Released on February 15, 2006
(Next Release on February 23, 2006)

An Unusual Sight
From the mid-Atlantic to the Northeast, the past weekend brought what had become an unusual sight: a significant snowfall. New York City was blanketed by a reported 27 inches of snow, while some suburbs of Washington, DC received over a foot of snow. While not quite as unusual, many motorists are also experiencing something they haven’t seen much of in over a year: falling gasoline prices. Will retail gasoline prices continue to drop? How low will they go? Although it is always difficult to definitively predict gasoline prices, it is useful to understand what we do know about the forces that are driving them.

Retail gasoline prices dropped nearly 6 cents per gallon between February 6 and February 13, and are down over 7 cents per gallon since January 30. But, the spot price of West Texas Intermediate crude oil has fallen much faster, dropping by nearly $9 per barrel (about 21 cents per gallon) between January 30 and February 14. This drop in crude oil prices has been reflected in spot gasoline prices as well, with the New York spot price down nearly 40 cents per gallon over that period. Spot gasoline prices elsewhere are even falling as well, with the Chicago spot price down nearly 27 cents per gallon, the Gulf Coast spot price down 34 cents per gallon, and the Los Angeles spot price down 44 cents per gallon! Since it usually takes at least a week to start seeing changes in spot prices reflected at the pump, and as many as 4 weeks to see the bulk of the change reflected in retail prices, it appears that consumers can look forward to a further decline in retail prices for the next couple of weeks.

However, should spot prices start rising again before the retail prices reflect the full magnitude of the current spot price decline, the drop in retail prices could be halted and pump prices could begin to rise again. Right now, there is some evidence to suggest that spot prices might once again start rising later this month or the beginning of March. First, the futures price for the current near-term contract (March futures contract) has been running 12 to 17 cents per gallon less than the April futures contract (the near-month contract in March) since the beginning of February, indicating an expectation within the market that prices might rise again soon. Secondly, there have been reports that refinery maintenance could be heavy during March, causing a drawdown of some of the gasoline inventories that have built up recently. Third, as we get closer to spring and warmer weather, gasoline demand is likely to increase, putting upward pressure on prices. And finally, as refiners start increasing their gasoline production in preparation for the upcoming peak driving season, refiners will need to make decisions on how they will phase out the use of MTBE as a gasoline blending component. As we highlighted in the January 5, 2006 edition of This Week In Petroleum, companies’ decisions to eliminate MTBE have been driven by State bans due to water contamination concerns and the potential for increased liability exposure due to the elimination of the oxygen content requirement for reformulated gasoline (RFG) included in the Energy Policy Act of 2005. The elimination of MTBE in the gasoline pool will result in a reduction of supply, which will put upward pressure on prices.

Thus, for the reasons cited above, EIA is estimating that pump prices will continue to decline for the next couple of weeks, but that prices are likely to start increasing again, maybe as early as March, as we get closer to spring and the beginning of the peak driving season. America’s motorists are likely in a similar position as skiers and schoolchildren in the East, who were thrilled to see the recent snowfall and hope for more over the coming weeks, but shouldn’t count on a continuing bounty as winter turns to spring.

U.S. Average Retail Gasoline Prices Fall Almost 6 Cents
The U.S. average retail price for regular gasoline lost 5.8 cents to 228.4 cents per gallon as of February 13, which is 38.6 cents higher than last year. Prices were down throughout the country, with the Midwest seeing the largest decrease of 9.1 cents to 218.9 cents per gallon. East Coast prices fell 5.4 cents to 232.2 cents per gallon. West Coast prices were down 2.2 cents to 245.6 cents per gallon, with California prices falling 2.2 cents to 252.2 cents per gallon.

Retail diesel fuel prices decreased by 2.3 cents to reach 247.6 cents per gallon as of February 13, which is 49.0 cents higher than last year. Prices were down throughout the country, with the largest price decrease of 2.7 cents occurring on the East Coast, dropping prices to 250.9 cents per gallon. West Coast prices fell 2.4 cents to 262.1 cents per gallon, with California prices falling 3.0 cents to 270.9 cents per gallon.

Residential Heating Oil Prices Drop While Propane Prices Increase Anew
Residential heating oil prices decreased for the period ending February 13, 2006. The average residential heating oil price fell by 3.0 cents last week to reach 241.7 cents per gallon, an increase of 43.6 cents from this time last year. Wholesale heating oil prices decreased by 11.9 cents to reach 167.1 cents per gallon, an increase of 29.8 cents compared to the same period last year.

The average residential propane price increased 0.8 cent, to reach 200.8 cents per gallon. This was an increase of 28.7 cents compared to the 172.1 cents per gallon average for this same time last year. Wholesale propane prices decreased 3.1 cents per gallon, from 100.7 cents to 97.6 cents per gallon. This was an increase of 16.0 cents from the February 14, 2005 price of 81.6 cents per gallon.

Cold Weather Lowers Propane Inventories
The first major East Coast winter storm of the season contributed to draw propane inventories down by 3.8 million barrels last week, with inventories settling at an estimated 43.5 million barrels as of February 10, 2006. Moreover, with reported declines in both propane production and imports during the past week, markets relied more on inventories to meet the sharp rise in demand. Most of the weekly stockdraw was concentrated in the Gulf Coast region, which fell by 2.7 million barrels, most likely in anticipation of replenishing Midwest and East Coast inventories following the severe winter storm. Surprisingly, East Coast inventories remained unchanged last week, but inventories in the Midwest fell by 0.9 million barrels, while inventories in the combined Rocky Mountain/West Coast regions declined by 0.2 million barrels during this same time. Propylene non-fuel use inventories plunged last week by 0.7 million barrels to account for a smaller 8.5 percent of total propane/propylene inventories, compared with the prior week’s 9.3 percent share.

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