Released on January 25, 2006
(Next Release on February 1, 2006)

Past, Present, and Future
In analyzing oil markets, some people may look at market conditions now and find some comparable period in the past in order to draw conclusions about where the market is headed. Other people analyze current pricing patterns and use them as the basis for forecasting future prices. And still others will base their assessment of oil markets on their expectations for the future, or their assessment of “forward fundamentals.” So, in analyzing oil markets is it best to: A) look to the past as a guide, B) use real-time pricing levels as a key barometer, or C) look to “forward fundamentals” as providing the best insight into oil markets? Long-time readers of This Week In Petroleum may have already guessed the answer: D) all of the above.

It can be valuable in gaining insight into current U.S. oil market conditions to look backwards towards the past. While it doesn’t receive the fanfare that the release of weekly data receives, EIA’s Petroleum Supply Monthly (PSM), which provides detailed monthly data nearly 2 months after the end of a given month, can be a valuable tool for analysts. For example, on Monday, January 23, EIA released the PSM that contains monthly data for November 2005. This data showed that U. S. gasoline demand in November averaged nearly 9.1 million barrels per day, or about 0.1 million barrels per day less than the data for the four weeks ending December 2 (the closest weekly data representation to the month of November), despite the fact that in previous editions of This Week in Petroleum, EIA has noted that monthly gasoline demand data usually run at higher levels than exhibited by weekly data. The November shift in the relationship between weekly-based data and monthly data illustrates that it is important, although not sufficient, to understand the past to better understand the present.

Another mantra of some U. S. oil market analysts is that currently high prices indicate that markets are tight, and since the months further out in the current strip of crude oil futures prices remain well above $60 per barrel for many years, markets may remain tight for the foreseeable future. Some even go so far as to use the futures strip as a forecast, with the assumption that billions of dollars are at stake at these prices. But, of course, futures prices for delivery dates months or years away are at best a reflection of expectations based on known current conditions. Studies have shown that using futures prices as a predictor, or forecast, is not any more accurate than many other methods. Yet, any look into the future should incorporate, in some measure, current conditions.

Speaking of the future, some analysts use the concept of “forward fundamentals” to help explain current oil market conditions. In the November 20, 2002 edition of This Week in Petroleum, EIA defined “forward fundamentals” as a concept “ … that prices today are reflecting perceptions of the supply/demand balance sometime in the not-too-distant future.” This has particular relevance today, in that some of the increase in oil prices recently is seemingly related to concerns about the situation in Iran, the second largest OPEC crude oil producing country. Of course, “forward fundamentals” is a useful concept, but it is important to place this notion in context with past market behavior and current inventory levels and prices to fully understand “forward fundamentals” in today’s oil market.

Thus, in understanding current U.S. oil market conditions, the analysis benefits from careful attention to insights derived from consideration of past and present data, as well as, future fundamentals based on current information. Reliance on only a subset of the available information unnecessarily constrains analysis, especially during recent years when oil markets have been extremely volatile.

U.S. Average Retail Gasoline Prices Gain 1.6 Cents
The U.S. average retail price for regular gasoline was up 1.6 cents to 233.6 cents per gallon as of January 23, which is 48.3 cents higher than last year. Prices were up throughout the country, with the Rocky Mountains and Midwest showing the largest regional increases of 1.9 cents to 222.0 cents per gallon and 228.2 cents per gallon, respectively. California prices gained just 0.7 cent to 242.4 cents per gallon. East Coast prices, still the highest regional prices in the nation, increased by 1.4 cents to 239.5 cents per gallon.

Retail diesel fuel prices increased by 2.3 cents to reach 247.2 cents per gallon as of January 23, which is 51.3 cents higher than last year. Prices were up throughout the country, with the largest price increase occurring on the West Coast, gaining 4.3 cents to 260.8 cents per gallon, the highest regional prices in the country. East Coast prices increased 2.7 cents to 251.6 cents per gallon, with New England prices gaining 0.5 cent to 266.8 cents per gallon.

Residential Heating Oil Prices Rise Anew While Propane Prices Drop Slightly
Residential heating oil prices increased for the period ending January 23, 2006. The average residential heating oil price rose by 3.2 cents last week to reach 246.3 cents per gallon, an increase of 47.3 cents from this time last year. Wholesale heating oil prices increased by 13.8 cents to reach 187.1 cents per gallon, an increase of 44.3 cents compared to the same period last year.

The average residential propane price decreased 0.2 cent, to reach 201.2 cents per gallon. This was an increase of 28.1 cents compared to the 173.1 cents per gallon average for this same time last year. Wholesale propane prices increased 4.6 cents per gallon, from 103.9 cents to 108.5 cents per gallon. This was an increase of 25.4 cents from the January 24, 2005 price of 83.1 cents per gallon.

Mild Winter Continues to Moderate Propane Stockdraw
The relatively mild temperatures in many parts of the country helped moderate the draw on U.S. inventories of propane last week to only 0.7 million barrels, moving inventories lower to an estimated 52.3 million barrels as of January 20, 2006. Consequently, the modest stockdraw kept U.S. inventories of propane above the upper limit of the average range for this time of year. Regional inventory changes were mixed last week, with only the Gulf Coast region showing a drop, measuring 0.8 million barrels. While inventories in the East Coast and Midwest regions posted similar 0.1-million-barrel gains last week, inventories in the combined Rocky Mountain/West Coast regions remained unchanged during this same period. Propylene non-fuel use inventories fell by 0.3 million barrels last week, reversing the five-week upward trend for this fuel. With last week’s drop, propylene non-fuel U. S. inventories accounted for a smaller 7.6 percent share of total propane/propylene inventories, compared with the prior week’s 8.1 percent share.

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