Released on December 8, 2004
(Next Release on December 15, 2004)

Fear Factor
Over the past year, many oil market analysts have discussed the impact fear has presumably had on oil prices. Concerns over the availability of summer-grade gasoline with lower sulfur requirements and a ban of MTBE in New York and Connecticut seemingly aided in a gasoline price run-up this past spring. Concerns about actual and possible crude oil supply disruptions in Iraq, Nigeria, Venezuela, Russia, and even in the Gulf of Mexico, have all played some role in high crude oil prices this past year, according to many analysts. This autumn, concern about whether there would be adequate heating oil supplies this winter drove retail and futures heating oil prices higher than they have ever been (unadjusted for inflation). Now, just days before an OPEC ministerial meeting, some analysts are expressing fear regarding the possibility of an oil price collapse.

It is instructive to look back and see how the fears that had been expressed earlier this year have actually played out. Over the first 5 months of 2004, gasoline prices rose dramatically, in part due to concerns about the availability of summer-grade gasoline, given that new restrictions on sulfur content were in place, and also because the gasoline blending component MTBE was banned in New York and Connecticut. With gasoline inventories at or below the lower end of the average range, demand growth relatively strong, and uncertainty over the ability of foreign refiners to make enough gasoline available that would meet the new specifications, gasoline prices rose to new heights. Yet, gasoline importers adapted by importing more blending components than in the past and then blending them into the types of gasoline needed in various parts of the country. In addition, U.S. refiners proved capable of producing record levels of gasoline. Thus, as the peak demand season unfolded this summer, available supplies proved more than capable of matching demand, resulting in retail prices dropping nearly 22 cents per gallon between May 24 and September 13.

Even as gasoline prices fell over the summer, the price of West Texas Intermediate (WTI) crude oil, the benchmark crude oil in the United States, went from around $37 per barrel in late June to as high as $48 per barrel by mid-August, as concerns about global crude oil production keeping pace with demand leapt to the forefront of the market’s attention. Just as global crude oil excess production capacity was dwindling to levels not seen since after Saudi Arabia quickly ramped up production following the Iraqi invasion of Kuwait in 1990, fear about possible production disruptions also caught the market’s attention. Then, when Hurricane Ivan hit the Gulf of Mexico in mid-September and shut in a substantial amount of high quality crude oil, the price of WTI climbed over $55 per barrel towards the end of October. Hurricane Ivan demonstrated how vulnerable world oil markets were to any sizeable disruption, given the lack of spare capacity, highlighting concerns previously expressed by some oil market analysts. But this further increase was relatively short-lived, as prices have since dropped significantly over the last few weeks.

Fear was also part of the dramatic increase in heating oil prices late this summer and into this fall. With inventories below the average range, in part due to decreased refinery production immediately following Hurricane Ivan, low inventory levels in Europe threatening the availability of adequate exports to the United States, and middle distillate demand growing at a rapid pace worldwide, concern that prices might rise even above already extremely high levels to encourage enough supply was voiced by many analysts. However, with weather in key portions of the United States warmer than normal so far this season and near-record refinery production of distillate fuel, the near-month futures price for heating oil has plummeted from almost $1.60 per gallon in late October to less than $1.23 per gallon now. While prices are still much higher than usual, the dramatic price decline has brought hope to consumers that the worst may be over.

Of course, the same hope that consumers have experienced in recent days translates to fear for suppliers. With current WTI prices about $14 per barrel lower than their peak in late October and down about $8 per barrel since last Tuesday (November 30), some suppliers have begun to worry that prices will continue to plummet, perhaps towards $30 per barrel, or even lower. However, as noted above, fears don’t always turn into reality. With inventories across many products and regions still below average levels and demand continuing to exhibit strong growth rates, oil market fundamentals remain tight. Oil markets still exhibit low spare capacity in global oil production, global refinery production, and in the tanker market. These capacity constraints are likely to continue to hover over oil markets for some time to come, reducing the likelihood of a dramatic price crash. EIA still expects prices to remain relatively high this winter, as reflected in the December edition of the Short-Term Energy Outlook issued earlier this week.

Residential Heating Fuel Prices React to Crude Oil Price Decline
Residential heating oil prices decreased for the period ending December 6, 2004. The average residential heating oil price decreased by 6.0 cents per gallon from last week to reach 197.0 cents per gallon, an increase of 54.4 cents from this time last year. Wholesale heating oil prices decreased 21.9 cents to reach 125.7 cents per gallon, an increase of 36.6 cents compared to the same period last year.

The average residential propane price increased 0.6 cent, from 170.4 cents to 171.0 cents per gallon. This was an increase of 35.6 cents over the 135.4 cents per gallon average for this same time last year. Wholesale propane prices decreased 9.8 cents per gallon, from 98.5 to 88.7 cents per gallon. This was a gain of 21.1 cents per gallon from the comparable period last year.

Retail Gasoline Prices Fall for the Fifth Week In a Row
The U.S. average retail price for regular gasoline decreased this week by 3.4 cents per gallon from the previous week to reach 191.1 cents per gallon as of December 6, 43.5 cents higher than this time last year. This is the fifth week in a row that prices have decreased and the sixth time in seven weeks that they have dropped. This is the lowest weekly average retail price since September 20. Prices were down throughout all of the country, with the Midwest region seeing the largest decrease of 5.2 cents to 183.2 cents per gallon. Retail prices on the East Coast fell 1.8 cents to 192.4 cents per gallon, which is 44.0 cents higher than last year. Prices in California fell 4.4 cents to 219.2 cents per gallon, which is 54.0 cents higher than this time last year. West Coast prices lost 3.7 cents to hit 212.0 cents per gallon, 49.0 cents higher than last year.

Retail diesel fuel prices were down 4.7 cents to 206.9 cents per gallon. Prices were down throughout the country, with the East Coast seeing a decrease of 3.0 cents to 211.1 cents per gallon, while the Midwest saw decrease of 5.3 cents to 203.3 cents per gallon. Prices in New England became the highest in the nation, falling 2.4 cents but hanging on at 223.4 cents per gallon. California prices, previously the highest nationwide, averaged 222.5 cents per gallon, despite falling 6.2 cents during the past week.

Propane Posts Unexpected Build
Continued mild weather over major portions of the Midwest and East Coast last week provided some reprieve that enabled primary storage facilities to add 1.0 million barrels to U.S. inventories of propane. This was the first weekly gain in inventories in about two months, pushing inventories up to 63.7 million barrels as of December 3, 2004. Last week’s modest stockbuild follows the prior week’s build in heating oil inventories that essentially had a somewhat calming effect with respect to industry analysts’ concerns about the possibility of an impending shortage of heating oil this winter. Accordingly, the unexpected propane stockbuild may also have the same calming effect on any market anxieties with respect to supply worries this winter, at least in the near term. Inventory gains were reported in all of the major regions, with the exception of the combined Rocky Mountain/West Coast areas that showed a 0.2-million-barrel draw. The Gulf Coast region reported the largest weekly increase with a 1.1-million-barrel gain, followed with similar 0.1-million-barrel gains in the East Coast and Midwest regions. Propylene non-fuel use inventories tumbled 0.4 million barrels last week to just 2.2 million barrels, accounting for a much smaller 3.5 percent share of total propane/propylene inventories, compared with the prior week’s 4.1 percent share.

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