Released on October 29, 2003
(Next Release on November 5, 2003)

Crude and Refined
When analyzing oil markets, crude oil, gasoline, and distillate fuel (both diesel fuel and heating oil) receive most of the attention. This is due to the size of these markets, with over 15 million barrels of crude oil refined in the United States every day, which in turn is used to produce nearly 9 million barrels of gasoline and nearly 4 million barrels of distillate fuel. With gasoline and distillate fuel comprising nearly two-thirds of the refined product consumed in the United States, the combination of the U.S. crude oil market and these two refined product markets, has provided the bulk of the analysis in This Week In Petroleum each week, and this week is no exception.

The data for the week ending October 24, once again provides a somewhat mixed signal. While crude oil and distillate fuel inventories increased, gasoline inventories fell a surprising 2.2 million barrels last week. But this is hardly unusual. During the 94 weeks since This Week In Petroleum began (starting with data for the week ending January 11, 2002), crude oil, gasoline, and total distillate fuel inventories have moved in the same direction only 20 times. This is not too startling, as gasoline and distillate fuel inventories follow vastly different seasonal patterns. However, the fact that these three markets often move in seemingly different directions, and often contrary to analyst expectations, may warrant some added commentary.

What may have been most surprising to the market this week was the decline in gasoline inventories. A close look suggests, however, that this may not be that surprising. Gasoline inventories, contrary to market expectations, built by 1.4 million barrels during the previous week (the week ending October 17), which contributed to a surprisingly low estimate of demand that week (8.754 million barrels per day). With last week’s 2.2-million-barrel draw, demand ballooned to 9.413 million barrels per day. (Actually, gasoline demand, or more specifically the amount supplied into the market, is based on finished gasoline inventories, which increased by 1.8 million barrels during the week ending October 17 before declining by 1.6 million barrels during the week ending October 24.) Last week’s gasoline demand is the fourth highest weekly average ever, and is more than 200,000 barrels per day more than any other weekly average in October! Nevertheless, averaging the last two weeks data may more accurately reveal the current underlying gasoline demand level. While such a calculation produces 9.084 million barrels per day, a relatively high number for October, this may reflect ongoing strengthening in U.S. Gross Domestic Product this quarter. Many economists expect apparent strong growth in the third quarter to carry over to the last three months of the year. Since economic growth is strongly correlated with gasoline demand, the gasoline inventory draw doesn’t appear too unusual after all, and could continue if the economy continues to improve. As such, gasoline market conditions bear watching, even as most analysts begin to more closely monitor evolving heating oil supplies.

Distillate fuel inventories exhibited a more typical seasonal pattern last week, with a decline in diesel fuel (low-sulfur distillate fuel) more than offset by a build in heating oil (high-sulfur distillate fuel). Heating oil inventories continue to build, and are beginning to approach the 5-year average for this time of year. This development, along with sufficient crude oil imports this winter, would go a long way to reducing the risk of major price spikes for heating oil should a short bout of cold weather appear in the Northeast (where the bulk of heating oil is consumed).

Of course, it is easy to understand why crude oil inventories increased last week. If the United States is producing about 5.6 million barrels per day and refining 15.4 million barrels per day, imports averaging 10 million barrels per day would imply a build in inventories. And with last week’s crude oil imports averaging nearly 10.2 million barrels, the largest weekly average ever during the month of October, crude oil inventories, in fact, did increase. As we have stated before, crude oil imports will be the critical supply component this winter. If they consistently average around 10 million barrels per day, there should be sufficient crude oil available this winter to meet major product requirements. But whether this level can be sustained, particularly in December and January, after OPEC’s latest cuts (effective November 1) start impacting U.S. imports, especially given reported strong economic activity and oil demand in Asia, remains a question that only time will answer.

U.S. Retail Gasoline Prices Fall Almost 3 Cents
The U.S. average retail price for regular gasoline fell last week by 2.9 cents per gallon as of October 27 to reach 154.2 cents per gallon, which is 9.8 cents per gallon higher than a year ago. This is the eighth time in nine weeks that the national average retail price has fallen. Although demand has been normal to high for this time of year, gasoline imports and production are both up in the past few weeks, leading to stocks in the normal range. Retail regular gasoline prices were down throughout most of the country last week, with the West Coast seeing a decrease of 2.8 cents per gallon to hit 170.2 cents per gallon. California prices averaged 173.7 cents per gallon after falling 3.2 cents this past week. The Rocky Mountains were the only region to see a price increase, rising 1.7 cents to hit 158.7 cents per gallon.

Retail diesel fuel prices decreased last week by 0.7 cent per gallon as of October 27 to a national average of 149.5 cents per gallon, which is 3.9 cents per gallon higher than a year ago. U.S. retail diesel prices fell after three weeks of rising prices. Retail diesel prices were down throughout the country last week, with the Gulf Coast seeing the largest price decrease of 1.1 cents to reach 144.1 cents per gallon.

Residential Heating Oil and Propane Prices Show Slight Increase
Residential heating oil prices increased slightly during the period ending October 27, 2003. The average residential heating oil price was 138.6 cents per gallon, an increase of 0.3 cent from last week and 11.4 cents higher than this time last year. Wholesale heating oil prices stood at 88.3 cents per gallon, a decrease of 1.3 cents from the previous week and an increase of 6.3 cents from last year.

Residential propane prices also showed a minimal increase of 0.3 cent per gallon with the average residential price rising from 132.2 to 132.5 cents per gallon, an increase of 18.4 cents over prices last year at this time. Wholesale propane prices decreased 2.8 cents per gallon, from 71.0 to 68.2 cents per gallon. This was an increase of 13.8 cents from the October 28, 2002 price of 54.4 cents per gallon.

Weekly Propane Inventories Fall
U.S. inventories of propane reversed direction last week with a weekly loss that totaled 0.9 million barrels, positioning inventories at an estimated 65.4 million barrels as of October 24, 2003. While total propane inventories typically report a net loss during October, the first two weeks of the month witnessed gains that totaled 1.9 million barrels. Nonetheless, total inventories at the primary level remained firmly within the average range for this time of year. Regional inventories were mixed, with the Gulf Coast down more than 2.0 million barrels, while East Coast and Midwest inventories offset some of the loss with gains that totaled 0.4 million barrels and 0.7 million barrels, respectively. Last week, Midwest inventories moved within the average range for the first time since last January, while East Coast inventories moved closer to the lower limit of the average range. Despite the weekly decline, Gulf Coast inventories remained slightly above the average range. Propylene non-fuel use inventories moved significantly lower last week to 1.7 million barrels, a level that accounted for just 2.6 percent of total propane/propylene inventories.

Note: 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.