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Released on January 23, 2003
(Next Release on January 29, 2003)
Another Domino Falling or a One-Week Blip?
In last week’s issue of This Week In Petroleum, a metaphor of one domino falling into another was used to articulate a theory on how U.S oil markets might evolve over the next several weeks. According to this theory, falling imports, caused mostly by reduced Venezuelan imports resulting from labor strikes in that country, would lead to declining crude oil inventories, which once depleted, would lead to declining crude oil refinery inputs. The data for the week ending January 17, released earlier this morning, indicates that, in fact, this may be beginning to happen, as crude oil inventories, which had fallen by the week ending January 10 to just 2.3 million barrels above the Lower Operational Inventory level, rose slightly last week, while crude oil refinery inputs fell by 400,000 barrels per day.
As a result, while the crude oil Lower Operational Inventory level of 270 million barrels is certainly not a level below which the crude oil system will fall apart, it clearly represents a very low level of inventories nationally, and with little or no discretionary buffer remaining, it is unclear how much lower crude oil inventories can go. However, we have often stated that one week does not make a trend, so it will be interesting to see in the next couple of weeks whether crude oil inventories will fall further to help make up for the dramatically reduced crude oil imports from Venezuela or whether crude oil demand (i.e., crude oil refinery inputs) will continue to fall. Even if additional crude oil imports from other countries begin to arrive, it is doubtful that, without near-normal levels of Venezuelan crude oil imports, crude oil inventory levels significantly above 270 million barrels can be maintained while crude oil refinery inputs are near 15 million barrels per day. One or the other clearly has to fall.
If crude oil refinery inputs do fall, the domino theory states that with reduced refinery output, products will be drawn down to keep up with product demand. With gasoline inventories near the upper limit of the normal range and distillate fuel inventories near the middle of the normal range, there would appear to be some discretionary inventory to draw upon. However, the typical inventory ranges for these products are relatively narrow, meaning that even a relatively slight supply/demand imbalance can erode perceived product excesses quickly. With downward economic pressure for crude oil refinery inputs and significant planned maintenance ahead, gasoline markets warrant close scrutiny, as inventories may yet move to challenging levels ahead of the spring upturn in gasoline demand.
While the near-term outlook for light products is uncertain and arguably weaker, residual fuel markets are much tighter. Residual fuel inventories have been below normal levels since the end of May due to relatively strong demand for light products, prompting relatively low refinery yields of the heavier products in the face of modest crude oil refinery inputs. The recent cold snap appears to have significantly boosted residual fuel demand, adding further downward pressure on inventories. For example, residual fuel demand has rarely averaged above 1 million barrels per day in recent years. Residual fuel is used in utilities and some industrial plants, and typically increases in those plants with duel-fuel capability only when natural gas prices get very high. With demand last week averaging over 1.0 million barrels per day, the highest weekly average since the week ending October 26, 2001, residual fuel inventories were drawn down to the lowest level seen since at least 1954! Residual fuel inventories are now just 0.6 million barrels above the lower operational inventory level of 29 million barrels. So while there may be some room for gasoline and distillate fuel inventories to be drawn down in the very short-term, this does not appear to be the case for residual fuel markets.
Mid-Winter Heating Fuel Assessment
Frigid weather, labor strikes in Venezuela, and uncertainties surrounding rising tensions in the Middle East have combined to push up heating fuel prices to near-record levels in some key heating regions of the country. In early October 2002, the Energy Information Administration (EIA) forecast that heating fuel markets would be expected to see higher prices for heating oil and propane following last winter’s lackluster weather that was the warmest on record. While heating oil and propane supplies, at the national level, have remained relatively adequate so far this winter, heating fuel prices have soared following the rapid rise in crude oil prices that recently hit a two-year high of $34 per barrel on the New York Mercantile Exchange (NYMEX). The sudden rise in crude oil prices has been driven by a combination of factors, including arctic temperatures that have blanketed vast regions of the nation this winter, and various supply uncertainties and disruptions. At the forefront of these uncertainties lies the prolonged Venezuelan labor strikes, crippling that country’s oil industry. Venezuela was the third leading exporter of crude oil and petroleum products to the U.S. during 2001, but since the strikes began, oil exports to the U.S. have been drastically curtailed. Moreover, the growing feeling that U.S. officials have grounds for a military strike against Iraq that could further curb world oil supplies is also weighing heavily on U.S. petroleum markets.
