This Week in Petroleum was just released, and the focus was the gasoline situation. Some excerpts:
Why are gasoline prices so high?
Gasoline inventories have recently been drawn down at a dramatic rate to bridge the gap between supply and demand (see Figure 4, in the Weekly Petroleum Status Report (WPSR)). Over 12 consecutive weeks during February, March, and April, total gasoline inventories declined by a cumulative total of more than 34 million barrels (15 percent). This is the sharpest decline in gasoline inventories over a consecutive 12-week period in EIA’s recorded historical data.
Is there an end in sight or will gasoline prices continue to rise all summer?
Although gasoline inventories are expected to remain lower than normal throughout the summer, high prices have encouraged more supply and inventories have increased slightly the last two weeks. Domestic gasoline production has increased by more than 500,000 barrels per day in the last three weeks and total gasoline imports (including blending components) during the week ending May 11, rose above 1.5 million barrels per day, making that week the fifth highest weekly import volume ever and the highest since last May. Should imports continue at such levels and more domestic refinery capacity come back online, supplies will improve and wholesale prices could come down. However, with gasoline inventories likely to remain low all summer, retail prices are expected to remain close to $3 per gallon during the entire summer season. Prices could rise again towards the end of summer if demand surges, as it often does, in late July and August.
This week’s numbers were just released. I was correct, in that we had a build. I was also correct that it would fall short of what we need to stay out of an unprecedented Memorial Day inventory situation:
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 1.0 million barrels compared to the previous week. At 342.2 million barrels, U.S. crude oil inventories are just below the upper end of the average range for this time of year. Total motor gasoline inventories climbed by 1.7 million barrels last week, but remain well below the lower end of the average range. Distillate fuel inventories increased by 1.0 million barrels per day, and are at the upper end of the average range for this time of year.
So, we now have 2 weeks in which to gain (200.7-195.2), or 5.5 million barrels, else we set a record low for Memorial Day. So we will need to average 2.75 million barrels each of the next two weeks. Impossible? No. Unlikely? Yes. The significance? I have been kicking that around. We could get off with no real problems, other than higher prices. What these low inventory levels do is increase the level of risk in case of an emergency of some sort. If a hurricane shuts down major production, we could see gas outages and a very fast runup in gasoline prices. Time will tell whether we luck out this summer.
I will update this as soon as this week’s report is released. But as I await the report, I wondered just how far we have to go to dig ourselves out of the hole we are currently in on gasoline inventories.
Last week’s report showed gasoline stocks at 193.5 million barrels. Just eyeballing the gasoline inventory graph, the 5-year average for gasoline on Memorial Day – the traditional start of summer driving season – ranges from a low of 208 million barrels to a high of 218 million barrels. Counting last week’s numbers, which will be reported in today’s This Week in Petroleum (TWIP), we have 3 weeks to get back to the lower end of the range. That would require a weekly build of (208 – 193.5)/3, or 4.8 million barrels a week. Impossible?
No, but it looks unlikely. The largest weekly gain that was ever recorded happened the week of May 28th in 1993. The increase in gasoline stocks that week was 11.5 million barrels. That appears to be quite an anomaly, because the next highest May increase was in 1994 at 5.6 million barrels. If we only look at the data since 2000 – which would be more in line with the current supply/demand picture – the largest May gain occurred in 2001 at 4.3 million barrels.
So, in order to avoid going into the summer driving season below the lower end of the range, we would have to see 3 consecutive weekly gains that have not been seen this century – fueled by very strong import levels (or record-breaking demand destruction). So, again I go out on a little limb and say that we will enter summer driving season below the bottom of the average range.
If we have an uneventful summer, prices may not go too much higher. But in my opinion we will go through the summer about one gulf hurricane away from nationwide average gasoline prices rushing past $4/gallon. They could go much higher in the event of a major refinery disruption ala Hurricane Katrina. It is really hard to imagine where gasoline prices could top out given current inventory levels.
Going for a Record?
To put the matter in a bit more perspective, here are the Memorial Day gasoline inventory levels since 1990.
|Vol (million bbl)
|May 25, 1990
|May 31, 1991
|May 29, 1992
|May 28, 1993
|May 27, 1994
|May 26, 1995
|May 31, 1996
|May 30, 1997
|May 29, 1998
|May 28, 1999
|May 26, 2000
|May 25, 2001
|May 31, 2002
|May 30, 2003
|May 28, 2004
|May 27, 2005
|May 26, 2006
Table 1. End of May Gasoline Inventories since 1990
The lowest number on the list is 1997 at 200.7 million barrels. Even to reach that number, we would have to gain (200.7-193.5)/3, or 2.4 million barrels for the next 3 weeks (7.2 million barrels total). And while I think we are likely to see a gain in inventories this week as higher prices continue to bite into demand, we aren’t likely to gain 7.2 million barrels over the next 3 weeks. So, again I go out on a limb and say we will hit Memorial Day with record low inventory levels.
How TWIP is Written
I recently asked Doug MacIntyre how he goes about writing TWIP. Here was his response:
Actually, I wish I knew sometimes. As a write this comment, it’s Tuesday afternoon and I have NO idea what my hook or topic will be (although gasoline does seem to be an obvious choice, not every report can be on gasoline). Sometimes it is mostly written by Tuesday, but most of the time, not a word has been written until Wednesday morning, plus I have to wait until I write those pithy 4 paragraphs of text that gets released with the data at 10:30 am ET! Often, the issues that take the least amount of time seem to be the ones I like the best. Anyway, right now, I’m at a blank for what tomorrow’s edition will be.
BTW, while I write the vast majority of them, I have some colleagues that pitch in every now and then, which I truly appreciate!
I told him he could always write about the blogger who had the amazing foresight months ago to start warning of potential record gasoline prices – based on his weekly reading of TWIP and the EIA statistics. 🙂