Released on February 11, 2004
(Next Release on February 19, 2004)

The Importance of Timing
Yesterday, OPEC announced that member countries would make a strong commitment to adhere to current production quotas through March. (EIA estimates that current OPEC-10 (OPEC excluding Iraq) production exceeds their quota by about 1.5 million barrels per day). In addition, OPEC agreed to reduce quotas by 1 million barrels per day beginning April 1. However, news reports this morning seem to indicate that OPEC may reconsider the April 1 cut should global demand continue to be strong enough to keep prices from falling significantly. The somewhat surprising announcement by OPEC yesterday coincided with EIA’s monthly release of the Short-Term Energy Outlook (STEO). Naturally, there has been a lot of interest in how OPEC’s announcement might change our just-released STEO.

The STEO, developed prior to the OPEC announcement, had already incorporated an expectation that OPEC production by the end of March would be almost 1.5 million barrels per day lower than its January average level. Of course, there is always considerable uncertainty regarding quota adherence and actual production.

The EIA forecast shows that OECD inventories are expected to remain at the lower limit of the typical band throughout the year, which is consistent with WTI prices staying in the high $20s to low $30s throughout 2004. EIA analysis of oil markets has consistently pointed to oil prices remaining firm, at least in the short-term.

The major impact of yesterday’s OPEC announcement could be on the current speculative influence in the market. The current crude prices may reflect a significant amount of speculative price pressure. This influence could extend for weeks, or even several months, longer than otherwise would be the case. This could result in slightly higher crude oil prices in the near term than shown in the current STEO, even if the EIA projection on global supply and demand was accurate. The chart below shows the net position of non-commercial players in the NYMEX market juxtaposed against the weekly average near-month futures price of West Texas Intermediate (WTI). As can be seen, when large net long positions are liquidated, prices generally fall significantly. Delaying this change in position may enable OPEC to reap a higher price than might be indicated based on fundamentals alone. Of course, ultimately, these positions will be liquidated; it is just a matter of when that might occur. But for OPEC, the timing may be important.

Net Position of Non-Commercial Participants in NYMEX WTI Futures Contracts Since 2002

U.S. Retail Average Gasoline Price Gains Two Cents
The U.S. average retail price for regular gasoline increased last week by 2.2 cents per gallon as of February 9 to reach 163.8 cents per gallon, which is 3.1 cents per gallon higher than a year ago. Retail regular gasoline prices were up throughout most of the country last week, with the Midwest increasing 4.0 cents to hit 161.9 cents per gallon. California prices averaged 182.1 cents per gallon after gaining 6.8 cents this past week, and average West Coast prices rose by 5.1 cents to reach 177.6 cents per gallon.

Retail diesel fuel prices decreased by 1.3 cents per gallon as of February 9 to a national average of 156.8 cents per gallon, which is 9.4 cents per gallon lower than a year ago. Retail diesel prices were mixed throughout the country last week, with prices surging upwards on the West Coast, gaining 8.8 cents to hit 174.1 cents per gallon. California saw a large increase of 11.4 cents to reach 181.0 cents per gallon. The East Coast saw a price decrease of 2.7 cents to hit 159.5 cents per gallon, which is 12.1 cents lower than last year.

Residential Heating Fuel Prices Decrease
Residential heating oil prices decreased for the period ending February 9, 2004. The average residential heating oil price fell 1.0 cent from last week to reach 161.5 cents per gallon, a decrease of 10.1 cents from this time last year. Wholesale heating oil prices decreased 4.2 cents to 92.6 cents per gallon, a decrease of 29.5 cents compared to the same period last year.

The average residential propane price dropped 0.1 cent, decreasing to 153.6 cents per gallon. This was an increase of 5.3 cents over the 148.3 cents per gallon average for this same time last year. Wholesale propane prices decreased 3.3 cents per gallon, from 75.2 cents to 71.9 cents per gallon. This was a decrease of 13.2 cents from the February 10, 2003 price of 85.1 cents per gallon.

Propane Inventories Post Sharp Weekly Decline
Persistent cold weather last week continued to pressure the nation's primary supply of propane sharply lower with a weekly stockdraw that measured 3.3 million barrels, leaving U.S. inventories of propane at an estimated 30.6 million barrels as of February 6, 2004. Although last week's sizeable drop in inventories was not unusual for this time of year, the weekly draw did account for about 45 percent of the total average draw for February over the most recent 5-year period. A strong regional decline continued in the Midwest, where propane inventories fell by 2.5 million barrels, a level that accounted for about three-fourths of the total weekly decline in inventories. East Coast inventories were also drawn down sharply last week with a stock draw nearing 0.5 million barrels, followed by a Gulf Coast draw that totaled less than 0.2 million barrels last week. Although Gulf Coast inventories typically play a much larger role in propane supply this time of year, the large drops in inventories earlier in the winter heating season have left inventories in this region approaching historical lows. But with only several more weeks of possible cold weather ahead, the low inventory levels in this region may be sufficient to last the remainder of the heating season, depending on the severity of the weather over this time. Propylene non-fuel use inventories grew by 0.4 million barrels last week to nearly 1.1 million barrels, a level that accounted for a 3.6 percent share of total propane/propylene inventories.

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