Released on September 25, 2002
(Next Release on October 2, 2002)

A Tale of Two Products
As we exit the gasoline season and get ready for the distillate fuel (particularly heating oil or high-sulfur distillate fuel) season, it’s an excellent time to see how the two products compare. Factors affecting the gasoline season this spring and summer may not be key factors in the distillate fuel market this autumn and winter. Last week, gasoline inventories increased by 2.2 million barrels while distillate fuel inventories decreased by 1.6 million barrels, providing a microcosm of the different inventory patterns for the two products recently. And as the closest available source of re-supply in terms of increases in demand or shortfalls in supply, the level of inventories is a key component to judging the risk of price spikes in both the gasoline and heating oil seasons.

As we entered the gasoline season at the beginning of April 2002, gasoline inventories were in the upper part of the normal range for that time of year, so there was muted concern about large price spikes this past summer. As we pointed out two weeks ago (see "A Record Breaking Summer” ), record demand was met by record refinery production and gasoline imports so that inventories stayed at the upper end of the normal range the entire season. With gasoline inventories well supplied, retail prices were unusually flat almost the entire gasoline season. Clearly, record-shattering imports played a key role in maintaining high levels of inventories.

Meanwhile, distillate fuel through the first six months of the year was either at or above the upper end of the normal range at the end of each month. And with another four or five months (July, August, September, October, and possibly November) when distillate fuel inventories usually build, it appeared likely that distillate fuel would enter the heart of the heating oil season with storage levels well supplied. But in July, distillate fuel inventories increased by only 2.5 million barrels, the lowest increase ever in EIA’s database for the month of July (going back to 1963). Then, in August, distillate fuel inventories (using weekly data) fell by 4.2 million barrels, which would make that the largest draw ever in EIA’s database for the month of August. Since distillate fuel inventories typically build 4-5 million barrels in August, this amounted to a downward swing of 8-9 million barrels, putting distillate fuel inventories at the end of August suddenly in the middle of the normal range and trending down! A four-million-barrel build in the week ending September 6 provided some false comfort, but draws in the next two weeks have all but wiped out that build. Once again, distillate fuel inventories are below 130 million barrels. If distillate fuel inventories don’t increase by over 8 million barrels over the last 10 days of September to end at 137.8 million barrels (a very unlikely scenario), then the build from the end of April through the end of September would be the smallest ever over that time period since at least 1963!

If distillate fuel inventories don’t build much or at all between now and the end of November, then inventories would be near the lower end of the normal range entering the heart of the winter season. Although distillate fuel inventories typically rise between now and the end of November, a slight continuation of the counter-seasonal decline of just 3 million barrels would be sufficient to put them below the lower limit of the normal by that time. If weather is not unusually warm, as it was last winter, then increases in demand would likely need to be met not only by drawing down inventories (since there wouldn't be as much available to draw from) but also from increased refinery production and/or increased imports. But with crude oil prices possibly around $30 per barrel or higher at that time, and inventories for other major products, such as gasoline, at ample levels, there would be little incentive for refiners to process more crude oil through their refineries, unless the spot price for distillate fuel was significantly higher than the already high crude oil price. Similarly, large amounts of distillate fuel imports have almost always followed large increases in spot prices for distillate fuel, unlike gasoline this past summer, which saw record imports without record prices because gasoline demand in Europe was relatively weak, freeing up gasoline for export here. However, unless European weather is unusually warm, distillate imports from Europe are only likely to come if prices here rise dramatically. Thus, at the end of the upcoming winter season, it is highly doubtful that we will look back on a season similar to the gasoline season this summer, with record breaking demand, but not record breaking prices. Of course, as was the case last year, very warm weather this winter could dampen demand sufficiently so that large increases in supply are not necessary. But unlike gasoline, if large amounts of distillate fuel supply are needed, both from refinery production and/or imports, high prices will likely be a prerequisite for that to happen.

Unless distillate fuel inventories begin building again now through November, it could be an interesting winter, if weather is not unusually warm. And the distillate fuel story this winter may be in sharp contrast to the one we just experienced for gasoline.

Retail Gasoline Prices Fall While Diesel Fuel Prices Rise
The U.S. average retail price for regular gasoline decreased slightly over the last week, decreasing by 0.6 cent per gallon as of September 23 to end at 139.5 cents per gallon. This price is 9.0 cents per gallon lower than last year. Retail diesel fuel prices increased for the sixth week in a row, rising by 0.3 cent per gallon to a national average of 141.7 cents per gallon as of September 23. U.S. diesel fuel prices have shot up 11.4 cents per gallon since August 12, but last week's increase was much smaller than gains in previous weeks. In recent years, diesel prices have been higher in the fall and winter, as harvesting and colder weather put increased pressure on diesel and heating oil prices. Retail diesel prices were up throughout most of the country, with the largest price increases occurring in the Midwest and Rocky Mountain regions, which each saw prices rise by 0.9 cent to end at 140.8 cents per gallon and 146.7 cents per gallon. Prices along the West Coast fell by 2.3 cents per gallon to end at 153.4 cents per gallon.