Slide 12 of 27

A major factor affecting the U.S. heating oil market this year is the shift in world petroleum markets that began in 1997. By the end of 1998 we will have completed a two-year period during which world petroleum inventories will probably have increased a cumulative 550 million barrels (about 7 days of world supply).

Most of 1996 was a time of tight supply-demand balances and rising prices. As 1997 began, crude oil prices fell with the return of Iraq to the crude oil market, but leveled out somewhat during the summer.

However, prices resumed their decline in the fall of 1997 as continued strong crude oil production exceeded lower than expected demand brought about by the collapse of the Asian economies and a warmer-than-usual winter.

• Through the first half of 1998, world supply continued to exceed demand and world crude price continued to fall through late summer. Since the beginning of 1998, crude prices, as well as other petroleum product prices, have been in contango for much of the time. This has provided incentives to increase refinery crude runs to produce and store product for future delivery. The U.S. distillate market has responded with the rest of the world markets, building inventories to very high levels.