Released on December 7, 2005
(Next Release on December 14, 2005)

Saved by the Bell…err ah …Imports
Earlier this year, petroleum industry analysts were voicing their concerns about the current low levels of distillate fuel, including heating oil, and to a lesser extent, propane inventories following the close of the 2004-5 heating season. While inventories for these heating fuels typically reach their yearly lows at the end of winter, other market forces were in play at that time which cast a shadow over whether the petroleum industry would be able to rebuild adequate levels of these fuels in time this winter. This article will focus on the U.S. propane market heading into the winter season.

The overall propane stockbuild during the traditional April through September period totaled an above average 41.9 million barrels. This compares with the 5-year average for this period of 38.3 million barrels. By the start of the heating season in October, propane inventories had reached an estimated 69 million barrels, a level near the upper boundary of the average range for this time of year. Moreover, this was also the highest level for the start of a heating season in three years. But how were propane markets able to reach even higher levels (71.5 million barrels on December 2) in the wake of Hurricanes Katrina and Rita, which dealt such a severe blow to a wide swath of petroleum infrastructure in the Gulf Coast? While propane markets had essentially built inventories to adequate levels by late August, the hurricanes could have easily erased or reduced that stock gain. With numerous key refineries and natural gas processing plants offline during September and October, propane production fell sharply during these months while propane spot prices shot higher along with other petroleum products including gasoline and heating oil. But higher prices also brought the opportunity for an influx of imports above year-ago levels, partially offsetting lower production from these facilities, as shown in the figure Propane Imports Offset Shut-in Production . The relatively mild fall weather in Europe that softened demand for propane, coupled with the rising spot prices for propane in the United States, provided the market incentive for the influx of propane imports. Without significant imports to make up for the shortfall in production, the only other main source for balancing propane markets is inventory withdrawals. Although the exact countries of origin of these incremental imports are not finalized until monthly data are available for this period (October through November), the fact that imports were mostly waterborne implies that they likely originated in Algeria, Nigeria, or Saudi Arabia, countries that have traditionally exported significant volumes of propane to the United States. As the graph below indicates, the surge in imports lagged the drop in production by several weeks, as propane markets adjusted to reflect shifting changes in world supply/demand balances.

Not only the flotilla of imports but a host of other factors also came into play that kept propane inventories at relatively high levels through November. With the arrival of colder temperatures, propane inventories typically begin to slowly decline starting in October of each year. However, this year propane inventories reported a slight build during both October and November, with a net gain for this period measuring about 2.5 million barrels. Comparatively, the 5-year average stock activity during this period was an 8.6-million-barrel decline in inventories. While higher imports were countering slumping production levels, propane demand remained weak, the result of warmer-than-normal temperatures during October and November that limited heating requirements, and storm-damaged petrochemical plants that reduced their feedstock needs for propane. Also, the fall corn crop did not require any above-normal drying due to the relatively low moisture content, a factor further contributing to the weak propane demand during this period. But with colder temperatures finally reaching many areas of the Midwest and East Coast this week, propane inventories would be expected to start following seasonal trends toward lower inventories in the coming weeks. However, with the recent influx of imports, propane inventories will be declining from a level nearly 6 million barrels above the same time last year.

Residential Heating Oil Prices Continue Falling While Propane Prices Increase Slightly
Residential heating oil prices decreased for the period ending December 5, 2005. The average residential heating oil price decreased 0.8 cent from last week to reach 240.9 cents per gallon, an increase of 43.9 cents from this time last year. Wholesale heating oil prices rose again, up 4.2 cents to reach 177.5 cents per gallon, an increase of 51.8 cents compared to the same period last year.

The average residential propane price increased 0.1 cent, to 193.9 cents per gallon. This was an increment of 22.9 cents over the 171.0 cents per gallon average for this same time last year. Wholesale propane prices increased 1.5 cents per gallon, from 107.0 cents to 108.5 cents per gallon. This was an increase of 19.8 cents from the December 6, 2004 price of 88.7 cents per gallon.

U.S. Retail Gasoline Price Decreases for Ninth Straight Week
The U.S. average retail price for regular gasoline dropped by 0.7 cent to 214.7 cents per gallon, falling for the ninth week in a row. This price was the lowest since June 13, 2005 but still 23.6 cents higher than this time last year. Prices were mixed throughout the nation, with the Midwest seeing an increase of 6.4 cents to 211.8 cents per gallon. The West Coast saw the largest decrease of 7.1 cents to 231.8 cents per gallon, the highest regional price in the country, while California prices fell 7.7 cents to 233.5 cents per gallon. East Coast prices fell by 2.7 cents to 212.5 cents per gallon, but New England prices rose 0.4 cent to 211.1 cents per gallon.

Retail diesel fuel prices fell 5.4 cents to reach 242.5 cents per gallon, the lowest price since August 8, 2005. Prices were down throughout the country, with the Rocky Mountains seeing the largest regional decrease of 12.0 cents to 247.1 cents per gallon. Midwest prices were down 5.2 cents to 239.0 cents per gallon, the lowest regional price in the nation. West Coast prices, the highest in the country, averaged 253.8 cents per gallon after falling 7.9 cents.

Propane Inventories Post Rare November Build
Last week's unexpected 0.7-million-barrel stockbuild assured a rare November inventory gain that has occurred only one other time since the early 1980's. The November stockbuild measured 1.1 million barrels, leaving primary inventories of propane at an estimated 71.5 million barrels as of week ending December 2, 2005, the highest level for the end of November since 1998. Except for a brief period during the early 1980's when it was more common to see stockbuilds extend into November, the only other time was 2001 when inventories gained about 2 million barrels. Regional gains were limited only to the Gulf Coast that saw inventories rise by 1.8 million barrels, more than offsetting the losses in the East Coast of 0.2 million barrels and 0.9 million barrels in the Midwest. During this same time, inventories in the combined Rocky Mountain/West Coast regions remained flat at 2.6 million barrels. Propylene non-fuel use inventories gained a modest 0.1 million barrels last week to account for a 4.8 percent share of total propane/propylene inventories, up from the prior week's 4.7 percent share.

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