Released on January 19, 2005
(Next Release on January 26, 2005)

Here Comes the Cold
By changing just one word of the title of the Beatles’ hit song “Here Comes the Sun,” written and sung by the late George Harrison, the title of this week’s report captures the sentiment of oil markets this week. After a winter that has been warmer-than-normal in the key Northeast and Central Atlantic regions, “Here Comes the Cold” would be an apt description of current conditions in oil markets. Beginning with last week’s forecast of impending colder weather, oil prices began to rise, and as the forecast came to ring true, prices continued to climb. Most weather forecasts now call for colder-than-normal temperatures to continue for the next several days, which should lead to strong heating oil demand, just as some refiners have begun their maintenance programs. With oil demand expected to remain strong due to cold weather, crude oil prices have increased due to the need for additional crude oil supply to produce more heating oil. In addition, problems with crude oil supply in the North Sea as well as Canada have also influenced prices in recent days. But with winter weather making a strong appearance in the key heating oil regions of the Northeast and Central Atlantic, the weather will remain a key factor for oil prices in the coming days and weeks.

Gasoline Supply May Limit Potential for Dramatic Price Increases This Spring
While most petroleum market analysts are focused on heating oil this time of year, it is not too early to take a look at the U.S. gasoline supply situation, even though peak summer demand is still months away. As with heating oil and some other petroleum products, gasoline markets generally follow seasonal patterns that require some lead time in the buildup of inventories to adequate levels in time to meet peak demand. In some instances, these cyclical patterns may last more than a year, which may create a situation of low inventories one year while temporarily building above average inventories during other years. Just such a situation may be occurring this year, as total gasoline inventories continue on a path above the average range for this time of year, in contrast with 2003 and 2004, when gasoline inventories were tracking at the lower end of the average range during the early months of those years (see Figure 4 in the Weekly Petroleum Status Report ). The average retail price of regular gasoline rose nearly 37 cents per gallon between December 9, 2002 and March 17, 2003, while it rose nearly 59 cents per gallon between December 29, 2003 and May 24, 2004. While it is too early to be definitive, because gasoline inventories appear better poised early this year to endure any potential supply problems that may occur prior to the start of the peak summer driving season, gasoline consumers may not see prices increase this spring/summer as much as during the last two years.

Gasoline inventories have risen more than would typically be expected in the last few months as refiners have processed more crude oil than they typically would at this time of year in order to produce record amounts of distillate fuel in order to increase heating oil supplies. With more crude oil being processed this winter, gasoline production has been relatively high, helping to build gasoline inventories. With current (January 14, 2005) gasoline inventories 9.5 million barrels, or 4.6 percent, above the same period last year, gasoline markets may avoid, or at least lessen, some gasoline supply concerns that contributed to the nearly 40 percent run-up in average gasoline prices seen during the first 5 months of last year. Although average gasoline prices are expected to remain above year-earlier prices during the first quarter 2005, compared to 2004 (according to the January edition of the Short-Term Energy Outlook ), the likelihood of gasoline prices following last year’s price increase during the first quarter of 2005 appears less likely at this time. Unfortunately, gasoline prices are starting the year much higher than in the previous two years due to much higher crude oil prices, meaning that even if prices don’t increase as much, they still are likely to be relatively high.

U.S. Average Retail Gasoline Price Gains 2.6 Cents
The U.S. average retail price for regular gasoline increased this week by 2.6 cents per gallon from the previous week to reach 181.9 cents per gallon as of January 17, 22.4 cents higher than this time last year. This is the second week in a row that prices have risen, and the first time since December 13 that prices have been this high. Prices were up throughout the country, with the Gulf Coast seeing the largest gain of 4.7 cents to 174.6 cents per gallon. Retail prices in the Midwest gained 3.2 cents to 180.4 cents per gallon, which is 22.4 cents higher than last year. Prices in California were flat at 193.2 cents per gallon. West Coast prices edged up 0.2 cent to 189.1 cents per gallon, which is 21.9 cents higher than this time last year.

Retail diesel fuel prices rose 1.8 cents last week to 195.2 cents per gallon. This price increase came after decreases in ten of the previous eleven weeks. Prices were up throughout the country, with the Gulf Coast seeing the largest increase of 3.2 cents to 190.8 cents per gallon, while prices in the Midwest rose 1.7 cents to 192.8 cents per gallon. East Coast prices gained 1.0 cent to reach 200.9 cents per gallon, while West Coast prices also broke the $2 mark by increasing 2.8 cents to 200.1 cents per gallon. Prices in New England stayed the highest in the nation, rising 0.5 cent to 216.8 cents per gallon. The average price in California increased by 0.9 cent to 202.3 cents per gallon, which is 35.1 cents higher than this time last year.

Residential Heating Oil Prices Increase While Propane Prices Show Minimal Decrease
Residential heating oil prices increased for the period ending January 17, 2005. The average residential heating oil price increased by 1.7 cents from last week to reach 196.3 cents per gallon, an increase of 37.9 cents from this time last year. Wholesale heating oil prices increased 7.3 cents to reach 139.0 cents per gallon, an increase of 38.8 cents compared to the same period last year.

The average residential propane price decreased 0.3 cent, from 172.8 cents to 172.5 cents per gallon. This was an increase of 20.2 cents over the 152.3 cents per gallon average for this same time last year. Wholesale propane prices increased 2.5 cents per gallon, from 80.9 to 83.4 cents per gallon, a gain of 6.8 cents compared to the same period last year.

Frigid Temperatures Sink Propane Inventories
The first sustainable cold wave this winter contributed to sink U.S. inventories of propane lower by 3.4 million barrels, ending the week of January 14, 2005 at an estimated 49.0 million barrels. At mid month, the accumulative stockdraw totaled 6.4 million barrels, a level measuring only about 44 percent of the 5-year average of 14.5 million barrels for January, with inventories continuing to track at the upper boundary of the normal range for this time year. Gulf Coast inventories posted the largest weekly decline of 1.7 million barrels, followed by a 1.1-million-barrel drop in the Midwest. East Coast inventories slipped by 0.5 million barrels while inventories in the combined Rocky Mountain/West Coast regions remained unchanged. Propylene non-fuel use inventories surged to account for 7.1 percent of total propane/propylene inventories last week, up from 5.3 percent the previous week.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.