Released on January 28, 2004
(Next Release on February 4, 2004)

Weathering the Storm . . . but at a Price
Following the rather lackluster weather experienced over much of the nation during the first half of the heating season, weather predictions for the second half are in stark contrast, with some forecasters calling for some of the coldest weather in many years. But will heating fuel inventories, particularly for distillate fuel oil (used for both heating oil and diesel fuel) and propane remain at adequate levels during this period? The answer to this question is, most likely, yes, but at higher prices compared with last year.

Despite the frequent artic air masses that swept over many portions of the Midwest and East Coast during January, heating fuel markets are poised to enter the last leg of the heating season with inventories that remain well positioned within their respective average ranges for this time of year. Even if the cold weather persists in February and heating oil and propane inventories report sharp declines over the next several weeks, the general consensus among industry observers is that stocks are high enough that even significant draws ahead will have overall levels sufficient to meet winter requirements. As of January 23, 2004, total distillate fuel inventories stood at a reasonably comfortable 131.0 million barrels, a level that was both higher than the ending January 2003 level and the average level over the most recent 5-year period from 1999 through 2003. Moreover, high-sulfur distillate fuel, or heating oil, along the East Coast where most of the nation's heating oil is consumed, posted an ending inventory of 30.8 million barrels during this same time, a level above the 5-year average, as well as, above the January 2003 ending level. Likewise, propane inventories in the Midwest, where propane is used predominantly for heating purposes, were 2.3 million barrels above the 5-year average and 4.0 million barrels above the year-ago level, as of January 23.

But as petroleum industry concerns slowly ease on inventory levels, the spotlight remains on petroleum product prices, which have sustained price strength during most of the heating season. For instance, residential heating oil prices on the East Coast have maintained a premium exceeding 11 cents per gallon for each month since the beginning of the heating season, compared with the same period last year. During this same period, residential propane prices in the Midwest have maintained a monthly premium of more than 15 cents per gallon, compared with the same year-ago period. Although residential heating oil and propane prices are closely following crude oil and natural gas price trends, their sustained strength appears additionally supported by anxiety over continued frigid weather in the Northeast and Midwest regions. Furthermore, low crude oil inventories and high natural gas prices have also weighed heavily on market sentiment in recent weeks. While refiners try to balance their crude inputs against tight crude oil markets in the face of reasonably strong product demand for heating oil and other petroleum products including gasoline, gas processors in some areas of East Texas and South Louisiana are operating at reduced rates because of unprofitable margins due to high natural gas prices. Thus, a key factor for the continuation of high heating fuel prices will largely depend on how frigid the temperatures are during the remainder of the heating season.

U.S. Retail Average Gasoline Price Increases by Almost 3 Cents
The U.S. average retail price for regular gasoline rose last week by 2.7 cents per gallon as of January 26 to reach 162.2 cents per gallon, which is 14.9 cents per gallon higher than a year ago. Retail prices have increased 14.4 cents since December 29, 2003, and they have not previously been this high since September 22, 2003. Retail regular gasoline prices were up throughout the country last week, with the Midwest seeing the largest increase of 3.7 cents to hit 161.7 cents per gallon. California prices averaged 172.6 cents per gallon after gaining 3.6 cents this past week, and average West Coast prices rose by 3.1 cents to reach 170.3 cents per gallon.

Retail diesel fuel prices increased by 3.2 cents per gallon as of January 26 to a national average of 159.1 cents per gallon, which is 9.9 cents per gallon higher than a year ago. This was the highest retail price since March 31, 2003. Retail diesel prices were up throughout the country last week, with the East Coast and Midwest each seeing the largest PADD level price increase of 3.8 cents to reach 163.6 cents per gallon and 156.4 cents per gallon, respectively. The Lower Atlantic had a price increase of 4.0 cents to hit 157.9 cents per gallon.

Residential Heating Fuel Prices Continue Upward
Residential heating oil prices increased for the period ending January 26, 2004. The average residential heating oil price gained 3.8 cents from last week to reach 162.2 cents per gallon, an increase of 12.5 cents over this time last year. Wholesale heating oil prices increased 4.9 cents to 105.1 cents per gallon, an increase of 7.1 cents compared to the same period last year.

The average residential propane price rose 1.3 cents, increasing to 153.6 cents per gallon. This was an increase of 17.7 cents over the 135.9 cents per gallon average for this same time last year. Wholesale propane prices increased 3.5 cents per gallon, from 76.6 to 80.1 cents per gallon. This was an increase of 10.5 cents from the January 27, 2003 price of 69.6 cents per gallon.

Propane Inventories Plunge Ahead of Frigid Weather
Frigid weather that was expected over the Midwest and East Coast regions contributed to the largest weekly stockdraw in nearly a year, which totaled more than 6.1 million barrels, pushing inventories down to an estimated 36.9 million barrels as of week ending January 23, 2004. Despite last week's stock plunge, U.S. inventories of propane remained within the average range, although the level moved close to the lower limits of the average range for this time of year. More than half of the weekly stockdraw occurred in the Gulf Coast region, which posted a nearly 3.2 million-barrel drop, followed with a 1.9 million-barrel decline in the Midwest region during this same time. Inventories on the East Coast reported a weekly decline that totaled about 0.8 million barrels. While East Coast and Midwest inventories continued to track within their respective average ranges last week, the plunge in Gulf Coast inventories moved the region's inventories below the average range for the first time since April of last year. Propylene non-fuel use inventories fell by more than one million barrels last week to about 0.7 million barrels, a level that accounted for only a 1.9 percent share of total propane/propylene inventories.

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