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Released on November 14, 2002
(Next Release on November 20, 2002)

Is Trouble Brewing for Heating Oil This Winter?
With the weather turning colder recently, some oil market analysts are closely following the upcoming heating oil season as they pore over the numbers with their warm cup of coffee. With distillate fuel inventories nationally at 121.4 million barrels, which is below the normal range for this time of year, and natural gas prices consistently around $4 per million BTU since the beginning of October, interest in oil markets has turned toward the U.S. distillate fuel market. And with the Energy Information Administration (EIA) calling for residential heating oil prices to be 15 percent higher than last year, any price increase will likely be coming off of a higher base than last year. But as this analysis will show, the upcoming winter is not unlike most winters in that the major factor determining how “tight” the distillate fuel market will be is weather.

In early August, it appeared that the upcoming winter was not going to be tinged with low inventories and high heating oil prices. Distillate fuel inventories nationally were near the top of the average range for that time of year, and even if the ensuing build was less than normal, inventories should still have been adequate going into the 2002-03 winter season. However, no one could have anticipated that instead of peaking in October, November, or even December as they typically do, distillate fuel inventories had probably already peaked back in early August! Between the end of July and the end of October, distillate fuel inventories would normally be expected to increase by about 6 million barrels. Instead they fell by 11.5 million barrels! Going back to at least 1963, never has there been a decline in distillate fuel inventories between the end of July and the end of October. The previous minimum build over this three-month window was 0.4 million barrels in 1998, when absolute levels were much higher. So how did this unusual inventory pattern develop? And why wasn’t it anticipated?

First, gasoline prices were extremely flat all summer long. Without the typical summer increase in gasoline prices, refiner margins were particularly low. As a result, there was little incentive for refiners to run more crude oil through their refineries, which not only meant less gasoline production, but also less production of other products, including distillate fuel.

Also, distillate fuel imports were weak this summer, as there was little need to bring them in with inventories relatively high through early August. Thus, with less production and imports, distillate inventories were unseasonably drawn down in August. Then in September, with crude oil refinery inputs down slightly over year-ago levels, a late up-tick in gasoline prices delayed a shift in the refinery slate away from gasoline and towards distillate fuel. Towards the end of September, as gasoline prices began to stabilize again, refiners shifted their focus back to distillate fuel. But two relatively severe storms, Tropical Storm Isidore and Hurricane Lili, hit the Gulf Coast almost one behind the other, and both followed a path through the Midwest region of the country that caused refineries to temporarily shut down operations (or, at a minimum, curtail production). With this forced shutdown upon them near the time when they would typically schedule routine maintenance, many refiners took this opportunity to do their maintenance and it took nearly until the end of October for refinery operations to return to more normal levels. All the while, distillate fuel inventories kept being drawn down to keep up with demand which, while less than last year’s levels, was beginning to show signs of picking up by the latter part of October.

So what might actually happen this winter? While no one can foresee the future, we can look at the current situation and see signs that might point to a distillate fuel market in which prices might increase. Besides distillate fuel inventories in early November being below the average range, there is some concern that distillate fuel imports, which are critical in adding to supply during the winter months, may not be as readily available as in past years. Numerous stories have been printed of late that point to increased distillate fuel demand in Europe, particularly as more and more people there switch away from gasoline-powered cars and towards diesel-powered cars. In the winters of 1999-2000, and 2000-2001, distillate fuel imports, especially from Russia, played a key role in supplying the U.S. market, particularly in the Northeast region of the country, where heating oil is a major fuel for heating homes. However, over the most recent four-week period, distillate fuel imports have averaged 346,000 barrels per day, which is relatively high for this time of year.

Another reason for concern has been the high natural gas spot prices that currently exist and the impact they might have on increasing heating oil demand, especially in the Northeast. The Henry Hub spot price of natural gas remained above $4 per million BTU for almost the entire month of October, and the concern is that if the weather turns much colder soon, high natural gas prices will cause some customers to turn to the distillate and residual fuel markets instead.

