Released on June 22, 2005
(Next Release on June 29, 2005)

It’s a Diesel World After All
Now that you have that familiar little ditty, “It’s a Small World After All,” stuck in your head and repeating incessantly, it’s time to ponder the increasing influence of diesel fuel on world petroleum markets. Generally, the summertime is dominated by gasoline demand here in the United States as Americans take to the roads for their family vacations. However, this year, surging global distillate demand in Europe and Asia has retail diesel selling at a premium over retail gasoline.

Some NYMEX traders have even been caught saying that gasoline is becoming a byproduct of distillate production. While this is clearly an exaggeration, especially here in the United States where, historically, finished gasoline demand is more than twice total distillate demand, it is certainly true that consumption of distillates is strengthening at a quickening pace. In fact, U.S. distillate demand has grown faster this year than gasoline demand; the 4-week average for total distillate fuel demand is 6.9 percent higher than last year, while the 4-week average demand for finished gasoline is only 2.5 percent higher than last year. Distillate demand is also strong in Europe, where a significant fraction of the new vehicle fleet is diesel-powered, and in China, where demand for distillates is twice that for gasoline, and where overall demand has been growing rapidly.

The NYMEX heating oil futures contract, which also serves as a proxy for jet fuel and diesel, has been selling at an unseasonable premium over gasoline so far this spring, and that doesn’t show signs of changing now that summer has officially arrived. Although some analysts dispute the notion that changes in product prices can drive the market for crude oil, recent anecdotal evidence seems to point to that conclusion. Many NYMEX traders in recent weeks have been reporting that surges in heating oil, and to a lesser extent gasoline, have led to increases in crude oil prices. With NYMEX near-month futures prices now near $60 per barrel, this trend merits attention.

With diesel selling at a premium to gasoline, refiners have been adjusting their product mix to take advantage of prices. Distillate production has been at historically high levels as refiners try to capitalize on the price differential between the middle distillates and gasoline. Increases in product output are achieved through increased crude runs and/or decreased production of another product. This means that higher distillate production should tend to reduce crude oil and gasoline inventories over the coming weeks. And despite refineries running about 95 percent of capacity, many analysts feel that distillate stocks are not showing sufficient signs of replenishment. While in recent weeks, U.S. heating oil output has climbed to levels averaging about 18 percent higher than a year ago, strong global demand for non-highway distillates seemingly has limited U.S. heating oil restocking this summer. With the heavy worldwide focus on transportation fuel production, market concern is intensifying that refiners will have inadequate time to replenish heating oil inventories ahead of the winter heating season.

Jet fuel is also playing an important role in the tight distillate market. As demand for air travel increases along with ground transportation, the problem becomes simultaneously satisfying demand for all light products. Jet fuel production cuts into distillate production rather than gasoline production because of the refinery distillation processes. So without increased crude inputs available, increasing jet fuel production reduces production of heating oil and diesel fuel.

Despite this increased attention to distillate fuels, gasoline will likely remain the dominant product in U.S. petroleum markets for the foreseeable future. But as distillate demand growth outpaces that of gasoline here and abroad, and as U.S. markets must increasingly compete for product imports, the role of distillate fuels, including diesel fuel, heating oil, and jet fuel, will continue to grow in importance.

U.S. Average Retail Gasoline and Diesel Prices Increase Again
The U.S. average retail price for regular gasoline increased this week by 3.1 cents from the previous week to 216.1 cents per gallon as of June 20, 22.4 cents higher than this time last year. This is the third week in a row that prices have increased. Prices were up throughout the country, with the Midwest seeing the largest regional increase of 4.3 cents to reach 212.5 cents per gallon. East Coast prices rose by 3.0 cents to 215.5 cents per gallon while West Coast prices gained 1.4 cents to 232.0 cents per gallon. California prices, the highest in the nation, increased 1.9 cents to 235.2 cents per gallon, which is 9.3 cents higher than this time last year.

Retail diesel fuel prices were up 3.7 cents last week to 231.3 cents per gallon, just 0.3 cent lower than the all-time high reached on April 11, 2005. Prices were up throughout the country, with the Midwest seeing the largest regional increase of 4.6 cents to 229.4 cents per gallon. California prices, the highest in the nation, rose by 1.9 cents to 247.6 cents per gallon, which is 45.7 cents higher than this time last year.

Propane Weekly Build Slows
The June propane stockbuild slowed last week with a modest 0.9 million barrels being added to primary inventories, moving U.S. inventories of propane up to an estimated 47.0 million barrels as of week ending June 17, 2005. At about mid month, the June stockbuild so far totaled about 3.4 million barrels, roughly one-third of the average build for this month over the most recent 5-year period. Moreover, the weak build was not limited to any particular region as in prior weeks, but was spread across all the major propane regions. East Coast inventories climbed by 0.1 million barrels last week on strong imports into the region, while at the same time the Midwest posted a weekly gain of only 0.2 million barrels. The Gulf Coast region continued to show the largest weekly gain with a 0.5-million-barrel increase, while the combined Rocky Mountain/West Coast regions climbed higher by 0.2 million barrels. Propylene non-fuel use inventories reached 5 million barrels last week, up 0.2 million barrels to account for a slightly higher 10.6 percent share of total propane/propylene inventories, compared with the prior week’s 10.4 percent share.