Released on December 12, 2007
(Next Release on December 19, 2007)

Will Oil Prices Continue to Drop?
Despite an increase yesterday, the spot price of West Texas Intermediate (WTI) crude oil has dropped over the last three weeks, from nearly $100 per barrel on November 20, to under $90 per barrel for most of last week. So, will crude oil prices continue to drop, and if so, how low might they fall?

While forecasting oil prices is a difficult task, EIA, in its just released December 2007 Short-Term Energy Outlook, projects the WTI spot crude oil price falling to about $86 per barrel by the end of winter. To understand this projection, it is important to look at some of the reasons behind the latest decline in crude oil prices.

Expectations about growth in global demand have been lowered by most analysts over the last few months. Concerns here in the United States about the housing market and tightening credit conditions have led some economists to worry about the possibility of a recession on the horizon. Concern about the U.S. housing market has been one of the factors the Federal Reserve has cited for lowering the Federal Funds interest rate. With strong global demand one of the key factors driving oil prices higher over the last few years, any significant lessening in demand growth could put downward pressure on oil prices.

Another factor behind the latest decline is increased oil production from OPEC. Although OPEC recently announced it would keep production targets the same, much of the world is beginning to see the impact of OPEC’s earlier decision to raise production levels as of November 1. Due to the lag in shipping times to many consuming countries, much of any increase done in November would not reach consuming countries until December or later. In addition, due to maintenance, some oil production from the United Arab Emirates was unavailable during much of November and has just recently been brought back into production following the end of the maintenance program. With additional production from OPEC, markets are less concerned about the sharp drop seen in global inventories during much of 2007.

In addition, the recent rise in U.S. and European refinery operations following a long and extensive maintenance period has also led to downward price pressure on products, and thus, crude oil. With relatively flat U.S. demand for transportation fuels recently, improved higher refinery throughputs have resulted in increased stock levels for these transportation fuels, relative to normal builds for this time of year.

Still, another factor behind the recent decline in oil prices is a lessening of geopolitical tensions. Following the release of the latest U.S. National Intelligence Estimate on Iran, which stated with moderate confidence that Iran had not restarted its nuclear weapons program as of mid-2007, oil market analysts have been less concerned about a possible disruption to Iranian oil exports in the near future.

With expectations of slower demand growth, increases in OPEC production, and reduced concerns about imminent supply disruptions, along with warm weather at the start of winter in the United States, it is not surprising that oil prices have dropped. EIA expects that these conditions will most likely persist for at least the next few months. Barring either a long bout of cold weather or a change in the conditions described above, this leads us to the view that oil prices could continue to fall modestly. However, it is our assessment that the global oil market will continue to be relatively tight, given that OECD inventories will remain relatively low through at least the first half of 2008 and that OPEC surplus capacity will continue to be relatively low. Low inventories and surplus production capacity should keep the spot price of WTI from falling significantly below $80 per barrel over the next few months.

Residential Heating Oil Prices Decrease Again
Residential heating oil prices fell modestly during the period ending December 10, 2007. The average residential heating oil price decreased by 1.6 cents last week to reach 325.8 cents per gallon, a gain of 81.6 cents from this time last year. Wholesale heating oil prices fell 2.6 cents, reaching 257.7 cents per gallon, which was an increase of 69.7 cents compared to the same period last year.

The average residential propane price rose by 0.9 cent to reach 247.0 cents per gallon, and achieved a record high for the tenth consecutive week. This was an increase of 49.6 cents compared to the 197.4 cents per gallon average for this same time last year. Wholesale propane prices gained 2.0 cents per gallon, from 156.0 to 158.0 cents per gallon. This was an increase of 49.1 cents from the December 4, 2006 price of 108.9 cents per gallon.

Average Retail Gasoline Price at $3 a Gallon
The U.S. average retail price for regular gasoline fell for the fourth consecutive week, dropping 6.1 cents to settle at 300.0 cents per gallon as of December 10, 2007, 70.7 cents above a year ago. All regional prices decreased as the East Coast was lower by 4.2 cents to 303.1 cents per gallon. The largest drop occurred in the Midwest where the price plunged a dime to 289.5 cents per gallon. The Gulf Coast dipped by 5.9 cents to 287.6 cents per gallon, the lowest regional price. A decline of 4.6 cents in the Rocky Mountain region sent the price to 300.8 cents per gallon. The West Coast continued as the highest regional price in the country, landing at 324.4 cents per gallon after losing 3.2 cents. The average price for regular grade in California was 332.9 cents per gallon, down 3.2 cents from last week but 82.5 cents per gallon more than last year.

The retail diesel fuel price plummeted 9.1 cents to 332.5 cents per gallon although it is 70.4 cents higher than last year. Regional prices were down across the country with the East Coast decreasing 7.2 cents to 337.2 cents per gallon. The Midwest recorded the largest drop, 10.9 cents, to fall to 327.6 cents per gallon. The Gulf Coast price was reduced by 8 cents to arrive at 326.5 cents per gallon. The Rocky Mountain region price slumped 9 cents to 339.7 cents per gallon. The West Coast dipped 9.2 cents to hit 344.0 cents per gallon. California prices plunged 11.2 cents to fall to 345.5 cents per gallon.

Propane Inventories Begin to Reflect Colder Temperatures
Propane inventories began to reflect the arrival of early winter weather last week with the largest decline so far this season that measured 1.4 million barrels. As of December 7, 2007, propane inventories stood at an estimated 59.6 million barrels. Regionally, imports remained strong, particularly in the East Coast and Midwest that partially offset inventory declines in those regions of 0.1 million barrels and 0.3 million barrels, respectively. However, with no imports reported in the Gulf Coast, inventories in this region posted the largest weekly decline of 1.1 million barrels. The combined Rocky Mountain/West Coast regions reported the only gain in inventories last week with a 0.1-million barrel increase. Propylene non-fuel use inventories were steady last week that put this fuel’s share of total propane/propylene at 2.4 percent, the same as the prior week’s share.

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