Released on January 14, 2004
(Next Release on January 22, 2004)

Reliving the Past
While much of Washington, D.C. has been reliving past glories with the announcement that Joe Gibbs will once again coach the Washington Redskins, gasoline consumers may not need to take such a distant view to get a glimpse of what the coming spring may bring with regard to gasoline prices

With last week’s nickel jump, the average retail price for regular gasoline in the United States climbed to $1.56 per gallon as of January 12. At this level, it represents the highest average price (not accounting for inflation) for January since EIA has been collecting weekly gasoline prices (dating back to August 1990). This continues a pattern seen for much of the last year, and largely stems from very high crude oil prices over this period. With the price of West Texas Intermediate (WTI) crude oil flirting with $35 per barrel in recent days, some analysts have speculated on what this might portend for the spring, when gasoline prices usually rise as demand increases. EIA’s Short-Term Energy Outlook – January 2004, which was released a week ago, forecast a monthly average retail price of about $1.57 for April and May. However, this forecast assumes a WTI price of about $30 per barrel, or about $4 to $5 per barrel less than it is today, along with essentially normal weather. If crude oil price changes are completely passed through to the pump, retail gasoline prices rise about 2.4 cents per gallon for every $1 increase in crude oil prices. Thus, one could add another 10-12 cents per gallon on top of EIA’s forecast for retail gasoline prices in April and May, should WTI prices remain at current levels. This would put average prices close to the high levels seen last March and August. Clearly, the price of crude oil can have a significant impact on what consumers will pay for gasoline in coming weeks.

But on top of crude prices, there are other factors that may influence gasoline prices this spring. Should cold weather persist for most of the winter, refiners may need to continue refining distillate fuel to a larger degree than they would otherwise, which may come at the expense of incremental gasoline production. Of course, refiners could make more of both distillate fuel and gasoline by refining more crude oil, but with commercial crude oil inventories at their lowest level since 1975, any increase in refinery throughput will need to come from imports. But it is unclear whether an increase in imports is close at hand or is still weeks away from arriving. Additionally, some refiners have already made plans to take down some of their units for planned maintenance over the next month or two, and as a result, it may be difficult to increase refinery throughput much above current levels over the next several weeks. Another factor that may influence gasoline prices this spring is the transition to ethanol-based summer-grade reformulated gasoline sold in New York and Connecticut. These states have banned the use of MTBE, a gasoline additive previously used in gasoline sold in those states. There is some uncertainty over how smooth this transition will be, especially in making the cleaner summer-grade gasoline. Gasoline terminal operators are required to have only summer-grade gasoline available beginning on May 1, meaning that many refiners begin processing summer-grade gasoline in late March and early April so that terminal operators will have time to meet their requirements. This uncertainty has the potential of making gasoline traders a little nervous, and when traders are nervous the potential exists for higher prices, at least in the short-term. Some of this uncertainty can be seen in March and April futures price spreads, which for some time have displayed a wider premium than customary.

Of course, there are many scenarios that would prevent a repeat of last year’s temporary price spikes. A decline in crude oil prices, as winter pressures ease, would go a long way in reducing the potential for high gasoline prices this spring. An increase in OPEC production or a sustained bout of warm weather in key regions are just two other ways in which crude oil prices could decline. Should the New York and Connecticut transitions to summer-grade gasoline go smoothly, one would also expect a reduction in the potential for high gasoline prices. With still months to go before the spring gasoline season begins in earnest, it is far too early to know with any degree of certainty how high gasoline prices might climb. But unlike Washington Redskins fans, who are harkening back to the glory days of the 1980s and early 1990s, gasoline consumers are hoping that last year’s history doesn’t repeat itself.

