Released on May 30, 2002
(Next Release on June 5, 2002)

WTI Takes A Holiday
Leading up to the Memorial Day holiday, the West Texas Intermediate (WTI) crude oil price fell from about $29 per barrel on May 14 to less than $27 per barrel by May 24 (and even lower on May 28, the first business day following the holiday). However, just like many of us who had to return to the reality of working for a living following the 3-day weekend, so too will WTI prices likely return to higher levels sometime this summer. Of course, the actual timing of such a price movement is difficult to predict. Whether it happens next week, later next month, or later this summer is unclear. But, unless the situation changes, higher WTI prices appear likely to occur at some point later this year. Why do we say this? Let’s explore the oil market for the answer.

First, crude oil supply is running short of crude oil demand (crude oil input into refineries) such that inventories are being reduced. This is the case, even though crude oil inputs to refineries are lower than at this time last year, largely because crude oil imports have dropped below year-ago levels by an even larger amount due to deep OPEC production cuts. Crude oil inventories are now 6.7 million barrels below levels a year ago and are in the lower half of the normal range for this time of year. Earlier this year, they were at the upper end, or even exceeded, the normal range. Thus, the crude oil market in the United States has clearly been tightening up recently, despite the lull in WTI prices that has occurred since the middle of May.

Second, product demand is expected to pick up as we head into the heart of summer (June, July, and August). For now, product inventories are relatively full, with both gasoline and distillate fuel (which includes heating oil and diesel fuel) inventories near the upper end of their respective normal ranges. As demand increases, there are basically three methods to supply this extra demand. First, product imports could increase to provide the incremental supply. However, it usually takes a few weeks for the product to be imported and distributed, thus making this method not the quickest way to add supply. Another method would be to refine more crude oil into products. This too will take a few weeks to refine the oil and distribute the product to its ultimate destinations. Plus, this will draw down crude oil inventories even further, assuming no appreciable increase in imports, thus increasing pressure on crude oil prices. The last method to supply incremental demand, and the timeliest, is to draw from product inventories. While this may appear to be the most economic and efficient method, this too may lead to price pressures later this summer. If product inventories are drawn such that they, too, end towards the lower end of the normal range, prices for these products will face upward pressure. And if crude oil inventories don’t rise, then at some point, the United States may see both crude oil and product inventories towards the lower end of the normal range. Failing a third quarter OPEC production increase and the resulting rising U.S. crude oil imports, U.S. crude oil inventories are likely to remain under pressure since, unlike global markets, crude oil demand normally peaks in the United States in late summer. This situation is a recipe for upward price movement, particularly if something happens that temporarily affects the supply of crude oil (e.g., unrest in the Middle East or a cut-off of Iraqi exports) or refined petroleum products (e.g., a major refinery or pipeline problem). While it is difficult to discern when prices will increase, particularly as weekly data often appear to buck longer-term trends, unless more supply is added or demand does not increase as much as many analysts expect, it does appear that oil markets will tighten further later this summer. Indeed, higher crude oil and product prices are one of the major current risks to a strong recovery in the U.S. economy and oil demand.

Memorial Day Weekend Sees Lower Retail Gasoline Prices
The retail gasoline market fell 1.0 cent last week, with prices for regular gasoline ending at 138.7 cents per gallon on May 27. This price is 31.7 cents per gallon lower than last year. While retail gasoline prices traditionally rise over the Memorial Day holiday weekend, this year decreases were seen throughout most of the country. The largest decrease occurred in the Midwest, where prices fell 2.7 cents to end at 137.8 cents per gallon. The Rocky Mountain region was the only area that saw prices rise, with an increase of 0.9 cent to end at 138.9 cents per gallon. Prices have remained relatively flat over the past seven weeks, and the near term outlook calls for prices to remain steady over the next few weeks assuming the status quo in oil markets. However, prices at the pump may rise if there are increases in crude oil prices or gasoline demand during the summer driving season as highlighted above. Retail diesel fuel prices decreased by 0.1 cent per gallon to a national average of 130.8 cents per gallon as of May 27.