Oil, gasoline prices plummet in first half

Driven by dramatically lower crude oil prices, U.S. retail gasoline prices-when adjusted for inflation-have declined over the past 6 months to their lowest point in at least 70 years, the American Petroleum Institute reported.

API said the declines were the direct result of increased worldwide oil production, Asia's substantial reduction in oil consumption, and the unusually warm weather this past winter in the U.S.

Meanwhile, the U.S. Energy Information Administration expects summer gasoline prices to remain well below year-ago levels.

Price spiral

Edward Murphy, API's director of finance, accounting, and statistics, said a downward price spiral that began late last year resulted in crude prices during first half 1998 averaging 29% below prices in first half 1997.

He said the dramatic price drop has significantly reduced companies' incentive and financial ability to search for new sources of petroleum, as well as to maintain production in existing marginal fields.

API also noted that crude prices, when adjusted for inflation, are at their lowest level since the time of the 1973 Arab oil embargo.

Supply milestones

U.S. crude imports were a record 8,588,000 b/d in second quarter 1998.

For the first 6 months of this year, total imports (crude oil and petroleum products) were 10,143,000 b/d, nearly equaling the record of 10,180,000 b/d set in second half 1997.

U.S. crude oil production declined 1.8% to 6.3 million b/d for the first half of the year. For June, crude oil production also averaged 6.3 million b/d.

Natural gas liquids output in the U.S. in the first half rose 0.9% to 1.9 million b/d, and production was up 1.6% in June to 1,856,000 b/d.

Total U.S. crude inventories increased by more than 100 million bbl during the first half, an increase not seen since 1990, just before the Persian Gulf crisis. By the end of June, petroleum inventories reached nearly 1.1 billion bbl.

Total petroleum products supplied to the U.S. market-a key measure of demand-increased only 0.7% to 18.5 million b/d during the first 6 months of 1998, compared with the same period a year ago. June deliveries totaled 19,016,000 b/d, up 2.1% from last June. Gains were recorded in all categories of fuels.

Refining activity

U.S. refining utilization in June was the highest for any month in nearly 20 years at 98.5%; east of the Rocky Mountains, the utilization rate hit 99.8%, just short of last September's record.

API said gasoline deliveries in the U.S. for the first half of the year averaged 7,982,000 b/d, up 1.3% from the same period in 1997.

In June, gasoline deliveries rose 0.2% to 8,303,000 b/d.

U.S. distillate deliveries averaged 3,502,000 b/d for the year's first half, up 1.5% from 1997. In June, distillate deliveries rose 8.8% to average 3,529,000 b/d.

Jet fuel deliveries averaged 1,562,000 b/d, down 0.3% from first half 1997. However, in June, deliveries averaged 1,651,000 b/d, up 5% from a year ago.

Residual fuel deliveries in the U.S. for the first half averaged 847,000 b/d, up 2.2% vs. a year ago. In June, resid deliveries averaged 787,000 b/d, up 2.9% from June 1997.

Total stocks of crude oil and petroleum products stood at 1,097,400,000 bbl at the end of June, up 1% from the end of May and up 8.5% from a year ago.

EIA forecast

EIA's latest short-term energy outlook predicted prices would remain at an average of about $1.04/gal for regular unleaded gasoline, slightly below the average for first quarter 1998.

The projection is down from previous EIA gasoline price forecasts and implies an average price about 16¢/gal below the year-ago level.

EPA said that, despite much lower gasoline prices and strong economic growth this year, summer gasoline demand would be less than 2% above the 1997 level.

It explained that gasoline demand growth was strong in the first quarter of 1998, but growth in subsequent months has been weak.

Oil supply/demand

EIA said oversupply caused world crude prices to fall to 9-year lows this spring.

EIA has lowered its forecast for crude prices through the next 6 quarters, with the 1998 average price now expected to be nearly $6/bbl below the 1997 average of $18.57/bbl.

It explained that Asian oil demand continues to weaken, U.S. demand growth has been slow despite continued solid economic growth, and the economies of Japan and the former Soviet Union remain uncertain.

"Unless oil production cutbacks exceed expectations, world petroleum stock levels could remain high through the rest of 1998.

"In response to weak prices, major world oil suppliers have pledged significant production cuts for the second time in 3 months. However, likely implementation of the cuts pledged by both the Organization of Petroleum Exporting Countries (see related story, p. 33) and non-OPEC producing countries is expected to do little more than keep oil prices above recent lows for the rest of the year."

Gas outlook

EIA said that U.S. natural gas demand is expected to fall 1.6% in 1998.

"Very high current levels of gas in storage suggest the potential for renewed downward pressure on gas prices, especially if summer cooling demand fizzles. While growth in demand for natural gas at electric utilities has been positive this year, demand in the industrial sector has fallen.

"The initial estimate of first-quarter data shows a surprising 5.1% decline in industrial gas use compared with the same period in 1997. This has occurred despite a 3.4% increase in industrial output by gas-intensive manufacturing industries and a sharp decline in year-over-year gas prices," EIA said.