Released on November 2, 2005
(Next Release on November 9, 2005)

Old Man Winter
Even though temperatures over portions of the Midwest and East Coast are almost spring-like this week, the arrival of the first bout of cold weather last week brought attention to the adequacy of heating fuels in light of the upheaval seen in petroleum markets since late summer. Overall, heating oil and propane supplies appear adequate at this early juncture in the 2005-06 winter heating season based on current inventory levels. However, the full impact on heating fuel supplies over the longer term remains uncertain following the devastating effects of the recent hurricanes on Gulf Coast petroleum infrastructure. While solid progress in post-hurricane repairs to this infrastructure has occurred, it remains unclear at this time when, or even if, a full recovery to pre-hurricane status will be possible prior to the onset of severe winter weather.

One of the best gauges for assessing the adequacy of supplies of any particular petroleum product to meet expected peak demand is the level of inventories on hand at any given time. This premise particularly holds true for heating oil inventories during the peak winter season when severe weather can cause short-term spikes in demand to occur either in a wide geographic region or much smaller confined areas. For this reason, to assess the adequacy of heating oil one needs to look not only at the nation’s supply but also regional inventories as well. The overall picture for distillate fuel oil inventories on the East Coast, or Petroleum Administration for Defense District I (PADD 1), the biggest U.S. market for heating oil, indicates that inventories are tracking near the middle of the average range (see Figure 5. Weekly Petroleum Status Report). Furthermore, looking more closely at the most critical areas for heating oil, the following graph shows the combined New England (PADD 1A) and Central Atlantic region (PADD 1B) with inventories of high sulfur distillate fuel (heating oil) near the upper limit of the average range.

However, if we look at these two key sub regions individually, they tell an even more interesting story. Heating oil inventories in New England (PADD 1A) (see New England Heating Oil Inventories) seem more than abundant, as they are well above the average range for this time of year, but they represent a much smaller market than in the Central Atlantic region that potentially includes inventories destined for other markets on the East Coast. The Central Atlantic region remains the major transportation and marketing hub for heating oil, with the New York harbor as a terminus for imports and futures trading on the New York Mercantile Exchange (NYMEX). Moreover, the Central Atlantic region includes the heavily populated regions near New York City and Northern New Jersey, and in this region (PADD 1B), heating oil inventories are near the middle of the average range (see Central Atlantic Heating Oil Inventories).

As noted, looking only at current inventory levels in the Northeast region this early in the heating season may not provide the complete picture on the adequacy of heating oil supplies for the winter heating season. While refinery production of distillate fuel slowly returns to more normal levels from the hurricane damage, distillate fuel inventories at both the national level and the critical Gulf Coast (PADD III) region remain at or below the average range. As an added complication, diesel fuel inventories stand at much less comfortable levels, especially when adjusted for solid demand growth. That is, since diesel fuel is often used during cold weather to supplement heating oil supplies, and since a still strong U.S. economy continues to support a tight balance between diesel supply and consumption, incremental volumes of diesel fuel may be attracted to heating markets only at relatively high prices.

Along the same lines, distillate fuel imports have not been as strong as would be expected for this time of year, due to tight world market conditions, raising further questions about future distillate fuel supplies if severe weather causes unexpectedly strong heating oil demand this winter. (See the October 26 edition of This Week in Petroleum, which discusses the distillate fuel imports in slightly more detail.)

Unlike distillate fuel inventories, propane inventories both at the national level and regionally, except on the East Coast, appear more in line with historical average ranges compared to prior years. As of the end of October 2005, U.S. inventories of propane stood at an estimated 69.4 million barrels, a level that continues to track at the upper limit of the average range for this time of year (see Figure 7. Weekly Petroleum Status Report ). Although hurricanes Katrina and Rita similarly caused extensive damage to propane production facilities, with production levels still lagging pre-hurricane levels, record imports over the last several weeks have more than compensated for lost production during this period. Coupled with apparent slowing petrochemical demand for propane as a feedstock and weaker crop-drying demand resulting from the dry summer, particularly for corn, propane inventories continued to grow at a robust pace for most of the stockbuilding season lasting from April through September. Although propane supplies appear in a stronger position than distillate fuel supplies at this point, propane markets, to maintain equilibrium, still must rely on the eventual return of production facilities to full operation, with strong imports in the interim making up for any shortfall in production.

