Released on October 6, 2004
(Next Release on October 14, 2004)

Watching The Wild Cards
As Major League Baseball begins its playoff season, some baseball experts are predicting a promising outlook for the wild card teams, the Boston Red Sox and the Houston Astros. But in oil markets, “wild cards” tend to represent things that can significantly move prices. Today, there are many such “wild cards” people have focused on. But what has increased the effect these “wild cards” have on oil prices is the tightness in global oil markets, characterized by relatively low inventories and extremely low spare crude oil production capacity.

Given the current tight global oil market, any hiccup in oil supplies, whether real or perceived, can have an exaggerated impact on oil prices. These events can come in the form of natural disasters (e.g., hurricanes), infrastructure problems (e.g., refinery or pipeline outages), or supply disruptions overseas, which sometimes result from political situations.

There are many political situations in the world that have the potential to affect, or have already affected oil prices at one time or another. A partial list of these would include: problems associated with the alleged back taxes owed by Yukos, a major Russian oil firm; turmoil in the Delta region in Nigeria; the instability related to Iraqi infrastructure; continuing concerns over the lack of oil sector investment in Venezuela from President Chavez’ administration; and concerns over the potential of escalating tensions in Iran regarding their nuclear capability.

Of course, many of these factors would have a relatively minor impact were there more spare production capacity available and/or inventories globally were at much higher levels. However, with global demand increasing this year enough such that it has now nearly matched global production capacity, leaving less than 1 million barrels per day of excess production capacity worldwide, there is little flexibility inherent in oil markets to respond to even minor supply disruptions. In addition, measured inventories remain below average levels in many major consuming countries, and have not built sufficiently this summer to change this equation, removing another cushion that could otherwise be relied upon should there be a surge in demand or a disruption in supplies, either from political factors or some other event. Thus, while political factors can influence oil prices in the near term, it is the very tight balance between global demand and supply that increases the effect these factors have on oil prices. Without the tight balance resulting from the fundamentals of supply and demand, these other events would not loom as large.

Absent an unexpected resolution of concerns regarding the major “wild cards” now on the table, a change in the present tight balance between oil supply and demand, leading to higher inventories, would be needed to bring prices significantly lower. Hopefully, the path to lower oil prices will not require as tectonic a shift as baseball returning to Washington, DC following an absence of 33 years! But it does look like it will take many months to get prices below $40 per barrel again, on a sustained basis.

Heating Fuel Price Survey Begins
Beginning this week and continuing into March 2005, prices for wholesale and residential heating oil and propane will be included in This Week In Petroleum as well as in the Weekly Petroleum Status Report and on EIA's Heating Oil and Propane Update web page. As of October 4, residential heating oil prices averaged 182.4 cents per gallon, which is 48.0 cents per gallon higher than last year at this time. Meanwhile, wholesale heating oil prices averaged 144.7 cents per gallon, an increase of 56.4 cents over the same period last year. Residential propane prices averaged 156.2 cents per gallon, which is 28.0 cents higher than one year ago. Wholesale propane prices averaged 90.7 cents per gallon as of October 4. This was an increase of 25.6 cents from same period last year.

Retail Gasoline Prices Gain 2 Cents
The U.S. average retail price for regular gasoline rose by 2.1 cents per gallon from the previous week to reach 193.8 cents per gallon as of October 4, 36.5 cents higher than this time last year. Prices were up throughout most of the country, with the West Coast region seeing the largest increase of 8.0 cents to 214.6 cents per gallon. Retail prices in the Midwest actually fell 1.2 cents to reach 189.4 cents per gallon, which is 39.2 cents higher than last year. Prices in California grew 10.4 cents to 219.8 cents per gallon, which is 34.4 cents higher than this time last year.

Retail diesel fuel prices rose by 4.1 cents this week to a national average of 205.3 cents per gallon, which is 60.8 cents per gallon higher than a year ago. Retail diesel prices are reflecting not only the rise in crude oil prices, but also, pressure from strong demand and high spot prices for heating oil. Prices were up throughout the country, with the West Coast seeing the largest increase of 6.9 cents to reach 223.8 cents per gallon. California prices remained the highest, rising 5.4 cents to average 229.0 cents per gallon.

Propane Build Sets September Record
U.S. inventories of propane gained a record 8.6 million barrels during September 2004, shattering the previous monthly record set during September 1970 that totaled 4.6 million barrels. Following last week’s 1.0-million-barrel gain, the nation’s primary supply of propane stood at an estimated 68.3 million barrels as of October 1, a level 5.8 million barrels above the same period last year. Moreover, the record September build also contributed to the above average seasonal build (April through September) that totaled more than 40 million barrels, compared with the most recent 5-year average build of 35.1 million barrels. With U.S. inventories near the upper boundary of the average range for this time of year, the propane industry has begun to build a small but important cushion prior to the start of the next heating season. Regional inventories were mostly higher, except on the East Coast that reported a weekly decline of 0.2 million barrels. Gulf Coast inventories continued to lead with a 0.7-million-barrel increase, followed by the Midwest region that reported a weekly gain of 0.5 million barrels. The combined Rocky Mountain/West Coast region pushed higher by 0.2 million barrels during this same period. Propylene non-fuel use inventories inched up by 0.1 million barrels last week to 2.3 million barrels, accounting for a slightly higher 3.4 percent share of total propane/propylene inventories, compared with the prior week’s 3.3 percent share.

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