Released on May 25, 2005
(Next Release on June 2, 2005)

Saving for a Rainy Day
With many parts of the country, including the Washington, DC area, experiencing more than the usual amount of rain lately, the phrase “saving for a rainy day” certainly leaps to mind. When it comes to oil markets, this phrase describes the seasonal nature of inventories. Because the demand for many petroleum products is seasonal over the course of the year, it is important to build inventories during the time of year when demand is lower so that supplies are available when demand peaks. When demand is seasonal, suppliers will not produce an amount equal to the peak demand, as this would be largely inefficient and costly. Instead suppliers use inventories so that production can remain relatively stable. The same can be said for crude oil, if demand for crude oil is limited to the amount of crude oil used in refineries. The graph below illustrates the relationship between the seasonal nature of crude oil refinery inputs and crude oil inventories.

As the graph shows, when refinery inputs (the red line) peak in the May through August period, U.S. crude oil inventories are drawn down (the blue bars in the upper portion of the graph). If crude oil inventories did not build substantially early in the year, refiners would be required to import significantly more crude oil during the summer, when U.S. refinery utilization reaches its peak level. This could lead to higher prices as refiners, effectively, bid against each other for available supplies. While the increase in U.S. crude oil stocks of 41 million barrels over the first four months of 2005 is somewhat larger than usual, it is by no means unprecedented – stocks rose by 45 million barrels during the comparable period in 2001. So, while some people, including some OPEC oil ministers, express concern about the build in U.S. crude oil inventories, it may simply reflect, among other things, prudent preparation on behalf of refiners.

The graph above uses the most recent 5-year average (April 2000 through March 2005) to calculate the monthly refinery inputs shown in the red line. However, as oil product demand grows, so has refinery production, implying an increase in refinery inputs, as well, over time. Therefore, crude oil refinery inputs are expected to exceed the averages shown in the red line, which could lead to larger-than-usual stock draws. EIA’s latest Short-Term Energy Outlook forecasts that U.S. crude oil refinery inputs will exceed 16 million barrels per day in both June and July, and could exceed 15.9 million barrels per day in August. Should refineries require this much crude oil this summer, consumers may be happy that refiners saved for a rainy day by building inventories so much over the first part of the year.

U.S. Average Retail Gasoline Price Decreases by Almost 4 Cents
The U.S. average retail price for regular gasoline decreased this week by 3.8 cents from the previous week to 212.5 cents per gallon as of May 23, 6.1 cents higher than this time last year. This is the sixth week in a row that prices have decreased. Prices were down throughout the country, with the Midwest seeing the largest regional decrease of 4.4 cents to reach 202.8 cents per gallon. East Coast prices fell by 3.2 cents to 211.8 cents per gallon while West Coast prices fell 3.8 cents to 239.9 cents per gallon. California prices saw a decrease of 3.9 cents to 243.4 cents per gallon, which is 11.0 cents higher than this time last year.

Retail diesel fuel prices were down 3.3 cents last week to 215.6 cents per gallon. Prices were down throughout the country, with the Rocky Mountains seeing the largest regional decrease of 6.0 cents to 220.7 cents per gallon. California prices fell by 5.9 cents to 237.3 cents per gallon.

May Propane Stockbuild Continues Strong
Primary stockholders of propane continued their relatively strong May build with the addition of 2.1 million barrels last week, positioning U.S. inventories of propane at an estimated 39.9 million barrels as of May 20, 2005. The May stockbuild remains on course to match the 5-year average build for this month, with inventory additions so far totaling 6.3 million barrels, or about three-fourths of the average monthly gain. Robust imports, particularly in the East Coast, also continued last week, which contributed to boost that region’s inventories higher by 0.8 million barrels. To a lesser degree, the Midwest region posted a 0.5-million-barrel gain last week, while in the Gulf Coast, inventories rose 0.7 million barrels during this same period. The combined Rocky Mountain/West Coast regions, following a period of lackluster gains, posted a 0.2-million-barrel build last week. Propylene non-fuel use inventories slipped lower by 0.1 million barrels to account for an 11.5 percent share of total propane/propylene inventories, down from the prior week’s 12.4 percent share.

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