Released on October 27, 2004
(Next Release on November 3, 2004)

Still in the Shop
Many of us have brought our cars or trucks into the dealer or auto repair shop to have them worked on to keep them in good condition. While we may not be anxious to see the repair bill, we are looking forward to getting the vehicle back in tip-top condition. This may describe the feeling oil market analysts have regarding the refinery maintenance still taking place in numerous refineries.

Refinery utilization reached nearly 96 percent as recently as the week ending September 10. However, following Hurricane Ivan and the beginning of the fall maintenance season, the average utilization rate has been below 90 percent in each week of the past six weeks. Last fall, maintenance was relatively light and refinery utilization never got below 90 percent in any week, much less six in a row.

Why is the refinery utilization rate deserving of such scrutiny? Simply put, it explains much of the inventory movements for both crude oil and petroleum products in recent weeks, and will also likely explain any upcoming change in these patterns. While 88 or 89 percent capacity utilization would be high for most industries, for refineries, this is a low figure. Utilization rates of almost 97 percent were seen this summer, while during the last three months of 2003, rates as high as 93 or 94 percent were sometimes experienced. When refinery utilization rates are under 90 percent, it generally means that rather than going into refineries, some crude oil is going into inventories. Since September 17, U.S. commercial crude oil inventories have, in fact, increased by 14 million barrels, much more than would typically be expected at this time of year. However, because less crude oil is going into refineries, less petroleum products are being produced. The impact has been seen most visibly the last five weeks in distillate fuel (which includes diesel fuel and heating oil) inventories. Over this period, these inventories have dropped by over 10 million barrels, with most of the decline in diesel fuel, but heating oil inventories have fallen as well. This occurred during a time of the year in which distillate fuel, and particularly heating oil, typically increase prior to the peak winter weather. Of course, the lower inventories are, the less flexibility is inherent in the system to respond to surges in demand due to unusually cold weather or any future supply disruption (perhaps related to frozen waterways). With distillate fuel prices in Europe high enough to discourage extra exports to the United States, even with the record (unadjusted for inflation) near-month futures prices for heating oil in New York, U.S. refinery production will be a key element for distillate fuel supply leading up to the cold weather expected in December and January.

Prices are certainly encouraging refinery production of distillate fuel. The differential between the spot price of heating oil in New York and the spot price of West Texas Intermediate is the largest it has been since March 2003 and the largest for late fall since November 2000, despite WTI prices around $55 per barrel. This means that even with crude oil prices as high as they are, refiners can make money by producing heating oil and selling it into the New York spot market. (New York is a critical market for heating oil as much of the heating oil that will be used in New England and the Central Atlantic states will go through the New York City region at some point.) Clearly, the only reason more distillate fuel is not being produced is that many refineries are still undergoing their routine maintenance. It should be pointed out that if any of this maintenance was discretionary, and could be postponed, it likely would be, with product prices as high as they are. But just as car and truck owners make appointments for their vehicles to go into the shop, so too, do refiners schedule crews to come and work on the refinery ahead of time. If they cancel these maintenance crews at the last minute, it may be some time before these crews can return, so logistics are a critical component during the maintenance season. With refineries keeping their maintenance plans as quiet as possible so as to not add to their competitors’ knowledge, it is difficult to know when we will see refineries getting back to a national utilization rate of 92 percent or more. When that does happen, we are likely to see the petroleum product inventory situation improve, although this may come at the expense of a drawdown in crude oil inventories. But until refinery utilization once again approaches 92 percent or more, oil market analysts and traders will just have to wait for refineries to get “out of the shop” before they can expect to see any significant improvement in distillate fuel inventories.

Residential Heating Fuel Prices Continue to Rise
Residential heating oil prices increased for the period ending October 25, 2004. The average residential heating oil price increased 7.2 cents from last week to reach 206.4 cents per gallon, which is 67.8 cents higher than this time last year. Wholesale heating oil prices increased 4.5 cents to reach 163.9 cents per gallon, an increase of 75.6 cents compared to the same period last year.

The average residential propane price increased 4.6 cents, to 167.2 cents per gallon. This was an increase of 34.7 cents over the 132.5 cents per gallon average for this same time last year. Wholesale propane prices increased 7.3 cents per gallon, from 99.1 to 106.4 cents per gallon. This was a gain of 38.2 cents from the October 27, 2003 price of 68.2 cents per gallon.

Retail Gasoline Prices Hesitate
The U.S. average retail price for regular gasoline fell this week by 0.3 cent per gallon from the previous week to reach 203.2 cents per gallon as of October 25, 49.0 cents higher than this time last year. This small decrease comes after five previous weeks of price increases. Prices were mixed throughout the country, with the Midwest region seeing the largest decrease of 2.2 cents to 196.8 cents per gallon. Retail prices on the East Coast gained 0.8 cent to reach 201.6 cents per gallon, which is 47.1 cents higher than last year. Prices in California fell 0.8 cent to 239.4 cents per gallon, which is 65.7 cents higher than this time last year.

Retail diesel fuel prices rose by 3.2 cents to a record-high national average of 221.2 cents per gallon (unadjusted for inflation) for the sixth week in a row, which is 71.7 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 Rocky Mountains seeing the largest increase of 5.9 cents to reach 227.8 cents per gallon. California prices remained the highest, rising 4.3 cents to average 243.7 cents per gallon.

Propane Inventories Flat
Following a typical October pattern of minor weekly gains and losses, U.S. inventories of propane for the week ending October 22, 2004 remained flat at 68.2 million barrels. With the stockbuilding season essentially over and the onset of colder weather still weeks away, propane inventories over the past several weeks have reflected mostly agricultural and other sector demand during this period. Since the beginning of the month, propane inventories have shown a net loss of only 0.1 million barrels, a level below the most recent 5-year average stock draw for this month of 2.6 million barrels. As a result of the modest stockdraw so far this month, U.S. inventories of propane remain at the upper limit of the average range for this time of year. Regional stock activity last week showed nearly offsetting results of a stockdraw in the Midwest of 0.6 million barrels against a stockbuild in the Gulf Coast that measured 0.5 million barrels. Elsewhere, inventories remained flat in both the East Coast and the combined Rocky Mountain/West Coast regions during this same time. Regional inventories remain either within or above their respective average ranges for this time of year. Propylene non-fuel use inventories rose by 0.1 million barrels last week to 2.4 million barrels, a level that accounts for 3.5 percent of total propane/propylene inventories.

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