Released on December 15, 2004
(Next Release on December 22, 2004)

Baby, It’s Cold Outside
This week, as the Northeast faces its first major dose of cold weather this winter, many will be reminded of the classic song written by Frank Loesser in 1948, which has been performed by everyone from Ella Fitzgerald to Jessica Simpson. While cold weather during the winter season should not be too surprising, the timing and severity of the first winter cold snap can have a large impact on oil prices. The later it occurs, the more time distillate fuel inventories have to build and the less is needed once the weather arrives. In fact, with warmer-than-normal temperatures this winter season up to now, distillate fuel inventories have modestly grown from their very low levels earlier in the fall. However, with cold temperatures finally descending on the key heating oil regions in the Central Atlantic and New England, distillate fuel consumption should increase, creating pressure to increase supply to consumers by increasing already-high levels of production from refineries, and/or increasing imports, and/or drawing from inventories.

Despite warmer-than-normal temperatures through last week (the data released earlier today is for the week ending December 10), distillate fuel inventories remain below the low end of the average range for this time of year ( see Figure 5 in the Weekly Petroleum Status Report ). With inventories at such levels, the significant increase in supply that will be required to meet any sustained surge in demand will need to come primarily from imports and additional refinery production. But with distillate fuel refinery production already at high levels and inventories of distillate fuel at low levels in Europe (leaving less available for export than usual), additional supply from these sources may not come easily. With forecasts of even colder temperatures along the northern half of the East Coast early next week as well, the U.S. heating oil market may shape up to be more interesting than many thought as recently as a week or two ago.

Retail Gasoline and Diesel Fuel Prices Continue Free-fall
The U.S. average retail price for regular gasoline decreased this week by 6.4 cents per gallon from the previous week to reach 184.7 cents per gallon as of December 13, 38.2 cents higher than this time last year. This is the sixth week in a row, and the seventh time in eight weeks, that prices have dropped. This is the lowest weekly average retail price since September 13. Prices were down throughout all of the country, with the Midwest region seeing the largest decrease of 10.3 cents to 172.9 cents per gallon. Retail prices on the East Coast fell 4.3 cents to 188.1 cents per gallon, which is 40.2 cents higher than last year. Prices in California fell 5.7 cents to 213.5 cents per gallon, which is 51.1 cents higher than this time last year. West Coast prices lost 5.4 cents to hit 206.6 cents per gallon, 46.2 cents higher than last year.

Retail diesel fuel prices were down 7.2 cents to 199.7 cents per gallon. Prices were down throughout the country, with the East Coast seeing a decrease of 4.8 cents to 206.3 cents per gallon, while the Midwest saw decrease of 8.0 cents to 195.3 cents per gallon. Prices in New England stayed the highest in the nation, falling 2.8 cents to 220.6 cents per gallon. Average retail diesel fuel prices in California, continued to fall at a faster rate, decreasing by 8.7 cents to average 213.8 cents per gallon.

After setting all-time highs (not adjusted for inflation) earlier in 2004, retail prices for petroleum products, especially gasoline and diesel fuel, have fallen sharply since October, partly due to the sizable decline in crude oil prices over the same period. The U.S. average retail price for regular gasoline hit an autumn high of $2.035 per gallon on October 18, somewhat lower than its peak for the year of $2.064 on May 24. The national average retail price for on-highway diesel fuel, on the other hand, hit an all-time high of $2.212 per gallon on October 25. Since those October peaks, retail gasoline and diesel fuel prices have dropped a total of 18.8 cents and 21.5 cents per gallon, respectively.

The decreases in retail gasoline and diesel fuel prices are directly attributable to falling spot (wholesale) prices for those products, which have resulted from warmer weather and falling crude oil prices. Average U.S. spot prices for gasoline peaked at about $1.44 per gallon in early October, and have since fallen to about $1.06 per gallon as of December 14. Spot prices for diesel fuel similarly peaked at about $1.61 per gallon in October, and now stand at about $1.25 per gallon. Over roughly the same period, spot prices for West Texas Intermediate (WTI) crude oil have fallen by over $13 per barrel (equivalent to about 31 cents per gallon), accounting for most of the decrease in spot product prices. Not all of the decrease in crude oil and spot product prices is likely to show up at the pump, though, because retail prices didn’t rise as much as spot prices before peaking and heading downward. However, if crude oil and wholesale product markets were to remain near current levels for the next few weeks, retail prices for gasoline and diesel fuel could possibly fall another 10 cents or so, as the recent declines in spot prices continue to be passed through to retail markets, allowing distribution and marketing margins to return to average levels.

Residential Heating Oil Prices Decrease Slightly
Residential heating oil prices decreased for the period ending December 13, 2004. The average residential heating oil price decreased by 2.5 cents from last week to reach 194.5 cents per gallon, an increase of 48.6 cents from this time last year. Wholesale heating oil prices decreased 1.7 cents to reach 124.0 cents per gallon, an increase of 30.5 cents compared to the same period last year.

The average residential propane price increased 0.2 cent, from 171.0 cents to 171.2 cents per gallon. This was an increase of 32.0 cents over the 139.2 cents per gallon average for this same time last year. Wholesale propane prices decreased 3.2 cents per gallon, from 88.7 to 85.5 cents per gallon, a gain of 11.8 cents compared to the same period last year.

Propane Inventories Resume Downward Trend
Following the prior week’s unexpected gain, U.S. inventories of propane resumed their downward trend last week with a 2.2-million-barrel draw that put inventories as of December 10, 2004 at an estimated 61.5 million barrels. Unseasonably mild weather last week continued to buoy inventories along the East Coast, where they increased by 0.1 million barrels, while in the Midwest and Gulf Coast regions during this same time, inventories fell by 0.5 and 1.8 million barrels, respectively. In the combined Rocky Mountain/West Coast region, inventory levels did not change last week. U.S. propane inventories, including those in the East Coast and Gulf Coast regions, remain either at or slightly above the upper limit of the normal range, while inventories in the Midwest region remain at the lower boundary of the normal range for this time of year. Propylene non-fuel use inventories moved higher by 1.2 million barrels to account for a 5.5 percent share of total propane/propylene inventories.

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