In short, the overall message for heating oil and propane markets this winter would be one of caution as mixed signals and continued recovery of storm-damaged refineries and other petroleum infrastructure add a new level of uncertainty over heating fuel conditions in the months ahead.

Residential Heating Oil Price Drops While Propane Price Increases Again
Residential heating oil prices decreased for the period ending October 31, 2005, predominantly in the Midwest. The average residential heating oil price fell 4.5 cents from last week to reach 257.8 cents per gallon, an increase of 51.8 cents from this time last year. Wholesale heating oil prices decreased 8.9 cents to reach 193.7 cents per gallon, an increase of 43.8 cents compared to the same period last year.

The average residential propane price increased 1.1 cents, to 196.1 cents per gallon. This was an increase of 27.9 cents over the 168.2 cents per gallon average for this same time last year. Wholesale propane prices decreased 0.3 cent per gallon, from 119.4 cents to 119.1 cents per gallon. This was an increase of 18.3 cents from the November 1, 2004 price of 100.8 cents per gallon.

U.S. Retail Gasoline and On-Highway Diesel Prices Fall Steeply
The U.S. average retail price for regular gasoline decreased by 12.3 cents to 248.0 cents per gallon, falling for the fourth week in a row. Over the past four weeks, retail prices have dropped a total of 44.8 cents per gallon. Nevertheless, this week’s price is 44.6 cents higher than this time last year. Prices were down throughout the country, with the Gulf Coast seeing the largest regional decrease of 14.4 cents to 245.5 cents per gallon. The Midwest had the lowest regional price in the country, falling 12.5 cents to 232.6 cents per gallon. East Coast prices fell by 13.0 cents to 250.5 cents per gallon. The West Coast averaged 271.2 cents per gallon, the highest regional average price in the country, after falling 8.5 cents; California prices lost 8.0 cents to 274.7 cents per gallon.

Retail diesel fuel prices tumbled 28.1 cents, the largest one-week decline on record, to reach 287.6 cents per gallon, the lowest price since September 26, 2005. Prices were down throughout the country, with the Midwest seeing the largest regional decrease of 32.8 cents to 290.7 cents per gallon. The highest regional average price in the country was in the Rocky Mountain region, falling 15.3 cents to average 307.9 cents per gallon. East Coast prices were down 26.7 cents to 278.4 cents per gallon, the lowest regional price in the nation. West Coast prices averaged 295.1 cents per gallon, a decrease of 19.1 cents.

Propane Inventories Post October Build
U.S. inventories of propane continued the seasonal build with a weekly gain of 1.3 million barrels, reaching an estimated 69.4 million barrels as of October 28, 2005. Although October stockbuilds are not considered rare, the continued post-season build this year would seem unlikely due in part to the hurricane damage to production facilities and market volatility since last summer. However, propane inventories posted a 0.8-million-barrel build during October, surpassing the most recent 5-year activity that showed a stockdraw measuring 0.2 million barrels, although the most recent 5-year period showed that four out of the five years had a build in inventories. Strong imports again boosted overall inventories but were particularly strong in the Gulf Coast, which reported a gain of 1.2 million barrels. Midwest inventories followed with a 0.2-million barrel weekly gain, while East Coast inventories remained unchanged during this same time. The combined Rocky Mountain/West Coast regions also remained unchanged last week. Propylene non-fuel use inventories broke with the recent downward trend and reported a 0.2-million-barrel weekly gain, rising to account for a 5.5 percent share of total propane/propylene inventories, compared with the prior week’s 5.3 percent share.

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