Released on February 9, 2005
(Next Release on February 16, 2005)

Looking Into the Crystal Ball
Yesterday, the U.S. Energy Information Administration (EIA) released its latest monthly Short-Term Energy Outlook, which takes a look through 2006 at U.S. energy markets across all major fuel types, as well as the global oil market. Of course, readers of This Week In Petroleum are mainly interested in the oil market, with many analysts interested in seeing EIA’s forecast for oil prices. But rather than focusing on it in any particular month, more insight can probably be gained by looking at the trends in prices contained in EIA’s forecast.

This is especially true when looking crude oil prices. While EIA is forecasting that the price of West Texas Intermediate (WTI) crude oil may trend lower over the forecast period, it may be more important to note that EIA expects WTI to stay well above $40 per barrel through all of 2006, and that WTI is expected to be around $45 per barrel for most of this year. EIA also raises the possibility that WTI prices might rise above the mid-$40s if the supply and demand balances for light products such as gasoline and diesel fuel tighten due to greater demand growth, lower supply than expected perhaps due to possible refinery outages, or both.

February can be a month of transition, both for sports and for oil markets. With last weekend’s Super Bowl putting the final touches on the football season, and pitchers and catchers reporting to spring training next week, the transition from football to baseball begins. In oil markets, February usually marks a transition in focus from heating oil towards gasoline. Even with a fairly sizeable draw in heating oil inventories the last two weeks, there are only a few weeks remaining in which severe cold weather might cause a surge in heating oil demand, so inventories should be sufficient to get through the rest of this winter. Hence, at least for oil analysts and traders, the shift in focus towards gasoline is likely to intensify.

Despite the fact that retail gasoline prices typically rise between now and early May (see chart below), at least one trader was quoted recently as saying that, “Gasoline prices should be falling over the next several weeks.” And looking at gasoline inventories, it appears that they are more than ample for this time of year, with Figure 4 in the Weekly Petroleum Status Report indicating they are in the upper portion of the average range for this time of year, which might lead someone to believe that gasoline prices should fall. However, gasoline demand has grown sufficiently over the last year such that in terms of the number of days of demand that inventories could cover, there is very little difference between this year and last year, when inventories were considered to be relatively thin. Additionally, there are some concerns about how much gasoline Europe will be able to export this year, as their inventories appear relatively low and some European refineries are not geared towards making low-sulfur gasoline. These reasons, along with the seasonal increase usually seen, are why EIA expects retail gasoline prices to generally rise heading into spring, following any very near-term market softness and related price dip. Whether retail gasoline prices will top the $2.064 per gallon set on May 24, 2004 at some point this year and set a new record price (albeit unadjusted for inflation – the inflation-adjusted record price occurred in March 1981 and would be equivalent to about $3.08 per gallon in today’s dollars), is still an open question (EIA is currently forecasting an average May price of $2.065 per gallon). However, it would be very unusual, and in EIA’s estimation relatively unlikely, that retail gasoline prices will fall significantly between now and the beginning of May. While prices are likely to fluctuate over this period, it appears that the trend over the next few months is upward.

U.S. Average Retail Gasoline Inches Lower
The U.S. average retail price for regular gasoline decreased this week by 0.2 cent per gallon from the previous week to reach 190.9 cents per gallon as of February 7, 27.1 cents higher than this time last year. This is the first time in five weeks that prices have fallen. Prices were mixed, with the Rocky Mountains and West Coast seeing a gain of 2.0 cents to 184.7 cents per gallon and 200.5 cents per gallon, respectively. Prices in California gained 1.9 cents to 205.3 cents per gallon. Retail prices on the East Coast gained 0.1 cent to 191.2 cents per gallon, which is 27.8 cents higher than last year. The Midwest saw prices drop 1.6 cents to 189.7 cents per gallon.

Retail diesel fuel prices fell 0.9 cent last week to 198.3 cents per gallon. This is the first time in four weeks prices have decreased. Prices were mixed throughout the country, with the West Coast seeing the largest regional increase of 2.8 cents to 211.3 cents per gallon. Prices in the Midwest lost 1.6 cents to 193.8 cents per gallon. East Coast prices dropped 2.3 cents to reach 202.5 cents per gallon, while prices in New England stayed the highest in the nation, falling 0.3 cent to 222.2 cents per gallon. The average price in California increased by 1.8 cents to 214.4 cents per gallon, which is 33.4 cents higher than this time last year.

Residential Heating Fuel Prices Drop Slightly
Residential heating oil prices decreased for the period ending February 7, 2005. The average residential heating oil price decreased by 2.8 cents from last week to reach 199.0 cents per gallon, an increase of 37.5 cents from this time last year. Wholesale heating oil prices decreased 5.2 cents to reach 134.5 cents per gallon, an increase of 41.9 cents compared to the same period last year.

The average residential propane price decreased 0.4 cent, from 172.8 cents to 172.4 cents per gallon. This was an increase of 18.8 cents over the 153.6 cents per gallon average for this same time last year. Wholesale propane prices decreased 1.0 cent per gallon, from 82.1 cents to 81.1 cents per gallon, a gain of 9.2 cents compared to the same period last year.

Weekly Propane Stockdraw Slows
The weekly draw on U.S. inventories of propane posted a 2.7-million-barrel decline last week, continuing the slowdown from the peak 4.0-million-barrel draw on January 21, and possibly signaling that peak winter demand is beginning to show some weakness as cold temperatures slowly wane. With last week’s stockdraw, U.S. inventories of propane moved down to an estimated 39.1 million barrels as of February 4, 2005, continuing on a path near the upper limit of the normal range for this time of year. Strong imports into the East Coast provided some cushion to inventories that reported a weekly stockdraw that measured 0.4 million barrels, while inventories in the Midwest posted a surprising low weekly draw of only 0.7 million barrels last week. Gulf Coast inventories posted the largest weekly decline with a 1.6-million-barrel draw, while inventories in the combined Rocky Mountain/West Coast region fell by 0.1 million barrels. Propylene non-fuel use inventories continued counter-seasonally higher with a 0.4-million-barrel gain last week, moving its share of total propane/propylene inventories higher to account for 10.2 percent.

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.