Released on August 3, 2005
(Next Release on August 10, 2005)

From the Dog Days of Summer …
In baseball, August represents the dog days of summer. This is often the month in which contenders are separated from also-rans. For example, the Washington Nationals, who were in first place in their division at the beginning of July, are now trailing in the wild card race. By the end of August, Washington Nationals’ fans should have a better idea as to their chances of making the playoffs. August is also a critical month for gasoline markets, providing either new price spikes or a respite from higher prices.

In August 2003, low supplies, along with refinery and pipeline outages, drove gasoline prices sharply higher, with the U.S. average price of regular gasoline increasing by 23.1 cents per gallon in the four-week period from July 28, 2003 to August 25, 2003. In contrast, in 2004, the U.S. average retail price actually dropped by 5.5 cents per gallon in the six-week period from July 26, 2004 to September 6, 2004 (Labor Day), as higher prices in July spurred additional production and imports, and kept demand from growing substantially in August.

It is unclear how gasoline markets will fare in August 2005. Recent refinery problems point to the potential for higher prices as the next few weeks unfold, but absent any additional major petroleum infrastructure problems, a repeat of the August 2003 price spike is very unlikely.

… To Old Man Winter
Yet, even as the mercury reached triple digits in some regions of the nation last week, and even as families continued to pack their minivans for their annual summer trek to the beach or other vacation locales, the current focus on gasoline markets is expected to give way soon to heating fuels, as the peak summer driving season slowly begins to wane. Typically, the period of April through September is when most primary stockholders replenish their inventories of distillate fuel oil (used for both heating and diesel fuel) and propane to adequate levels prior to the start of the next winter heating season. But with only two months remaining in the rebuilding season, primary stockholders at this point should have some indication of where inventories stand in comparison with historical trends over recent years.

Since petroleum product markets may run in cycles lasting longer than a single peak season, it’s sometimes important to look back to prior year market developments for indications of what may affect the current season. Distillate fuel inventories began the 2004-05 heating season within the average range, with 123.1 million barrels as of September 30, 2004. Although inventories initially moved lower and trailed near the lower boundary of the average range during October and November 2004, warmer-than-normal weather over most of the East Coast during the peak heating months of December through February eased demand, and contributed to moderate distillate withdrawals. Consequently, by the end of the heating season on March 31, 2005, distillate fuel inventories stood at 104.5 million barrels, a level within the average range for that time of year. In early spring, several petroleum market observers began to voice concern about the lack of an adequate build in distillate inventories, as some refiners apparently postponed scheduled spring maintenance to take advantage of robust gasoline demand and margins. However, with diesel fuel prices continuing to exceed gasoline prices during this time, refiners quickly began to shift their attention towards distillate fuel supply, which contributed to boost distillate inventories to a level near the upper limits of the average range by late July (see Figure 5, Weekly Petroleum Status Report). As a result, the overall seasonal stockbuild in distillate fuel inventories (April through July) totaled nearly 23 million barrels, a cumulative gain of about 35 percent above the most recent 5-year average for this period. Barring any major surprises over the next two months, distillate fuel inventories are poised to begin the 2005-06 heating season at a relatively comfortable level in absolute terms.

The relatively mild 2004-05 winter in the central region of the country also moderated the draw on propane inventories. Stocks were 27.2 million barrels by March 31, 2005, a level within the middle of the average range for that period. Since March, U.S. inventories of propane exceeded the average monthly build each month through July, with the overall stockbuild measuring more than 35 million barrels, or 21 percent above the most recent 5-year average build for the April through July period (see Figure 7, Weekly Petroleum Status Report). Moreover, with inventories currently at 62.6 million barrels, if over the next two months propane inventories attain the same build averaged over the last 5 years of 9 million barrels, U.S. inventories of propane would reach about 72 million barrels by September 30, a relatively comfortable level in absolute terms.

However, even if inventories continue to build in line with historical experience in August and September, propane and heating oil consumers should expect to pay more than last year. Consumers cannot count on another relatively mild winter. With relatively strong demand expected, inventories could be comparatively tight on a days supply basis. And crude oil prices are expected to remain at or near all-time highs (unadjusted for inflation), which will affect the price of all petroleum products.

U.S. Average Retail Gasoline Price Gains Slightly
The U.S. average retail price for regular gasoline increased 0.2 cent to 229.1 cents per gallon after two previous weeks of falling prices. Prices were mixed throughout the country, with the Midwest seeing the largest increase of 2.1 cents to 221.9 cents per gallon. The Gulf Coast saw the largest decline, dropping 2.5 cents per gallon from last week to reach 218.2 cents per gallon, the lowest regional price in the country. The highest regional price remained on the West Coast, where prices gained 1.4 cents to 251.1 cents per gallon. The average price in California was even higher, gaining 0.8 cent to 254.9 cents per gallon, 42.1 cents higher than last year.

Retail diesel fuel prices were up 0.6 cent last week to 234.8 cents per gallon, after prices fell the previous two weeks. Prices were mixed throughout the country, with the West Coast seeing the largest regional increase of 6.4 cents to 259.4 cents per gallon. California prices were up 7.9 cents to 265.7 cents per gallon. Gulf Coast prices were the lowest in the nation, increasing 0.1 cent to average 227.9 cents per gallon.

Propane Inventories Sharply Higher

U.S. inventories of propane soared higher by 3.6 million barrels last week, the largest weekly gain so far this year, and ended the week of July 29, 2005 at an estimated 62.6 million barrels. Moreover, last week’s gain also contributed to the overall July stockbuild of 9.6 million barrels, a level about one-third higher than the most recent 5-year average for this month. Most of the weekly build occurred in the Gulf Coast region with a 2.4-million-barrel gain that pushed inventories to 36.1 million barrels, the fourth highest level for this month. The record for end-July propane inventories in this region was reported in 1986, and the highest ever for this region was 50.3 million barrels reached on September 30, 1986. Midwest inventories gained 1.2 million barrels last week, while the East Coast reported an increase of 0.4 million barrels. The combined Rocky Mountain/West Coast regions reported a loss of 0.4 million barrels during this same time. Propylene non-fuel use inventories moved up 0.2 million barrels last week but accounted for a smaller 8.6 percent share of total propane/propylene inventories from the prior week’s 8.8 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.