Released on July 2, 2003
(Next Release on July 9, 2003)

The Price Is Right
Guessing the correct price of a product can be a daunting task, as witnessed by the popular television game show "The Price Is Right," where contestants compete against each other to guess the price of common everyday products. The same can also be said for guessing the price for motor gasoline, as many industry professionals and organizations, including the Energy Information Administration (EIA), try to do all the time. With the summer driving season now in full swing as holiday travelers prepare for the July 4th holiday weekend, gasoline prices, which typically rise through this period, are bucking the trend with flat to even lower prices compared to prices earlier this year.

Historically, gasoline prices generally follow a pattern that mirrors gasoline demand, with prices slowly rising from early spring to a seasonal peak during the busiest driving period in July or August. But with prices at 148.7 cents per gallon as of June 30 for regular gasoline, a level that is 24.1 cents per gallon lower than the record high of 172.8 cents per gallon reached on March 17, 2003, the prospect of July or August prices approaching the March peak is very slim. In comparison, regular gasoline retail prices stood at 139.2 cents per gallon prior to the 2002 July 4th holiday, and reached their summer peak last year on July 29 at 140.7 cents per gallon. But the variables that caused gasoline prices to peak earlier this year are not necessarily the same ones that have caused gasoline price peaks during past years.

While gasoline demand continues to be a major factor driving gasoline prices, other factors came into play that caused the unseasonably high prices earlier this year. Perhaps the most obvious factor was the war in Iraq which caused a high degree of market uncertainty at the same time gasoline inventories were at a yearly low of only 199.0 million barrels. Labor strikes in Venezuela during late 2002 and severe winter weather were some of the other uncharacteristic factors that caused gasoline inventories to reach their low levels during March 2003. Gasoline inventories have since recovered somewhat to 205.0 million barrels, a level that is 6.0 million barrels above the 2003 low but still considered below average for this time of year. Although gasoline inventories remain comparatively low, there still exists some potential for further inventory building in the short-term as world crude oil and product markets continue their struggle to establish some level of market equilibrium in anticipation of the eventual return of large-scale Iraqi oil exports. Moreover, rising gasoline inventories over the next several weeks would also have the effect of tempering any sudden jump in gasoline prices that could arise from possible world oil market volatility. But the most surprising reason for relatively stable gasoline prices likely stems from the level of demand that has been anything but robust this year. Based on the most recent four-week average through June 27, 2003, gasoline demand averaged about 8.9 million barrels per day, or 2.4 percent below the same period last year. Although gasoline demand in recent weeks has shown some signs of a rebound, overall demand during the first half of 2003 was plagued by sluggish economic growth and the earlier spike in gasoline prices. In addition, bad weather in many regions of the nation, high energy costs, and anxiety over the war in Iraq that kept consumer confidence and spending down, have been cited as contributing to unusually weak consumption.

Nevertheless, even if the summer driving season does begin in earnest following the July 4th holiday, as possibly evident by the record 9.5 million barrel level of gasoline demand last week, supplies are expected to be adequate for the remainder of the travel season for a number of reasons. One aspect of the apparent sluggishness in world crude oil markets since the end of the Iraqi war has been the upsurge in gasoline imports this year through the week ending June 27, 2003 that totaled more than 11 percent above the same year-to-date period last year (based on weekly data). Recent strong import levels have contributed to a slight upward movement in gasoline inventories toward the lower limit of the average range. But the key to a robust gasoline market this summer will primarily hinge on a genuine rebound in economic activity that would provide the needed boost in consumer spending and travel. Likewise, a period of good weather would provide somewhat of a boost in travel and demand following an abnormally wet spring in some regions of the nation. Moreover, based on current wholesale gasoline prices, EIA expects retail gasoline prices to remain essentially flat, possibly even trending downward somewhat in some regions, over the next several weeks. Accordingly, with adequate domestic and foreign supplies, any subsequent rebound in gasoline demand is not only unlikely to push retail prices back toward their earlier peak, but barring major infrastructure problems, any significant re-tightening in the gasoline balance is likely to result in only a modest seasonal increase from current levels. Only time will tell if this assessment is the right price for retail gasoline prices this summer.

U.S. Retail Gasoline Prices Fall by a Cent
The U.S. average retail price for regular gasoline fell last week for the second week in a row. Prices decreased by 0.9 cent per gallon as of June 30 to reach 148.7 cents per gallon, which is still 9.5 cents per gallon higher than a year ago. Prices were down throughout the country, with the Gulf Coast seeing the largest decrease, falling 1.3 cents to end at 138.3 cents per gallon. The West Coast showed the highest prices at 174.5 cents per gallon. The region with the lowest price is the Gulf Coast, where prices for regular gasoline averaged 138.3 cents per gallon.

Retail diesel fuel prices decreased for the fifteenth time in 16 weeks, falling 0.3 cent per gallon as of June 30 to a national average of 142.0 cents per gallon, which is still 13.1 cents per gallon higher than a year ago. Retail diesel prices were mixed throughout the nation last week, with the largest decrease occurring in California, where prices fell on average by 2.4 cents to 160.2 cents per gallon. New England and the Rocky Mountain region saw price increases of 0.7 cent.

Propane Stockbuild Set June Record
Primary stockholders of propane set a record June build that totaled 11.1 million barrels, a level that fell short of eclipsing the all-time record of 13.3 million barrels reached during May 1998. Contributing to the near-record build was the strong flow of imports to the U.S. during June that totaled an estimated 5.5 million barrels. As a result, U.S. inventories of propane pushed upward to an estimated 44.3 million barrels as of the week ending June 27, 2003. Nevertheless, propane inventories at the national level remain about 2.6 million barrels below the lower limit of the average range for this time of year. At the midpoint in the traditional build season that lasts from April through September, U.S. inventories of propane have gained 22.7 million barrels, only slightly less than the 23.0 million-barrel average based on the most recent past 5-year period. Correspondingly, if U.S. inventories of propane maintain the second half 5-year average build that totaled 13.3 million barrels, primary inventories would be expected to begin the winter heating season with about 58 million barrels, a level slightly below what is believed to be the comfort zone of about 60 million barrels.

Regional inventories continued to show mixed results last week with East Coast inventories remaining relatively flat, while Midwest inventories posted the largest gain that measured nearly 1.3 million barrels. Gulf Coast inventories, which normally post the largest weekly gain, grew by less than 0.4 million barrels. Inventories of propylene for non-fuel use moved lower last week to 2.6 million barrels, a level that accounts for 5.8 percent of total propane/propylene inventories, down from last week's 6.4 percent share.

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