Released on November 19, 2003
(Next Release on November 26, 2003)

What Is Going On?
The near-month futures price for West Texas Intermediate (WTI), the benchmark crude oil for the United States, settled above $33 per barrel yesterday (November 18) for the first time since March 17. Along with the sharp jump in crude oil prices yesterday (November 18), the near-month contract for gasoline rose by 4.57 cents per gallon and is now at its highest level since August 29, while the near-month contract for heating oil increased by almost 4 cents per gallon and is at its highest level since March 17. Just two weeks earlier (November 4), WTI was below $29 per barrel, the gasoline futures price was 13 cents per gallon lower, and the heating oil futures price was 12 cents per gallon lower. What is going on?

Inventories are an excellent barometer of the balance between supply and demand. If supplies are high and demand is low, one would expect inventories to be relatively high, reflecting the “loose” balance between supply and demand. But, if supplies are low relative to demand, one would expect inventories to be relatively low, signaling a “tight” balance. For most of the year, inventories across the board have been relatively low, and this has been reflected in WTI prices at or above $30 per barrel for much of the year. But the jump above $33 per barrel may have surprised some analysts, renewing talk of a significant “uncertainty premium.” Today’s data, showing an increase in U.S. commercial crude oil inventories of 2.9 million barrels between November 7 and November 14, may make the latest price increase even more surprising to some. However, there are some clues to be found in the data if it is examined more closely.

First, the increase in U.S. crude oil inventories last week was almost entirely on the West Coast, a region that is relatively isolated from the rest of the country’s petroleum infrastructure, and was seemingly the result of a huge surge in crude oil imports, largely concentrated on the West Coast. Crude oil inventories in PADD 2 (the region where Cushing, OK, the main delivery point for WTI spot contracts, is located) dropped below the key level of 60 million barrels. Inventories in PADD 3 (the largest refining region in the world), also fell slightly and remain in the lower half of the normal range. So, while U.S. crude oil inventories increased nationally, regions east of the Rockies saw a continuation of recent declines, anticipated by some to continue through the end of the year.

Additionally, gasoline inventories, which have been at or below the lower end of the normal range all year (see Figure 4 in the Weekly Petroleum Status Report) continue to remain relatively low, especially in the context of continued surprisingly strong demand growth in the United States. Averaged over the last four weeks, gasoline demand has been over 9.2 million barrels per day, or 4.7 percent above the same four-week period a year ago. And this follows September and October, months which also exhibited strong growth in gasoline demand relative to comparable year-ago levels. While retail gasoline prices continued their recent decline this week, falling slightly under $1.50 per gallon on average, the hike in crude oil, and now gasoline spot and futures prices, may bring this decline to an abrupt end in the next week or two.

Of course, a lot of the focus this time of the year centers on distillate fuel, of which heating oil is a major component. While distillate fuel inventories have been around the middle of the normal range in recent weeks, they have dropped in each of the last three weeks, signaling perhaps an early start to the winter draw in inventories. Did distillate fuel inventories peak at 134 million barrels on October 24? Perhaps, but weather over the next few weeks could alter this assessment.

In conclusion, petroleum markets, particularly those here in the United States (and to some extent Europe as well), are relatively tight, especially for crude oil and gasoline. With inventories already relatively low, market participants have become anxious recently about the availability of supplies. OPEC ministers talking about possibly cutting production further when they meet again on December 4 can shake up a market already nervous over geopolitical events reported daily in Nigeria, Venezuela, Saudi Arabia, and Iraq, all key U.S. suppliers. Reports of refinery problems or other infrastructure issues have a larger impact on prices when inventories are low, and reports of reduced crude oil shipments from West Africa, while not apparent in U.S. import data yet, can also help to “spook” the market. With crude oil inventories remaining well below 300 million barrels, product inventories at a substantial deficit to normal, and with some market participants seemingly anticipating a further expansion of that inventory deficit, $30 oil prices may not be that surprising. Indeed, given such market conditions, it might not take much to push prices even higher. But whether this is temporary or the start of a bumpy ride this winter has yet to be determined.

U.S. Retail Gasoline Price Slips Under $1.50
The U.S. average retail price for regular gasoline fell last week by 0.7 cent per gallon as of November 17 to reach 149.7 cents per gallon, which is 8.8 cents per gallon higher than a year ago. This is the eleventh time in twelve weeks that the national average retail price has fallen, and the first time since July 7 that the U.S. average retail price for regular gasoline has been below $1.50 per gallon. Retail regular gasoline prices were down throughout most of the country last week, with the West Coast seeing a decrease of 0.1 cent per gallon to hit 166.1 cents per gallon. California prices averaged 168.1 cents per gallon after falling 0.4 cent this past week. The Midwest and Rocky Mountains had the largest PADD-level price decreases, falling 1.3 cents to hit 145.1 cents per gallon and 154.2 cents per gallon, respectively. New England saw a decrease of 2.5 cents to hit 156.4 cents per gallon.

Retail diesel fuel prices rose after three previous weeks of falling prices, increasing by 0.5 cent per gallon as of November 17 to a national average of 148.1 cents per gallon, which is 7.6 cents per gallon higher than a year ago. Retail diesel prices were up throughout most of the country last week, with the Midwest seeing the only price decrease of 0.2 cent to reach 146.5 cents per gallon. The West Coast saw the largest price increase, 1.7 cents to hit 159.6 cents per gallon.

Residential Heating Oil and Propane Prices See Slight Increases
Residential heating oil prices increased slightly during the period ending November 17, 2003. The average residential heating oil price was 140.0 cents per gallon, an increase of 1.4 cents from last week and 12.8 cents higher than this time last year. Wholesale heating oil prices stood at 90.8 cents per gallon, an increase of 3.3 cents from the previous week and an increase of 13.2 cents from last year.

The average residential propane price rose 0.3 cent to 133.0 cents per gallon. This was an increase of 16.9 cents over propane prices for this same time last year. Wholesale propane prices decreased 0.3 cent per gallon, from 63.9 to 63.6 cents per gallon. This was an increase of 10.8 cents from the November 18, 2002 price of 52.8 cents per gallon.

Weekly Propane Inventories Continue Lower
U.S. inventories of propane continued lower last week with a nearly 0.7-million-barrel decline that pushed stocks down to an estimated 65.0 million barrels as of November 14, 2003. Last week's drop in inventories follows on the heels of the prior week's hefty decline that when combined, shows a loss totaling more than 1.8 million barrels during the first half of the month. This level matches the stockdraw averaged for the entire month of November over the most recent 5-year period, possibly hinting that the overall November draw will most likely be above average. The Gulf Coast continued to post the largest drop in inventories last week with a 0.8-million-barrel decline, followed with a nearly 0.3-million-barrel loss in the Midwest during this same period. But surprisingly, the East Coast reported a nearly 0.5-million-barrel gain during this same period, the result of the lag in reporting inventories from a waterborne import into the New England region several weeks earlier. With last week's gain, inventories in the East Coast moved to a position that was well within the average range for this period. Propylene non-fuel use inventories edged lower by nearly 0.2 million barrels last week to 1.9 million barrels, accounting for a smaller 3.0 percent share of total propane/propylene inventories from the prior week's share.

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