Released on October 20, 2004
(Next Release on October 27, 2004)

Nervous
In the bottom of the seventh inning in Game 6 of the American League Championship Series, with the visiting Boston Red Sox leading the New York Yankees by a score of 4-0, television announcer Tim McCarver said, “Should the Yankees lose this game, this city [New York] will be very nervous tomorrow [October 20].” Just as there will be plenty of nervous baseball fans today, there are also plenty of analysts and traders nervous about what the upcoming winter might be like for oil markets, particularly heating oil.

With crude oil and petroleum product prices at or near record high levels (unadjusted for inflation), there is little wonder why markets are nervous. Oil demand continues to grow, despite high product prices, and there is little excess production capacity to make up for lost production currently in the Gulf of Mexico (still amounting to over 0.4 million barrels per day) or perceived potential disruptions in Nigeria, Russia, Iraq, or elsewhere. But what may have oil analysts and traders most nervous (besides Game 7 tonight) is the outlook for heating oil this upcoming winter.

Distillate fuel inventories, which include both diesel fuel and heating oil, have declined for five weeks in a row, while heating oil inventories alone have dropped in four out of the last five weeks. As noted in last week’s This Week In Petroleum, should this trend continue, this would imply an earlier pre-winter peak than normally seen and mean that inventories appear increasingly likely to enter the peak winter season at low levels. Adding to the nervousness in oil markets is the unpredictability of the weather. The U.S. Climate Prediction Center is calling for below-normal temperatures in the Middle Atlantic states this upcoming winter, which would lead to increased demand for heating oil and upward price pressure. But, as they would be the first to say, it is extremely difficult to predict the winter weather with any significant degree of certainty in October, just as it is difficult to know before hand whether the Yankees or the Red Sox will win their baseball game tonight. But one thing is certain. Just as baseball fans will be nervously watching Game 7, so too, will oil market analysts and traders be nervously watching the data, weather forecasts, and anything else that might help them get a handle on what prices will be this upcoming winter.

RWill a Record Corn Crop Impact Midwest Propane Markets?
Earlier this summer, the U.S. Department of Agriculture (USDA) forecast the 2004 corn crop at a record 10.9 billion bushels, up about 8 percent from the previous record set during 2003. However, last week, the USDA revised upward their 2004 forecast to 11.6 billion bushels, a level now about 15 percent above the previous year’s record. Since propane is used as the primary fuel for crop drying by farmers, many industry observers will be asking whether the record corn crop will impact Midwest propane markets in the lead-up to the winter heating season. While the last several years have seen record corn crops, Midwest propane markets have essentially managed to balance heavy crop-drying demand with residential heating and other end-use sector demand without any major problems. Nevertheless, this has not always been the case, as witnessed several times during the last decade, particularly during 1992 when the large and wet corn crop had a major impact on propane supply and prices during the fall harvest season. Particularly rainy weather during the fall of 1992 pushed the corn harvest season into early December; at the same time extremely cold weather was beginning to move into the region, causing an early drain on Midwest propane inventories that sent propane prices spiraling higher. But are conditions ripe for the same thing to occur this year as it did during 1992? Possibly, but some of the same factors that caused market volatility during 1992 are not apparent, at least not yet. While the 2004 corn crop is larger than the 1992 corn crop, and Midwest (PAD District II) inventories at the beginning of October 1992 and 2004 are nearly identical at slightly more than 24 million barrels, weather conditions have remained more favorable so far this year, and may provide for a smoother harvest season compared to 1992. Although it still is too early to gauge weather’s full impact on propane markets through the fall 2004 harvest season, the Midwest has not seen the heavy rains and early cold temperatures that occurred at this same time during the 1992 harvest season. Despite expected strong demand for propane for crop drying this fall, if farmers are able to get into their fields during their normal harvest periods, and weather allows farmers to let their crops dry naturally in the field for several weeks, then Midwest propane markets may weather the record corn harvest without a propane price spike or supply disruptions seen in past years.

Propane Posts First Seasonal Decline
U.S. inventories of propane posted their first decline of the winter heating season last week with a 0.4-million-barrel drop that put inventories as of October 15, 2004 at an estimated 68.2 million barrels. With last week’s stockdraw, inventories at the mid-point of October show a net drop for the month of 0.1 million barrels, possibly indicating the end of the strong period of stockbuilding that began in August 2004. Regionally, inventories in the Midwest accounted for the only weekly decline that totaled 0.6 million barrels, most likely signaling the beginning of the shift in inventories from primary to secondary levels in anticipation of impending colder weather and agricultural demand for crop drying. However, inventories continued higher last week in the East Coast and Gulf Coast regions that posted increases of 0.1 million barrels and 0.2 million barrels, respectively, while inventories in the combined Rocky Mountain/West Coast area remained unchanged at 3.1 million barrels during this same period. Propylene non-fuel use inventories also remained unchanged last week at 2.3 million barrels, accounting for the same 3.4 percent share reported during the prior week.

Residential Heating Fuel Prices Continue to Rise
Residential heating oil prices increased for the period ending October 18, 2004 to a record high (unadjusted for inflation). The average residential heating oil price grew by 8.0 cents from last week to reach 198.8 cents per gallon, an increase of 60.5 cents from this time last year. Wholesale heating oil prices increased 9.4 cents to reach 159.4 cents per gallon, an increase of 69.8 cents compared to the same period last year.

The average residential propane price increased 2.8 cents, to 163.2 cents per gallon. This was an increase of 31.0 cents over the 132.2 cents per gallon average for this same time last year. Wholesale propane prices increased 3.0 cents per gallon, from 96.1 to 99.1 cents per gallon. This was a gain of 28.1 cents from the October 20, 2003 price of 71.0 cents per gallon.

Retail Gasoline Prices Up More Than 4 Cents Nationally
The U.S. average retail price for regular gasoline rose by 4.2 cents per gallon from the previous week to reach 203.5 cents per gallon as of October 18, 46.4 cents higher than this time last year. Prices were up throughout the country, with the West Coast region seeing the largest increase of 5.4 cents to 229.5 cents per gallon. Retail prices on the East Coast gained 4.3 cents to reach 200.8 cents per gallon, which is 44.3 cents higher than last year. Prices in California grew 7.5 cents to 240.2 cents per gallon, which is 63.3 cents higher than this time last year. This is the highest nominal price ever recorded by EIA.

Retail diesel fuel prices rose by 8.8 cents this week to a record-high national average of 218.0 cents per gallon (unadjusted for inflation), which is 67.8 cents per gallon higher than a year ago. Retail diesel prices are reflecting not only the rise in crude oil prices, but also pressure from strong demand and high spot prices for heating oil. Prices were up throughout the country, with the Midwest seeing the largest increase of 10.6 cents to reach 216.1 cents per gallon. California prices remained the highest, rising 7.2 cents to average 239.4 cents per gallon.

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