Released on June 29, 2005
(Next Release on July 7, 2005)

Great Expectations
Many oil traders and market analysts have commented recently on their expectations of an extremely tight oil market towards the end of the year, particularly for distillate fuel (heating oil and diesel fuel). With global product demand typically much higher in winter than summer in the Northern Hemisphere, due to the increase in demand for heating fuels, there have been concerns that supplies will be hard to come by, thus increasing the need for storage ahead of this upcoming demand crunch. This expectation has been cited as one of the main reasons why crude oil prices have jumped to $60 per barrel recently, as refiners and others purchase crude oil now to be used later. But are these expectations valid, or are these fears unwarranted?

While, in time, we will know if these expectations were justified, this is hardly the first time that fears of impending tightness have fueled a price rally before the tightness appeared. As the table below shows, concerns about impending tightness prior to the peak demand periods for both gasoline and heating oil have led to price peaks before the peak season has even occurred. In fact, the last three key U.S. product seasons (gasoline in 2005, heating oil in 2004/05, and gasoline in 2004) show a much more dramatic reaction prior to the peak season (defined as Memorial Day to Labor Day for gasoline and November through March for heating oil) than the previous three product seasons (heating oil in 2003/04, gasoline in 2003, and heating oil in 2002/03). With oil markets as tight as they have been over the last year or so, any perceived future tightness seemingly is quickly translated to current prices. In the past, EIA and others have used the phrase “forward fundamentals” to characterize this behavior.

What has happened in the last three product seasons is that the wholesale price has actually fallen some during parts of the peak season compared to the price prior to the season. In each case, as the product season began in earnest, enough supplies were on hand to meet demand, and as the fears of an impending crisis lessened, so too did price pressures. Of course, one of the reasons why sufficient supplies were available in each of these instances was that the high prices seen prior to the peak demand season provided enough economic incentive to produce enough supply to meet actual demand. So, to summarize, the expectations of high prices later are reflected in higher prices prior to the peak seasons, thus giving refiners and importers economic incentive to have enough supply available to actually bring prices down at the beginning of the peak demand season. Whether this pattern holds true again for the upcoming winter season remains to be seen. But with the heating oil wholesale price bottoming out at $1.36 on May 18, $0.51 higher than the bottom price seen prior to the 2004/05 heating oil season, consumers will hope that prices don’t increase as much prior to this upcoming heating oil season as they did a year ago. Otherwise, expectations of a winter with record-high heating oil prices (unadjusted for inflation) will come to fruition.

U.S. Average Retail Gasoline and Diesel Prices Continue to Rise
The U.S. average retail price for regular gasoline increased this week by 5.4 cents from the previous week to 221.5 cents per gallon as of June 27, 29.4 cents higher than this time last year. This is the fourth week in a row that prices have increased. Prices were up throughout the country, with the Midwest seeing the largest regional increase of 7.6 cents to reach 220.1 cents per gallon. East Coast prices rose by 4.4 cents to 219.9 cents per gallon while West Coast prices gained 5.3 cents to 237.3 cents per gallon. California prices, the highest in the nation, increased 6.0 cents to 241.2 cents per gallon, which is 17.5 cents higher than this time last year.

Retail diesel fuel prices were up 2.3 cents last week to 233.6 cents per gallon, reaching a new all-time high (unadjusted for inflation). Prices were up throughout the country, with the Rocky Mountains seeing the largest regional increase of 5.2 cents to 228.8 cents per gallon. California prices, the highest in the nation, rose by 4.6 cents to 252.2 cents per gallon, which is 48.8 cents higher than this time last year.

Propane Inventories Post Strong Gains
The roller-coaster effect of inventory building so far during June took another turn last week with a strong 2.6-million-barrel gain that raised the nation’s primary stocks of propane up to an estimated 49.6 million barrels as of June 24, 2005. However, with only one week remaining in the month, the June stockbuild, currently at about 65 percent of the most recent 5-year average build for this month, will most likely fall short of the average 9.3-million-barrel June build. While the June stockbuild may fall below the average level, the first half of the build season, April through June, most likely will edge slightly above the 5-year average for this period. Over the past 5 years, the first half of the build season averaged nearly 22 million barrels, compared with the 22.4 million barrels so far added during the 2005 period through last week. The weekly stockbuild was limited to the Midwest and Gulf Coast regions that reported respective gains of 1.0 million barrels and 1.5 million barrels. In the East Coast, inventories remained unchanged last week, while the combined Rocky Mountain/West Coast regions reported a 0.1- million-barrel loss during this same time. Propylene non-fuel use inventories also remained unchanged last week at 5.0 million barrels, although its share of total propane/propylene inventories inched lower to 10.1 percent from the prior week’s 10.6 percent share.

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.