U.S. Crude Oil and Distillate Fuel Inventories
There is likely to be some surprise that distillate fuel inventories increased between January 2 and January 9, while crude oil inventories, which as of January 2 were already at their lowest level since the fall of 1975, dropped another 5 million barrels this past week. At 264 million barrels, they are 6 million barrels below the Lower Operational Inventory (LOI) level defined in 1998. However, with improvements in refinery operations, as well as a reduction in refineries since then, it makes sense that the LOI level is actually somewhat lower than 270 million barrels. However, regardless of what the “real” LOI level is, the fact remains that crude oil inventories are historically low, and this limits refiner’s flexibility or capacity to immediately boost operating levels and the production of key refined products to meet demand. In turn, this limits immediate distribution of products to areas where demand pressures may exist, thus raising the potential for price volatility.

The increase in distillate fuel inventories may be more surprising, in that the Northeast and mid-Atlantic did begin to feel the effects of cold weather last week. But the cold weather did not really hit until Tuesday evening (January 6), leaving little time to actually impact primary storage data for the week ending January 9.

U.S. Retail Average Gasoline Price Climbs 5 Cents
The U.S. average retail price for regular gasoline rose last week by 5.0 cents per gallon as of January 12 to reach 156.0 cents per gallon, which is 10.6 cents per gallon higher than a year ago. Retail prices haven’t been this high since October 20, 2003, and this is the largest one-week run-up since August 25. Retail regular gasoline prices were up throughout the country last week, with the Lower Atlantic seeing the largest increase of 8.0 cents to hit 155.1 cents per gallon. California prices averaged 166.7 cents per gallon after gaining 5.0 cents this past week, and average West Coast prices rose by 4.6 cents to reach 164.5 cents per gallon.

Retail diesel fuel prices jumped up 4.8 cents per gallon as of January 12 to a national average of 155.1 cents per gallon, which is 7.3 cents per gallon higher than a year ago. This was the largest single week price increase since the week ending February 10, 2003 and the highest retail price since April 7, 2003. Retail diesel prices were up throughout the country last week, with the Lower Atlantic seeing a price increase of 7.2 cents to reach 153.0 cents per gallon while the East Coast as a whole saw a price increase of 6.4 cents to 158.3 cents per gallon.

Residential Heating Fuel Prices Rise Sharply
Residential heating oil prices rose significantly for the period ending January 12, 2004. The average residential heating oil price gained 6.2 cents from last week to reach 156.0 cents per gallon, an increase of 12.9 cents over this time last year. Wholesale heating oil prices increased 8.5 cents to 102.1 cents per gallon, an increase of 13.6 cents compared to the same period last year.

The average residential propane price gained 6.9 cents, increasing to 149.7 cents per gallon. This was an increase of 22.1 cents over the 127.6 cents per gallon average for this same time last year. Wholesale propane prices increased 12.6 cents per gallon, from 72.6 to 85.2 cents per gallon. This was an increase of 23.2 cents from the January 13, 2003 price of 62.0 cents per gallon.

Cold Weather Pushes Propane Inventories Lower
Just as propane markets enter the coldest period of the heating season, U.S. inventories of propane reflected this with a weekly draw that totaled nearly 3.0 million barrels, pushing inventories down to an estimated 46.7 million barrels as of January 9, 2004. Moreover, declines in both production and imports last week also contributed to the strong weekly stockdraw as primary stockholders relied more on inventories to meet strong winter demand for propane. While the decline in imports most likely only reflected the fluctuating pattern that is typical for this source of supply, the drop in production, on the other hand, may be the beginning of "ethane rejection," where gas processors reduce their production of ethane and other natural gas liquids including propane, as a consequence of high natural gas prices. Regional inventories continued sharply down in the Gulf Coast last week with a 1.7-million-barrel drop, followed with a 0.7-million-barrel decline in the Midwest. During this same period, East Coast inventories reported a weekly drop measuring 0.4 million barrels. Propylene non-fuel use inventories inched slightly lower to about 2.0 million barrels from a previous weekly level of nearly 2.1 million barrels, although its share to total propane/propylene inventories increased slightly to 4.3 percent.

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