# Presentation: 154725

## Myth About Second Quarter Crude Oil Prices

- March 9, 2000
- Energy Information Administration

**Notes:**
Crude Oil Price Myth

Some oil market observers have suggested that crude oil prices may weaken during the second quarter since world petroleum demand usually falls in the second quarter from the first quarter.

This is a myth that surfaces from time to time, but it is not supported by historical data.  Ironically, this myth is surfacing again this year, following a sharp upturn in prices that began in the second quarter last year.

The following slides will demonstrate that the second quarter has not been a weak crude oil price quarter historically, and will explain why.

## World Crude Production Not Keeping Pace with Demand 

**Notes:**
The origin of the crude price myth is the seasonal relationship between world oil product petroleum demand and crude oil production.  

Normally, crude oil production exceeds product demand in the spring and summer, and stocks build.  These stocks are subsequently drawn down during the fourth and first quarters (dark blue areas).  When the market is in balance, the stock builds equal the draws.  

This cyclical pattern of supply being greater than demand during the second and third quarters and then demand exceeding supply during the fourth and first quarters might lead one to expect crude oil price to weaken during the summer and strengthen during the winter. 

What does history tell us?

## Prices Show No Tendency to Decrease Second Quarter

***Historical OECD Stock Change and Crude Oil  Price Change Between First & Second Quarters***

**Notes:**
Historical crude price data show no tendency toward a second quarter decline.

The table illustrates that prices move up in the second quarter more often than they move down.  Since the Gulf War, prices have risen in the second quarter in 6 out of 8 years.

Furthermore, the change in crude oil price during the second quarter appears to be related to more than the size of the stock build.

EIA has performed statistical tests for seasonality of crude oil prices and found them to lack seasonal variations.

Why don’t crude oil prices show seasonality when the world petroleum balance shows seasonality?

## OECD Crude Oil v Product Demand Seasonal Patterns

**Notes:**
The answer lies in separating crude oil demand from product demand.  Crude oil demand should be a better indicator of pressures on crude oil price than product demand.

Product demand swings much more than crude oil demand.  

Crude oil demand, which is approximated by crude oil inputs to refineries plus stock changes, is much flatter than product demand throughout the year, particularly during the second quarter compared to first.

The next chart illustrates this more directly for the upcoming year.

## OECD Crude “Demand” Remains Flat Between 1st and 2nd Quarters

**Notes:**
As we enter the year 2000, we can expect crude oil demand to follow the usual pattern and remain relatively flat in OECD countries between first and second quarters.
Note that for OECD, product demand is greater than crude use.  These areas import products from outside the region.

While product demand falls during the second and third quarters, crude inputs to refineries remain high enough to allow for some product stock building  Additionally, purchases of crude oil exceed inputs to refineries for a time, allowing crude oil stocks to build as well in order to cover the shortfall between crude oil production and demand during the fourth and first quarters.

Price can strengthen during the “weak product demand” summer months when the market feels stock building is inadequate to meet the upcoming winter quarter (fourth and first quarter) demands.

## The More Important 	Price Indicator This Year is Low Stocks

**Notes:**
Crude prices this year at the beginning of the second quarter are likely to be higher -- not lower -- as a result of the current shortfall in crude oil production relative to demand on top of low stocks.

OECD stocks of crude oil and products plunged steeply in 1999.  By year end, they were below the low levels at end December 1996 -- OPEC’s stated target.  This does not take into consideration the growth in demand that these stocks must help supply. 

EIA expects OECD stocks to stay very low throughout the year 2000.  The projection shows end March levels remain well below those seen at the end of the first quarter 1996.  The build during the summer will not be adequate to make up for the draws, resulting in a net draw of over 300 thousand barrels in an already tight market.   

More important -- U.S. crude oil and gasoline inventories are at the lowest levels seen in decades for this time of year.  Furthermore, the U.S. will not likely receive any potential OPEC crude oil production increases until May.  Refinery use of crude oil in February was very low, and refineries must ramp up production in March and April over 1 million barrels per day to meet the high gasoline demand season.  With little inventory, they will have to find this crude oil in a market where demand is exceeding production.  Gasoline prices may surge to unprecedented levels before the spring is out.  There is a high probability of volatility on top of the high prices as lack of stocks and nearby supply slows resolution of any shortfalls.

High prices are being forecast for the rest of the summer.  Even if OPEC production increases are more generous than expected, U.S. refineries will likely be running at high utilization rates, increasing the chances for volatility.