Petroleum price runups, record low inventories, growing imports, weak refining margins, high refining capacity utilization, and stagnation in the use of futures markets--are these events of the 1990's signaling fundamental changes in the petroleum sector, or are they part of the historically uneven oil market cycles?

If one theme marks the recent history of the petroleum sector, it is volatility. The new Energy Information Administration (EIA) report Petroleum 1996: Issues and Trends explores some of the consequences of fluctuating petroleum markets and evolution in the industry:

Gasoline prices: Retail prices rose rapidly in spring 1996, climbing from an average of $1.09 in February to $1.28 in May. The increase was mainly due to a sharp nonseasonal rise in crude oil prices on top of the normal increases seen early in the summer driving season. Spring 1997 saw similar markets working in reverse, however, as crude oil and gasoline prices fell during the first and second quarters.

Inventories: Crude oil, distillate, and gasoline stocks shrank significantly in 1995 and 1996, drawing attention to the longer term declines resulting mainly from refinery shutdowns in the 1980's. The recent declines, however, occurred primarily at tank farms and bulk terminals, the points in the supply system most able to respond to changing supply economics. The declines seemed to be driven mainly by expectations of falling crude oil and product prices and by the poor financial performance of the downstream sector.

Futures markets: High futures prices in 1996 focused attention on the futures market, and some claimed that the futures market lay behind the price runups. The report shows there is no evidence that large funds from noncommercial traders ("speculators") have been setting prices.

Cash margins and refinery profitability: Refinery capacity utilization has been increasing during the 1990's, but the profitability of the refining and marketing sector has often been lower than that of U.S. industry in general. Much of the poor financial performance in the 1990's can be attributed to narrowing price differences between light and heavy crude oil and products. The narrowing was driven in part by an expanding supply of light sweet crude oil and by the availability of considerable capacity to convert the heavy products like residual fuel into higher value products.

Petroleum 1996: Issues and Trends briefly discusses these and other topics in an introductory industry overview, then analyzes in depth the spring 1996 gasoline price runup, crude oil supply issues, U.S. crude oil imports, petroleum stocks, futures markets, refining cash margin trends, and the financial performance of U.S. refining and marketing firms.

Contact:

Craig Cranston, Office of Oil and Gas

craig.cranston@eia.doe.gov

Phone: (202) 586-6023

URL: http://www.eia.doe.gov/emeu/plugs/petro96.html