It sort of crept up on me, but last night as I reviewed This Week in Petroleum, I was struck by just how fast the U.S. has built gasoline inventories. Currently at 230 million barrels, I could not recall ever seeing gasoline inventories that high. So, I went back and looked, and the last time gasoline inventories stood at this level was in 1994. While crude, distillate, and propane inventory levels are typical for this time of year, the gasoline situation bears investigating.
Inventories from a year ago were fairly high at 222 million barrels, but then in mid-February we started a steep slide (accompanied by a steep increase in gasoline prices) to record low territory. We bottomed out in May – just before summer driving season – at 193 million barrels. We then struggled to build inventories back, and spent from May until December hovering along near the bottom of range for gasoline inventories.
But starting in December, we had a very steep build that has now put us well above normal. Why, and what is the significance?
I think the “why” is two-fold. First, gasoline prices this winter were much higher than they were a year ago. There were conflicting reports about whether gasoline demand had fallen, and by how much, but EIA data do suggest that demand during late 2007 fell marginally year over year. It is encouraging to me that (some) people are willing to change (some) behaviors as prices soar.
Of more significance, though, is the difference in imports from a year ago. In late 2006, gasoline prices really crashed, and this had an impact on imports; they fell from previous year levels. In late 2007, gasoline prices were about $0.80/gallon higher than the prior year levels, and this attracted more imports. The sharpest contrast can be seen by comparing December 2006 to December 2007. In 2006, imports were never above 1 million bpd, and in 2 of 4 weeks they were below 900,000 bpd. In 2007, imports were only just shy of 1 million bpd once (0.985 million bpd) and then in 2 weeks out of 4 they were above 1.1 million bpd. That is the primary reason inventories bounced back so sharply starting in December of 2007.
We could still potentially see $4 gasoline by summer, but it is looking increasingly less likely that inventories will drive the price as they did last year. Inventories should start to come down as turnaround season gets into full gear, but we are starting this year in a more comfortable place than last year. To hit $4 by summer, oil prices will need to continue the current run – maybe to the $120/bbl range – and/or gasoline inventories need to start coming down quickly. If oil holds at around $100, we are going to have to see a pretty steep draw to get to $4 before summer.