Weather also appears to be one of the key factors driving most regional heating fuel prices higher, as arctic blasts of cold air continue to keep some areas of the country in the deep freeze. On the East Coast (PAD District 1), where most of the nation’s heating oil is consumed, inventories of high sulfur distillate, or heating oil, plunged by 6.8 million barrels from the end of September through December, a level more than double the 2.6 million barrels averaged over the past 5-year period. During this same period, residential heating oil prices in the region rose by nearly 13 percent to 142.1 cents per gallon by the end of December, the highest for this month since 2000. Temperatures were 54 percent colder-than-normal in the New England region during the fourth-quarter 2000. Comparatively, New England temperatures averaged 6 percent colder than normal during the fourth quarter 2002 (see chart below). Propane consumers in the Midwest region (PAD District II), where most of the nation’s propane is consumed, witnessed residential propane prices rise about 14 percent during the fourth quarter 2002, ending December at 112.8 cents per gallon. The previous high for this month was in December 2000 when extremely high natural gas prices encouraged the use of propane as an alternative fuel for many industrial sector uses. But with the recent sharp rise in natural gas prices, a recurrence of the same market conditions as in 2000 may be possible this winter, causing many industrial facilities to again switch from natural gas to propane. Similar to the sharp drop in heating oil inventories on the East Coast during the last quarter of 2002, propane inventories in the Midwest region also experienced steep declines during the period. From the end of September through December, propane inventories fell by 7.1 million barrels, a level that was nearly one-fourth higher than the average over the past 5-year period.
|
Cold
Weather Heats Up Demand |
Difference
from Normal Heating Degree-Days,
October
- December
|
| (Figures
in parentheses denote warmer-than-normal temperatures) |
| Year |
West-North
Central
|
East-North
Central
|
Middle
Atlantic |
New
England |
| 2000 |
16% |
12% |
9% |
54% |
| 2001 |
(16%) |
(15%) |
(17%) |
(11%) |
| 2002 |
29% |
(2%) |
7% |
6% |
| Source:
Percentages compiled from monthly data published by the National Oceanic
and Atmospheric Administration, U.S. Department of Commerce. |
While heating oil and propane fuel markets appear to have weathered the first half of the 2002-03 heating season without any major supply or distribution problems, the remainder of the heating season may offer strikingly different challenges as potentially volatile world oil markets and continued frigid temperatures add stress to crude oil and regional distillate fuel inventories that are either below or within their respective average ranges for this time of year.
The Big Chill Sends Propane Inventories Much Lower
The deep freeze that is gripping large sections of the nation propelled U.S. inventories of propane lower by nearly 4.5 million barrels last week, sending inventories down to an estimated 43.1 million barrels as of the week ending January 17, 2003. While frigid weather during January is not exactly unusual, the severity, duration and wide-ranging areas from the current cold spell are relatively rare, with the last such stretch occurring during the winter of 1993-94, according to the National Weather Service. During the first two weeks of January, U.S. inventories of propane fell by about 7.5 million barrels, a level that is roughly one million barrels above the mid-point of the nearly 13-million-barrel draw averaged for the entire month of January during the last 5-year period. But will the January 2003 stock draw set a record for this month if the current cold spell continues? Possibly, although the winter of 1993-94 saw January inventories plunge a record 17.6 million barrels, with the second largest January draw of nearly 16 million barrels occurring during the severe winter of 1976-77. Despite the recent steep stock draws, U.S. and regional inventories continue to track within their respective average ranges for this time of year.
Cold Weather Pushes Residential Heating Fuel Prices Higher
Residential heating fuel prices increased for the period ending January 20, 2003. The average residential heating oil price was 145.3 cents per gallon, up 2.2 cents per gallon from the previous week. Wholesale heating oil prices increased 2.6 cents per gallon this week, to 91.1 cents per gallon. Residential heating oil prices are 29.1 cents per gallon higher than last year at this time.
Residential propane prices showed their largest one-week increase since the start of the heating season, jumping 4.9 cents per gallon from 127.6 to 132.5 cents per gallon. Wholesale propane prices also showed marked increases, rising 6.2 cents per gallon, from 62.0 to 68.2 cents per gallon. Residential propane prices are 19.1 cents higher than one year ago.
Average U.S. Retail Gasoline Price Highest Since September 2001
The U.S. average retail price for regular gasoline rose for the sixth week in a row last week, increasing by 0.5 cent per gallon as of January 20 to end at 145.9 cents per gallon, the highest price since September 24, 2001. This price is also 35.4 cents per gallon higher than last year. Prices throughout most of the country were up, with the largest increase occurring on the West Coast, where prices rose 3.0 cents to end at 154.8 cents per gallon. The Midwest was the only region that saw a price decrease, with prices falling by 0.4 cent to end at 143.8 cents per gallon.
Retail diesel fuel prices increased last week, rising to a national average of 148.0 cents per gallon as of January 20. Retail diesel prices were up throughout most of the country, with the largest price increases occurring in the Gulf Coast and West Coast, where prices rose 0.8 cent per gallon to end at 145.4 cents per gallon and 152.8 cents per gallon, respectively.
Note: Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.
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