Released on January 22, 2004
(Next Release on January 28, 2004)

Uncharted Territory
At the same time an unmanned vehicle is charting a new frontier on Mars, so, too, are oil market analysts and traders moving across uncharted territory. Although the high oil prices may remind many of the oil market a year ago, there are some significant differences that distinguish markets now from markets in early 2003.

Of course the largest difference is that there is no significant loss of supply, either globally or locally into the United States, like we had last year when a strike by Venezuelan oil workers drastically reduced production and exports from that country. Over the last four-week period, crude oil imports into the United States have averaged nearly 9.6 million barrels per day, much more than the 8.6 million barrels per day averaged over the same four-week period a year ago. Yet, even with more imports, U.S. commercial crude oil inventories (excluding the Strategic Petroleum Reserve) are over 10 million barrels less than last year’s low level and remain near 28-plus year lows. The main reason for this apparent disconnect (i.e., higher imports but lower inventories) is an increase in demand, or in the case of crude oil, inputs to refineries. While it is true that product demand over the last four weeks has averaged 1.6 percent less than the same period a year ago, crude oil demand, defined as the amount of crude oil used in refineries, is actually up 532,000 barrels per day, or 3.6 percent. Put another way, over the last four weeks, 14.9 million more crude oil barrels have been used by refineries compared to the same period a year ago. This explains more than the difference between inventories and also helps explain another significant difference in oil markets between this year and a year ago.

Distillate fuel inventories are 12 million barrels higher now than they were a year ago, with more than half of this difference in high-sulfur distillate fuel (heating oil). With refineries using more crude oil and emphasizing distillate fuel production, a lot of the extra production has ended up in inventories, as the cold weather is only now beginning to draw down primary inventories. In previous weeks, consumers were able to use inventories from secondary and tertiary levels during the initial stage of the cold weather experienced this month in parts of the country that use a lot of heating oil, but now that the cold weather has remained for a couple of weeks, we will likely see a draw in primary storage levels as the secondary and tertiary levels are replenished. Data for the week ending January 16 indicate that this may have begun already, with distillate fuel inventories down 2.8 million barrels. And while it would take more than two or three weeks of significant draws in inventories to bring distillate fuel inventories to levels near the bottom end of the average range, for now, distillate fuel inventories are at much more comfortable levels than they were a year ago.

Yet, as noted, crude oil, gasoline, and heating oil prices remain close to year-ago levels. At that time, the situation in Venezuela dominated the oil market headlines (see January 2, 2003, This Week In Petroleum for an example). While the disruption in supplies was a shock to the oil market, the feeling was that at some point Venezuelan production would begin to increase and the crisis would dissipate. But this year, it is difficult to see what might turn the market around, other than warmer temperatures. Thus, non-commercial participants in the WTI futures markets, unlike last year, continue to hold very high net long positions (a long position is taken when a trader feels prices will go higher), even as oil prices go above $35 per barrel. With OPEC’s next ministerial meeting now about three weeks away, it is unclear when traders may begin to sense a fall in prices and liquidate their positions. For now, oil markets remain in uncharted territory, and as a result, it may be some time before oil consumers begin to experience lower prices.

U.S. Retail Average Gasoline Price Climbs 3.5 Cents
The U.S. average retail price for regular gasoline rose last week by 3.5 cents per gallon as of January 19 to reach 159.5 cents per gallon, which is 13.6 cents per gallon higher than a year ago. Retail prices have increased 11.7 cents since December 29, 2003, and they have not previously been this high since September 2 2, 2003. Retail regular gasoline prices were up throughout the country last week, with the Central Atlantic seeing the largest increase of 4.3 cents to hit 162.9 cents per gallon. California prices averaged 169.0 cents per gallon after gaining 2.3 cents this past week, and average West Coast prices rose by 2.7 cents to reach 167.2 cents per gallon.

Retail diesel fuel prices inched up 0.8 cent per gallon as of January 19 to a national average of 155.9 cents per gallon, which is 7.9 cents per gallon higher than a year ago. This was the highest retail price since March 31, 2003. Retail diesel prices were up throughout most of the country last week, with New England seeing the largest price increase of 3.5 cents to reach 174.8 cents per gallon while the East Coast as a whole saw a price increase of 1.5 cents to 159.8 cents per gallon. The West Coast saw prices drop by 0.9 cent to 163.2 cents per gallon, with prices in California also falling by 0.8 cent to 167.2 cents per gallon.

Residential Heating Fuel Prices Continue Upward
Residential heating oil prices increased for the period ending January 19, 2004. The average residential heating oil price gained 2.5 cents from last week to reach 158.7 cents per gallon, an increase of 13.4 cents over this time last year. Wholesale heating oil prices decreased 1.9 cents to 100.2 cents per gallon, an increase of 9.1 cents compared to the same period last year. The average residential propane price rose 2.5 cents as well, increasing to 152.2 cents per gallon. This was an increase of 19.6 cents over the 132.6 cents per gallon average for this same time last year. Wholesale propane prices decreased 8.6 cents per gallon, from 85.2 cents to 76.6 cents per gallon. This was an increase of 8.4 cents from the January 20, 2003 price of 68.2 cents per gallon.

Propane Inventories Decline as Cold Weather Continues
Cold weather contributed to trimming U.S. inventories of propane last week by more than 3.7 million barrels, lowering the nation's primary supply of propane to an estimated 43.0 million barrels as of January 16, 2004. Since the beginning of the month, U.S. inventories of propane have dropped by nearly 7 million barrels, which is about 47 percent of the average monthly draw for January, based on the most recent 5-year period. As such, this draw most likely will fall significantly short of approaching the record 18.7 million-barrel stockdraw recorded during January 2003. Regional stockdraws were relatively proportional among the major consuming areas last week with East Coast inventories reporting a nearly 0.3-million-barrel decline, followed with a 1.6-million-barrel decline in the Gulf Coast, and a nearly 1.7-million-barrel drop in the Midwest. For the third consecutive week, Midwest inventories ended the week above those reported in the Gulf Coast region, marking the first time this has occurred in more than four years. Although Gulf Coast inventories began the heating season more than 13 million barrels above those in the Midwest region, the draw on Midwest inventories since that time has been far below normal, possibly reflecting weak heating demand during this period. Propylene non-fuel use inventories edged lower by 0.2 million barrels last week to about 1.8 million barrels, accounting for a 4.1 percent share of total propane/propylene inventories.

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