Released on November 13, 2003
(Next Release on November 19, 2003)

A Crude Story
Often, oil market analysts focus their attention on the two major petroleum products, namely gasoline and distillate fuel (including both diesel fuel and heating oil). Gasoline dominates the headlines in the summer and distillate fuel (mostly heating oil) dominates discussion during the winter. And although imports play a key role for both products during their peak season, the vast majority of the supply comes from U.S. refineries that use crude oil to make these products. Ultimately, any story about gasoline or heating oil either begins or ends as a crude oil story.

U.S. commercial crude oil inventories (excluding crude oil in the Strategic Petroleum Reserve) have been below 300 million barrels since the end of August 2002. Crude oil inventories fell sharply at the end of September and early October last year as Hurricane Lili and Tropical Storm Isidore impacted imports significantly during that stretch. Just as crude oil inventories were starting to recover again in November 2002, oil workers in Venezuela went on strike in early December, severely curtailing production and thus dramatically reducing exports, especially to the United States during most of winter 2002/03. As a result, crude oil inventories dropped to about 270 million barrels in February and the first half of March. However, as Venezuela began to increase its production (although they have still not reached pre-strike levels according to EIA estimates) and Saudi Arabia increased its production in response to both the Venezuela strike and the war in Iraq, crude oil imports began to increase. As can be seen from the chart, since April, crude oil imports have consistently run well above levels seen last year. This has helped crude oil inventories slowly increase to around 290 million barrels. However, with OPEC cutting production beginning on November 1 and meeting again next month to discuss the possibility of further production cuts, it is unclear how long crude oil imports can continue to average around 10 million barrels per day, especially with China’s economy growing sharply, boosting its crude oil imports accordingly.

As the calendar turns closer to the peak winter period from December through February, year-ago comparisons should be made cautiously, as lower levels of Venezuelan crude oil imports last winter may generate the illusion of comfortable supplies, even if crude oil imports drop significantly below 10 million barrels per day. What will be more important this winter is the level of imports, or the crude oil balance. Should imports average closer to 9 million barrels per day as opposed to 10 million barrels per day, crude oil inventories will likely be drawn down. And if crude oil inventories drop for a significant period of time, that will likely lead to one of two scenarios. Under one scenario, product inventories would fall as refiners cut back their refinery production (since crude oil prices would likely rise and thus reduce the margin between the spot prices refiners sell their products for and the cost of the crude oil used to make these products). To preempt this, the second scenario would be that product prices would also rise, meaning higher costs for consumers that use heating oil and even possibly for gasoline consumers. Either way, this winter shapes up to be another one in which either the main story will be one of crude oil, or it will be an important subplot, possibly lost in the clamor over cold weather, logistical bottlenecks, and/or high heating oil prices.

U.S. Retail Gasoline Prices Fall by Over 3 Cents
The U.S. average retail price for regular gasoline fell last week by 3.1 cents per gallon as of November 10 to reach 150.4 cents per gallon, which is 6.5 cents per gallon higher than a year ago. This is the tenth time in eleven weeks that the national average retail price has fallen. This is the lowest that prices have been since early July. Retail regular gasoline prices were down throughout the country last week, with the West Coast seeing a decrease of 2.0 cents per gallon to hit 166.2 cents per gallon. California prices averaged 168.5 cents per gallon after falling 2.6 cents this past week. The Midwest had the largest regional price decrease, falling 5.6 cents to hit 146.4 cents per gallon.

Retail diesel fuel prices fell for the third week in a row, decreasing by 0.5 cent per gallon as of November 10 to a national average of 147.6 cents per gallon, which is 4.9 cents per gallon higher than a year ago. Retail diesel prices were down throughout most of the country last week, with the Midwest seeing the largest price decrease of 1.1 cents to reach 146.7 cents per gallon. The West Coast saw a small price increase, 0.3 cent to hit 157.9 cents per gallon.

Residential Heating Oil and Propane Prices Rise Slightly
The period ending November 10, 2003 saw residential heating oil prices increase slightly. The average residential heating oil price was 138.5 cents per gallon, rising 0.2 cent from last week and 11.0 cents higher than this time last year. Wholesale heating oil prices moved to 87.5 cents per gallon, an increase of 2.1 cents from last week and an increase of 10.1 cents from last year.

The average residential propane price grew slightly to 132.8 cents per gallon, up 0.3 cent from the previous period. This was an increase of 17.0 cents over propane prices for this same time last year. Wholesale propane prices held fast at 63.9 cents per gallon. This is an increase of 10.2 cents from the price of 53.7 cents per gallon for last year's equivalent period.

Propane Posts First Major Drop from Likely Peak Inventories
Last week's hefty 1.2-million-barrel drop in inventories marks the first major outflow that most likely will show that U.S. inventories of propane peaked at 66.8 million barrels on October 31, 2003. Despite the up and down fluctuations in inventories during October, last week's sizable drop in inventories this close to the start of the winter heating season poses an unlikely chance that inventories will rebuild beyond the October 31 level. With last week's decline, U.S. inventories of propane fell to an estimated 65.6 million barrels as of November 7, 2003, a level that remains well positioned in the average range for this period of year. Regional inventories reflected mostly seasonal activity with Gulf Coast inventories showing the largest decline that measured 1.5 million barrels, as primary stockholders begin to shift supplies to the major heating regions ahead of cold weather. Midwest inventories gained a modest 0.1 million barrels last week while inventories in the East Coast posted a robust 0.3-million-barrel increase during this same time. With these inventory shifts, the major propane heating regions have begun to show a more balanced inventory picture compared with recent months that showed Gulf Coast inventories well ahead of other regions in the Midwest and East Coast. Consequently, inventories on the East Coast and Midwest are tracking within the lower limit of the average range. At the same time, Gulf Coast inventories moved from well above the average range to a level approaching the upper limits of the average range. Propylene non-fuel use inventories remained relatively unchanged at 2.1 million barrels last week, a level that also remains unchanged from last week’s percentage of total propane/propylene inventories that accounted for a 3.2 percent share.

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