Released on May 18, 2005
(Next Release on May 25, 2005)

Crossover?
The release of the Energy Information Administration (EIA) weekly report, Gasoline and Diesel Fuel Update, on Monday, May 16, 2005, continued an apparent new pattern with retail diesel prices exhibiting a premium over gasoline for the 38th consecutive week. With petroleum markets now solidly focused on the impending driving season following the end of the heating season, the yet-to-be-seen crossover to higher gasoline prices relative to diesel fuel that typically occurs by this time of year continues to be of note. While this price pattern is far from unique, the timing, duration, and magnitude of this particular price differential may warrant some examination, compared with historical trends between the two petroleum products.

As previously reported in the November 3, 2004, and March 2, 2005 editions of This Week In Petroleum (TWIP), the relationship between weekly gasoline and diesel fuel prices has shown a clear seasonal pattern since March 1994. This pattern was exemplified during summer driving seasons, when average retail gasoline prices would typically move above average retail diesel fuel prices from roughly April through September. Similarly, diesel fuel prices usually move above gasoline prices during the heating season months of October through March. As mentioned in those previous reports, diesel fuel and heating oil are very similar petroleum products, with their respective prices being strongly influenced by winter heating oil demand. Moreover, prior to this winter, the longest period for a diesel fuel price premium was 38 weeks, occurring from August 19, 1996 through May 5, 1997, which matches the current streak. Conversely, the shortest period for diesel fuel prices holding a premium over gasoline was 4 weeks, from December 8 through December 29, 2003. Since the winter of 1996-97, the period for higher diesel fuel prices appeared to be trending downward, perhaps indicating a smoothing in the transition between the peak summer driving season and the winter heating season. This pattern abruptly ended with the 2004-05 winter, however. Not only has the diesel premium matched or lasted longer than at any time since EIA began collecting weekly retail diesel prices in March 2004, but the gap widened sharply this winter. Historically, the price gap averaged about 2 to 8 cents per gallon in favor of diesel fuel during the winter. However, the winter of 2004-05 saw the gap widen to an average of about 11 cents per gallon through May 16, 2005, including a nearly 20-cent-per-gallon price premium reached on December 27, 2004.

Contributing to this season’s gap were exceptionally low stocks of distillate fuel throughout the winter and strong demand for heating oil and diesel fuel. Despite rapidly rising gasoline prices during the late winter and early spring months of 2005, gasoline inventories tracked near the upper limit of their typical range for that time of year, creating a relatively looser market environment for gasoline, further widening the price gap during this period.

As the winter heating season wound down, lingering industry fears over possible low distillate stocks heading into next winter seemingly combined with the perception of adequate gasoline supplies throughout the Atlantic Basin to extend the premium period to new lengths. Another factor contributing to this gap may be the emergence of very tight global supply/demand conditions for diesel fuel. With the bulk of strong Asian, especially Chinese, demand growth in middle distillate fuels, including diesel, and with continued strong U.S. economic activity also propelling rapid growth in diesel consumption, the global balance for distillate fuel has tightened seemingly much more so than that of gasoline. Although EIA’s current short-term outlook calls for the premium of gasoline over diesel fuel to return this summer, continued strong fundamentals in the U.S. and international distillate markets could make that projection a close call.

U.S. Average Retail Gasoline Price Decreases by 2 Cents
The U.S. average retail price for regular gasoline decreased this week by 2.3 cents from the previous week to 216.3 cents per gallon as of May 16, 14.6 cents higher than this time last year. This is the fifth week in a row that prices have decreased. Prices were down throughout the country, with the West Coast seeing the largest regional decrease of 4.0 cents to reach 243.7 cents per gallon. East Coast prices fell by 3.0 cents to 215.0 cents per gallon while Midwest prices fell 0.3 cent to 207.2 cents per gallon. California prices saw a decrease of 4.3 cents to 247.3 cents per gallon, which is 20.4 cents higher than this time last year.

Retail diesel fuel prices were down 3.8 cents last week to 218.9 cents per gallon. Prices were down throughout the country, with the West Coast seeing the largest regional decrease of 8.4 cents to 239.7 cents per gallon. California prices fell by 8.6 cents to 243.2 cents per gallon.

Propane Inventories Post Strong Weekly Gains
A strong rebound in imports last week helped boost U.S. inventories of propane higher by 3.1 million barrels, ending the week of May 13, 2005 at an estimated 37.8 million barrels. At the mid-point, the May stockbuild remains on target with 4.6 million barrels, a level slightly more than 50 percent of the 8.7 million barrels averaged over the most recent 5-year period for this month. Higher imports across all the major propane consuming regions contributed to lift inventories up by 0.1 million barrels in the East Coast, 0.9 million barrels in the Midwest, and 2.2 million barrels in the Gulf Coast last week. However, during this same period, the combined Rocky Mountain/West Coast regions remained unchanged for the second week. Propylene non-fuel-use inventories also remained unchanged last week at 4.7 million barrels, a level accounting for 12.4 percent of total propane/propylene inventories, compared with the prior week’s share of 13.5 percent.

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