Released on December 10, 2003
(Next Release on December 17, 2003)

A Matter of Balance
Demand for certain petroleum products generally follows well established seasonal and cyclical trends that are dependent on a variety of factors including weather, and the level of economic activity as measured by gross domestic product (GDP). For instance, gasoline demand typically rises during the spring and summer months with peak demand occurring sometime between the Memorial Day and Labor Day holidays, while demand for distillate fuel oil (used for both heating oil and diesel fuel) and propane normally peak during the cold winter months of December, January or February. But occasionally seasonal factors that affect demand for these products can overlap cyclical trends that may cause temporary imbalances as well as rebalances within normal supply/demand patterns.

For example, gasoline demand through November 2003 followed a pattern that was somewhat different from seasonal trends exhibited over recent years. During the first half of the year, gasoline demand was nearly flat compared with the same period last year, as the harsh winter was followed by an unusually rainy spring, essentially dampening demand during this period. The rather lackluster level of gasoline demand was occurring despite positive signs of a recovering U.S. economy, which posted a GDP growth rate measuring 3.3 percent during the second quarter of 2003. During the peak summer driving season, GDP growth more than doubled to an 8.2 percent annual rate during the third quarter that contributed to strong gasoline demand growth during the period. However, following the Labor Day holiday when gasoline demand typically falls off as the summer driving season comes to a close, gasoline demand continued unseasonably robust through November 2003. In fact, gasoline demand posted seasonal records for the months of October and November, as warmer-than-normal temperatures and continuing very strong U.S. economic activity combined to boost gasoline demand beyond the traditional summer driving season well into the beginning of the heating season. This unseasonably high level of gasoline demand had led to a further deterioration in the balance of gasoline supply that shows total gasoline inventories continuing on a path that is near the bottom of the average range. As a result, total gasoline inventories remain at their lowest level for November since 1996.

Just as the mild fall weather has contributed to strong gasoline demand, it also contributed to the partial rebalancing of inventories of distillate fuel oil and propane. Following the harsh winter a year ago, inventories for both distillate fuel oil and propane stood at comparatively low levels by the end of the heating season in March 2003. With distillate fuel oil inventories at a three-year low of less than 99 million barrels, propane inventories were hovering at their lowest level since 1970 at 21.6 million barrels prior to the start of the traditional build season that lasts from April through September. But with relatively weak gasoline demand during the first half of the year, refiners apparently began to shift their attention away from maximizing gasoline production in favor of distillate fuel oil in an attempt to get a jump start on replenishing stockpiles of distillate fuel oil in time for next winter. While this scenario contributed to significantly boost distillate fuel oil supply during this period, low inventories in some of the primary heating regions in the East Coast remained a concern as recently as the beginning of the heating season. But mild weather during October and November over the East Coast had the effect of forestalling some level of distillate fuel oil demand, which helped to rebalance distillate fuel oil inventories, particularly in the East Coast where most of the nation’s heating oil consumers are located. Likewise, propane inventories benefited from the mild fall weather and lack of any significant demand for grain drying that helped propel Midwest inventories from a path that had tracked below the average range since the end of the heating season in March 2003, to a level well within the average range as of the week ending December 5, 2003. Moreover, by the end of October 2003, Midwest propane inventories had moved above the prior year level for the first time since July 2002. Nevertheless, inventories of both distillate fuel oil and propane have shown some measure of improvement, reflecting an improved balance of supply and demand by the end of November that was not apparent just a few months ago. However, the longer-term outlook for these petroleum fuels may once again fall out of balance as evidenced by last week’s severe snow storm over most of the East Coast, coupled with the surprisingly sharp 6.4-million-barrel drop in U.S. commercial crude oil inventories during this same period.

U.S. Retail Gasoline Price Declines by 1.4 Cents
The U.S. average retail price for regular gasoline fell last week by 1.4 cents per gallon as of December 8 to reach 147.6 cents per gallon, which is 11.6 cents per gallon higher than a year ago. Retail regular gasoline prices were down throughout the country last week, with the West Coast seeing the largest PADD level decrease of 2.6 cents per gallon to hit 163.0 cents per gallon. California prices averaged 165.2 cents per gallon after losing 2.8 cents this past week.

Retail diesel fuel prices rose 0.5 cent per gallon as of December 8 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 mostly up throughout the country last week, with New England seeing a price increase of 0.1 cent to reach 160.6 cents per gallon and California seeing a price increase of 3.5 cents to reach 169.5 cents per gallon. The West Coast as a whole also saw an increase of 3.0 cents to hit 163.5 cents per gallon. The only region seeing a decrease was the Rocky Mountains, falling by 0.7 cent to 152.8 cents per gallon.

Residential Heating Oil and Propane Prices Continue to Rise
Residential heating oil prices increased once more for the period ending December 8, 2003. The average residential heating oil price gained 1.4 cents from last week to reach 142.7 cents per gallon, an increase of 12.8 cents over this time last year. Wholesale heating oil prices increased 2.9 cents to reach 89.1 cents per gallon, an increase of 10.8 cents compared to the same period last year.

The average residential propane price gained 1.1 cents, increasing to 135.2 cents per gallon. This was an increase of 16.4 cents over the 118.8 cent average for this same time last year. Wholesale propane prices increased 4.7 cents per gallon, from 62.9 to 67.6 cents per gallon. This was an increase of 11.6 cents from the December 9, 2002 price of 56.0 cents per gallon.

Propane Inventories Sharply Lower
Coinciding with the first major East Coast snow storm of the season, U.S. inventories of propane plunged nearly 2.3 million barrels to end the week of December 5, 2003 at an estimated 61.9 million barrels. Last week’s drop in inventories was the largest of the season so far and was the steepest decline in inventories since late last winter. Despite last week’s sharp decline, U.S. inventories of propane remain near the upper level of the average range for this time of year. While Midwest and Gulf Coast inventories reported weekly declines totaling 0.5 million barrels and 1.7 million barrels, respectively, inventories on the East Coast rose for the second week with a 0.1 million-barrel build. Strong waterborne imports into the East Coast during the past two weeks have acted to buoy inventories in the region following the recent onslaught of colder weather. Nevertheless, regional inventories in the East Coast, Midwest, and Gulf Coast continued to track within their respective average ranges last week. Propylene non-fuel use inventories remained relatively unchanged last week at 1.6 million barrels, although last week’s drop in total inventories of propane/propylene caused its share to inch up to 2.6 percent from the prior week’s share of 2.5 percent.

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