Released on January 5, 2004
(Next Release on January 12, 2005)

Group Mentality?
The current situation in oil markets may strike a chord with those of us old enough to remember the final scene in the last episode of the Mary Tyler Moore Show. For those who are too young or don’t remember, the cast is enjoying a group hug and is crying, since most of them have been fired and will no longer see each other, when someone mentions that they need a tissue. However, rather than one person going to get the tissue box and bringing it back, the entire group remains in their hug and shuffles en masse over to the tissue box. The wide fluctuations in daily oil prices seen in recent trading sessions, especially given lighter-than-normal trading over the last two weeks due to the holidays, conjures up an image of traders staying clustered together and helping to move oil prices one way or another on what appears to be fairly insignificant or old news. For example, the near-month futures price for light, sweet crude oil was up about $2 per barrel at one point yesterday on news that Saudi Arabia had cut their production by 500,000 barrels per day. Yet, this “news” is exactly what had been announced when OPEC met last month, and most analysts had expected Saudi Arabia to follow through on its commitment. But, once prices started edging up, the increase snowballed. This followed a drop of $1.33 per barrel the previous day, ostensibly on the forecast for warmer-than-normal weather to continue in the Northeast and central Atlantic regions, where most of the heating oil is consumed in this country. What’s an analyst to think?

It is important to distinguish the difference between day-to-day oil price movements and the outlook for oil markets over many months. Day-to-day price movements may be strongly influenced by weather forecasts, statements by key oil ministers, and any current events that have the potential to affect near-term oil supply. However, fundamentals of supply and demand will be the major determinant of oil prices over the next several months and beyond. Global oil demand growth is likely to be the key factor for oil markets in 2005. While most analysts expect global oil demand growth to be significantly less than the 2.6 million barrels per day seen in 2004, markets will remain tight if it is close to the 2.0 million barrels per day EIA expects in 2005, a level that exceeds expected growth in non-OPEC supply and downstream refinery capacity. However, if world oil demand grows by less than 1.5 million barrels per day in 2005, as some analysts are expecting, oil markets could loosen up and the likelihood that prices could ease in 2005 would increase. One thing is clear, however. While there may be an element of a group mentality in the day-to-day movements in oil prices, there is no such group consensus on what path oil prices will take over the next 12 to 24 months, other than that is likely to be a bumpy ride on a day-to-day basis.

Retail Gasoline and Diesel Fuel Prices See Another Decrease
The U.S. average retail price for regular gasoline decreased this week by 1.3 cents per gallon from the previous week to reach 177.8 cents per gallon as of January 3, 26.8 cents higher than this time last year. This is the ninth week in a row, and the tenth time in eleven weeks, that prices have dropped. Retail gasoline prices have not been this low since March 29, 2004. Prices were down throughout most of the country, with the Gulf Coast region seeing the largest decrease, falling 3.0 cents to 167.1 cents per gallon. Retail prices in the Midwest gained 1.4 cents to 171.8 cents per gallon, which is 21.9 cents higher than last year. Prices in California fell 2.8 cents to 198.2 cents per gallon, which is the first time California prices have been under the $2 mark since February 16, 2004. West Coast prices also fell by 2.6 cents to 193.0 cents per gallon, which is 33.1 cents higher than this time last year.

Retail diesel fuel prices fell 3.0 cents last week to 195.7 cents per gallon. This is the ninth time in ten weeks that prices have fallen or stayed flat. Price changes were down throughout most of the country, with the Gulf Coast seeing the largest decrease of 4.1 cents to 188.7 cents per gallon, while prices in the Midwest lost 3.0 cents to 192.9 cents per gallon. The average price in California decreased by 3.4 cents to 206.3 cents per gallon, while prices along the West Coast fell 2.9 cents to 201.1 cents per gallon. Prices in New England stayed the highest in the nation, falling 1.6 cents to 218.0 cents per gallon.

Residential Heating Oil Prices Decrease While Propane Prices Remain Steady
Residential heating oil prices decreased for the period ending January 3, 2005. The average residential heating oil price decreased by 2.7 cents from last week to reach 195.1 cents per gallon, an increase of 45.3 cents from this time last year. Wholesale heating oil prices decreased 7.4 cents to reach 128.2 cents per gallon, an increase of 34.6 cents compared to the same period last year.

The average residential propane price increased 0.2 cent, from 172.9 cents to 173.1 cents per gallon. This was an increase of 30.3 cents over the 142.8 cents per gallon average for this same time last year. Wholesale propane prices decreased 4.7 cents per gallon, from 89.6 to 84.9 cents per gallon, a gain of 12.3 cents compared to the same period a year ago.

Mild Winter Helps Bolster Propane Safety Net
Above normal temperatures during December extended the mild weather pattern through the first half of the 2004-05 winter heating season, which, in turn, contributed to bolster propane inventories ahead of the typically more severe weather expected during the second half of the winter heating season. Since the end of September, primary stockholders have withdrawn 11.8 million barrels of propane, a level below the 5-year average stockdraw of about 13.6 million barrels. Consequently, U.S. inventories of propane finished the first half of the heating season at an estimated 55.4 million barrels as of December 31, 2004, the highest level for this period since 2001. Moreover, forecasts of continued mild weather through next week can be seen as only strengthening the apparent safety net for propane inventories created by the rather lackluster heating demand seen so far this winter. Weekly activity showed East Coast inventories moving up in a counter-seasonal pattern last week that reflected several large import cargos into New England and the Lower Atlantic regions, while inventories in the other major regions, including the Midwest and Gulf Coast continued lower with declines of 0.3 million barrels and 0.9 million barrels, respectively. The combined Rocky Mountain/West Coast regions posted inventories lower by 0.2 million barrels during this same period. U.S. inventories reported a net weekly loss of 1.3 million barrels, adding to the cumulative monthly decline of nearly 8.3 million barrels, a level below the 5-year average for this month of 11.3 million barrels. Propylene non-fuel use inventories fell 0.2 million barrels last week to 3.2 million barrels, accounting for a 5.8 percent share of total propane/propylene inventories.

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