Imports: Crude oil and product imports reached record levels in 1996, climbing to 8.5 million barrels per day, meeting over 46 percent of petroleum consumption. Since the late 1980's, while total imports grew, U.S. sources of foreign crude oil shifted towards Latin America and away from the Middle East. North America (U.S., Canada, and Mexico) is the leading oil consuming region worldwide. Asia/Oceania now surpasses both the U.S. and Europe in oil consumption and is the highest regional importer, with some Asian countries almost totally import dependent. Inventories: Crude oil, distillate and gasoline stocks experienced large declines in 1995 and 1996. Longer term stock declines have also occurred, mainly as a result of refinery shutdowns during the 1980's. The recent 1995-96 declines, however, occurred primarily at tank farms and bulk terminals, the points in the supply system most able to respond to changing supply economics. These latest declines seemed to be driven mainly by expectations that crude oil and product prices would fall in the near future. Poor profitability and low refining margins also contributed to the drop in inventories, as they forced refiners to trim costs. Futures Markets: The development of the futures markets in crude oil and petroleum products was one of the most important changes to oil and gas markets over the past two decades. As trading volume grew, so did the ability of oil industry participants to hedge their price risk. The high prices in 1996 brought much attention to the futures market, including questions about the influence futures markets were having on petroleum markets and whether the futures market was behind the price runups. EIA's analysis shows that the futures markets functioned normally and that commercial and noncommercial traders behaved in accordance with established hedging theory. EIA found no evidence that large funds of money from noncommercial traders (i.e. the "speculators") have been setting prices. EIA also found that trading volume in energy futures has fallen off, partly as a result of the low stock levels and a less stable relationship between futures prices and spot market prices for crude oil and petroleum products. Cash Margins and Refinery Profitability: Refinery capacity utilization has been increasing during the 1990's, but profitability of the refining and marketing sector has been frequently lower than that of U.S. industry in general. Much of the poor financial performance in the 1990's can be attributed to the decline in the price difference between light and heavy crude oil and products. These price differences were affected to a large extent by increasing availability of light sweet crude oil supply and a large amount of refining capacity available to convert the heavy products like residual fuel into higher valued products. Petroleum 1996: Issues and Trends can be accessed immediately via the Worldwide Web at http://www.eia.doe.gov. Click on "Petroleum" under "Fuel Groups," then scroll down to the report title in the "Other" category. Published copies will be available at the end of September from the U.S. Government Printing Office, 202/512-1800, or through EIA's National Energy Information Center, 202/586-8800.
EIA Press Contact: Thomas Welch, 202/586-1178 EIA-97-24 Contact:
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