Released on October 22, 2003
(Next Release on October 29, 2003)

Stay Tuned
In the age of the Internet, 24-hour news channels, and Personal Digital Assistants (PDAs), we’ve become accustomed to having answers immediately at our fingertips. And with the shift from Daylight Savings Time to Standard Time for most of the country just days away, oil markets have shifted their focus away from gasoline and towards heating oil. The question many people want an answer to is: How high will heating oil prices reach this winter?

Unfortunately, for those who like instant answers, it is probably too early to answer that question with much definitiveness. The data released earlier today for the week ending October 17 adds to the ambiguity. Those analysts who are more bearish (expecting ample supplies this winter to keep prices from rising too high) point to total distillate fuel inventories being above the 5-year average for the first time in many months. This has happened while distillate fuel imports the last two weeks have averaged less than 250,000 barrels per day, an amount that can be greatly exceeded should the need arise. With demand for distillate fuel so far this season not showing an increase over year-ago levels (based on weekly data), these analysts point to adequate supplies on hand to meet the expected demand this winter.

However, other analysts are more bullish about this winter’s heating oil market (not believing current supplies are adequate to meet peak demand this winter, particularly if the weather is similar to last year’s). These analysts point to high-sulfur distillate fuel (heating oil) inventories continuing to track below 5-year averages and below last year’s level, which turned out to be insufficient to keep prices from rising significantly late in the season as cold weather descended on the Northeast and Midwest regions. These analysts were emboldened when the data for the weeks ending October 3 and October 10 showed heating oil inventories declining, which many cited as a signal that the winter stockdraw season had gotten an early start. However, data for the week ending October 17 show heating oil inventories increasing by 1.6 million barrels, which is 1 million barrels more than the combined decline seen in the previous two weeks.

So, which is it? Is the outlook bearish or bullish? This week’s data point to the folly of being too definitive one way or the other this early in the winter season. While heating oil inventories did increase substantially this past week, they remain below the 5-year average. But with diesel fuel inventories plentiful, and able to be used as heating oil if needed (albeit as an imperfect substitute), some additional cushion exists. An interesting angle in analyzing the heating oil market involves watching other markets, namely crude oil, natural gas, and even gasoline.

Crude oil prices directly impact heating oil prices, so any significant change in crude oil prices will likely be reflected in heating oil prices. Crude oil inventories declined last week by 1.8 million barrels, which was against market expectations according to surveys of analysts conducted by Bloomberg News, Reuters, and Dow Jones. With crude oil inventories relatively low already, there is some uncertainty about the sufficiency of crude oil supply this winter, particularly if OPEC decides to cut production further at their next meeting in December. However, part of the reason crude oil inventories declined last week was because the amount put through refineries increased, which resulted in an increase in total distillate fuel production, and even more specifically, heating oil production. So, while a decline in crude oil inventories may be bullish for heating oil prices, if it comes as a result of increased heating oil refinery production, this concern is significantly reduced.

Many heating oil analysts are also keeping one eye on natural gas markets. If natural gas prices get too high, it will encourage some industrial natural gas customers with the ability to switch to diesel fuel to do so. While the amount of fuel switching that can occur is not precisely known, some have estimated that as much as 200,000 - 300,000 barrels per day of additional distillate fuel demand has resulted when natural gas prices rose quickly while cold weather was draped over the Northeast, where most of the fuel switching occurs.

Finally, even gasoline markets have implications for heating oil markets. If gasoline inventories decline too much or demand remains relatively high, refiners may have to produce more gasoline at the expense of distillate fuel. However, last week’s data showed a more typical winter pattern with gasoline refinery production actually declining slightly, even as crude oil refinery inputs increased by 237,000 barrels per day. And even with this decline in gasoline production, gasoline inventories still were able to increase by 1.4 million barrels. As long as this continues, it will be a bearish signal for heating oil markets.

Yet heating oil prices, particularly those in New England and the Central Atlantic regions, are higher than last year at this time. Much of this is because crude oil prices are higher than they were a year ago and this has translated into higher spot prices and higher residential heating oil prices. Whether crude oil prices continue to track higher will depend on many global factors, most notably, OPEC production decisions and the pace in the recovery of Iraqi oil production following the war. However, one thing is known. It is too early to rush to judgment on this winter’s heating oil outlook. But stay tuned. It will likely be an interesting season to watch.

U.S. Retail Gasoline Prices Increase, Pushed Up by Midwest Prices
The U.S. average retail price for regular gasoline rose last week by 0.3 cent per gallon as of October 20 to reach 157.1 cents per gallon, which is 11.3 cents per gallon higher than a year ago. This price increase came after seven previous weeks of declining prices, and it was driven entirely by an increase of 3.4 cents in the Midwest, which brought prices in that region to 156.1 cents per gallon. Retail regular gasoline prices were down throughout the rest of the country last week, with the West Coast seeing a decrease of 3.4 cents per gallon to hit 173.0 cents per gallon. California prices averaged 176.9 cents per gallon after falling 3.6 cents this past week, and have now fallen a total of 33.2 cents since August 25.

Retail diesel fuel prices increased last week by 1.9 cents per gallon as of October 20 to a national average of 150.2 cents per gallon, which is 3.3 cents per gallon higher than a year ago. This is the third week in a row that U.S. retail diesel prices have risen. Retail diesel prices were up throughout the country last week, with the Rocky Mountains seeing the largest price increase of 3.2 cents to reach 153.8 cents per gallon.

Heating Oil and Propane Prices Continue to Increase
The third week of the heating season continued to show minor increases in heating oil. On October 20, 2003, the average residential heating oil price stood at 138.5 cents per gallon, an increase of 0.6 cent from last week and 11.4 cents higher than this time last year. Residential propane prices also increased, with the average residential price rising to 132.7 cents per gallon, an increase of 2.2 cents from last week. Wholesale heating oil prices stood at 89.6 cents per gallon, a decrease of 4.9 cents from last week and an increase of 2.5 cents from last year, while the average wholesale propane price stood at 71.0 cents, down 1.3 cents from the previous week, but up 17.0 cents from the October 21, 2002 price of 54.0 cents per gallon.

Weekly Propane Build Continues
U.S. inventories of propane continued on an upward path last week with a 0.5 million barrel gain that put inventories as of October 17, 2003 at an estimated 66.3 million barrels. Last week’s increase marked the second consecutive weekly gain with a combined build for the first half of the month totaling nearly 1.9 million barrels. This compares with October inventories at the U.S. level over the past 5-year period showing an average net loss of more than 0.5 million barrels. Regional gains showed the Midwest with the largest increase last week, totaling nearly 0.3 million barrels, followed by a 0.2-million-barrel increase in the East Coast. Inventories on the Gulf Coast remained relatively flat last week, contrasting sharply with the prior weekly gain that totaled 0.9 million barrels. The sudden shift in regional inventory gains to the Midwest and East Coast, compared with the Gulf Coast, may be a late build-season attempt by primary stockholders to better position inventories within those markets before the onset of winter. While inventories in the East Coast and Midwest regions continue to lag at or below their respective average ranges, inventories on the Gulf Coast region remain well above its average. Propylene non-fuel use inventories remained relatively unchanged last week at 3.1 million barrels, a level that represents about 4.7 percent of total propane/propylene inventories.

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