Generally, the higher the API gravity, the higher the gasoline (naphtha) content of the crude oil. Since the primary product made from crude oil is gasoline, those crude oils which contain higher amounts of gasoline are valued higher. Heavier crude oils can be made into gasoline through the processes of "cracking" and "reforming" but these processes add refining costs to the final product.

Additional value is also placed on low sulfur crude oil, which is called "sweet crude." High sulfur crude oil is called "sour" crude oil. Most sulfur must be removed from the products before they can be marketed. The more sulfur that has to be removed, the higher the cost of making the final product. Thus, refiners will generally pay more for low sulfur crude oil.

Some interesting graphs related to API and types of crude oil are provided below. Over time, the range between what refiners pay for heavy crude vs. lighter crudes expanded from $3.50 to about $5.50. And demand shifted toward a crude slate between 20 and 35 API gravity.

However, there is a problem associated with the Iraqi food-for-oil program. The U.N. program allows Baghdad to sell up to $5.3 billion worth of oil every six months to buy food. In a declining crude oil price market, this deal only worsens the situation. As the price drops, Iraq will sell more and more crude oil to attain the allowed income. The excess crude oil only serves to aggrevate an already over supplied market, thus driving the price of crude oil even lower.

Refiners drew down gasoline inventories by 2 million barrels, but overall, the amount of gasoline in storage is higher than it was this time last year.

Distillate inventories decreased 1.6 million barrels. The cold weather that swept the U.S. this past two weeks should help use up some of the extra heating oil stored in eastern tanks. However, even at winter use rates, total inventories are not expected to be drawn down much below the high inventory level for 1997, or about 60 million barrels.

Continued competition in the Eastern states keeps gasoline prices low. Two factors may influence January's data. First, many small gasoline stations were taken out of service in late December because they had not replaced their underground storage tanks. While the unavailability of gasoline in some local areas is not expected to alter total demand, their may be a blip in the data as consumers find alternative stations and supplies shift to those stations. A short spike in prices in local areas may occur. Second, the SEC mandated BP-AMOCO divestment of gas stations may also cause small, local disruptions in supply and prices.

New data this week should reveal how much impact the cold weather has on distillate inventories. Power outages work against the consumption of distillate since ignition systems and fans require power to operate. And even if demand increases, there is no reason to believe that supply will be anything but abundant through the entire season.

Gasoline prices continued their slide. EIA reported gasoline prices per gallon for Regular on December 21 were as follows: PAD I - $.93, PAD II - $.91, and PAD III - 0.90.

Diesel prices on December 11 were also lower: PADDs I - $.98, PADD II - $.95, and PADD III - $.94

FORECAST: Gasoline prices may see a few localized spikes, then should settle down and continue to follow the price of crude oil, remaining reasonable through 1999.

On December 21 the average price of (reg-mid-premium) gasoline in PADD V was $1.16 per gallon. The price of Regular in PADD was $1.11 per gallon. Reformulated gasoline costs $1.14 per gallon.

The average price of diesel in PADD V dropped to $1.06 and Californian's are paying $1.12 per gallon.

FORECAST: The price of gasoline and diesel should continue to follow the price of crude oil.