If all of these factors come together, namely limited imports from Europe, fuel switching into oil, and low inventories limiting the amount of supply that can be drawn down, then a cold snap with associated demand increases and supply delays this winter could cause prices to spike precipitously. The key factor remains how cold it will get this winter. If the weather is much colder than normal, we could see large price increases. But if weather is either normal or warmer than normal, we still may be able to get through the winter without relying on these additional supply sources (inventories and European imports) to such a degree that would cause a large increase in prices. But only time will tell. While the U.S. distillate fuel market is heating up, it hasn’t boiled over yet.

Retail Gasoline and Diesel Fuel Prices Fall Last Week
The U.S. average retail price for regular gasoline fell last week after increasing in four of the previous five weeks, decreasing by 0.9 cent per gallon as of November 11 to end at 143.9 cents per gallon. This price is 25.7 cents per gallon higher than last year.

Retail diesel fuel prices fell last week for the third week in a row, decreasing by 1.5 cents per gallon to a national average of 142.7 cents per gallon as of November 11. Distillate fuel inventories are expected to drop below the normal range this winter and remain low through 2003, so it is unlikely that prices will decrease significantly in the coming months. Retail diesel prices were down throughout the country, with the largest price decrease occurring on the Gulf Coast, which saw the price fall by 2.3 cents per gallon to end at 137.1 cents per gallon.

Residential Retail Heating Oil Prices Fall Week
Residential heating oil prices marked their first decline since the start of the heating season. The average price for the period ending November 11, 2002 was 127.2 cents per gallon, down 0.5 cent per gallon. Residential propane prices on the other hand continued to move upward by 0.7 cent per gallon from 115.1 to 115.8 cents per gallon. Heating oil prices are 6.1 cents per gallon higher than last year at this time while residential propane prices are 2.0 cents higher than one year ago. Wholesale heating oil prices decreased 5.0 cents per gallon, to 77.4 cents per gallon. Wholesale propane prices also decreased from 55.2 to 53.7 cents a gallon, down 1.5 cent per gallon.

Cold Weather Pummels Propane Inventories
Blustery weather in the upper Midwest region contributed to U.S. inventories of propane plummeting by nearly 2.7 million barrels last week. Although inventories ended the week of November 8, 2002 at an estimated 62.0 million barrels, the level continued to cling near the upper limits of the average range for this time of year. As expected, the Midwest stock draw was exceptionally large at 1.6 million barrels, leaving inventories in the region near the bottom of the average range. But East Coast and Gulf Coast inventories were less affected by weather last week with stock draws measuring 0.4 million barrels and 0.6 million barrels, respectively. Inventories in the East Coast and Gulf Coast regions remain at or above the upper limits of their respective average ranges for this time of year.

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Retail Prices (Cents Per Gallon)


Retail Data		Changes From		Retail Data		Changes From
11/11/02		Week	Year	11/11/02		Week	Year
Gasoline	143.9	-0.9	25.7	Heating Oil	127.2	-0.5	7.1
Diesel Fuel	142.7	-1.5	15.8	Propane	115.8	0.7	2.4

Spot Prices (Cents Per Gallon)

Spot Data		Changes From
11/08/02		Week	Year
Crude Oil WTI	25.83	-1.21	3.60
Gasoline (NY)	79.5	-5.8	21.0
Diesel Fuel (NY)	71.0	-4.9	8.2
Heating Oil (NY)	69.1	-4.8	7.7
Propane Gulf Coast	46.3	-2.1	9.9
Note: Crude Oil WTI Price in Dollars per Barrel.

Stocks (Million Barrels)


Stocks Data		Changes From		Stocks Data		Changes From
11/08/02		Week	Year	11/08/02		Week	Year
Crude Oil	283.6	-6.9	-28.1	Distillate	121.4	-0.5	-9.3
Gasoline	194.0	1.9	-11.3	Propane	62.043	-2.684	-6.646