Released on December 14, 2005
(Next Release on December 21, 2005)

Looking To the Future
Earlier this week, three different organizations outlined their views of the future in global oil markets. Perhaps most interesting, was that each of the three looked at different future time horizons, resulting in different conclusions.

Early on Monday morning (U.S. Eastern Time), the Organization of Petroleum Exporting Countries (OPEC) met and released their oil market assessment, indicating that the world is currently well supplied through the first quarter of 2006. OPEC stated once again that because product demand typically falls in the second and third quarters, it will meet again next month to discuss the possibility of reducing its production. But, as EIA pointed out in our February 16, 2005 edition of This Week In Petroleum, while demand for oil products is lower in the second and third quarters compared to the first and fourth quarters, there actually is very little change in the amount of crude oil used in refineries (a proxy for crude oil “demand”) between the first and second quarters among countries belonging to the Organization for Economic Cooperation and Development (OECD), and crude oil demand typically increases in the third quarter. However, as OPEC looks towards the first quarter of 2006, it foresees global oil markets as being well supplied, albeit at much higher prices than seen previously during this time of year.

Later Monday morning, the Energy Information Administration (EIA) took a different look into the future, releasing its Annual Energy Outlook 2006 (AEO2006). This publication provides a long-term view, with an annual forecast through the year 2030. The headline of the AEO2006 was that, in contrast to its recent previous long-term forecasts, EIA now expects oil prices to remain high for many years. EIA is now projecting oil prices in 2025 to be about $54 per barrel (in 2004 dollars), which is about $21 higher than last year’s AEO price for 2025. In preparing the AEO2006, EIA reevaluated its prior expectations about world oil prices in light of current circumstances in oil markets. EIA noted that, since 2000, world oil prices have risen sharply as supply has tightened, first as a result of strong demand growth in developing economies such as China, and later as a result of supply constraints resulting from disruptions and inadequate investment to meet demand growth. As a result, the AEO2006 reference case includes much higher world oil prices than were projected in AEO2005. In other words, EIA expects oil markets to remain tight (meaning spare production capacity will continue to remain low, both upstream and downstream) causing oil prices to remain elevated for the foreseeable future.

Then yesterday, December 13, the International Energy Agency (IEA) released its latest monthly Oil Market Report (OMR), which typically looks into the future as far as the next 12-18 months. However, this particular edition of the OMR highlighted the IEA’s view of oil markets through 2010 and concluded that there is “ … no strong evidence of a significant change in current [oil] market conditions over the next five years.” The IEA’s view of the future, while shorter in scope than EIA’s, comes to a similar conclusion: oil prices are likely to remain high for the foreseeable future. In addition, the IEA notes that while OPEC spare capacity is expected to grow some in 2006, effective spare capacity may not reach 3 million barrels per day until 2009. This puts pressure on the oil industry to maintain inventories at higher levels in order for the market to be able to respond to potential supply outages and demand surges that are likely to come over the next several years.

Every week, EIA publishes oil data for the week ending the previous Friday. While the data provide the latest information on current oil market conditions, many analysts and traders also use this data to shape their own interpretations of the future. Whether looking a day ahead or 25 years ahead, the various time horizons and perspectives organizations take in looking into the future of oil markets leads them to see current oil market conditions as either half-full or half-empty.

Residential Heating Fuel Prices Increase
Residential heating oil prices rose slightly for the period ending December 12, 2005. The average residential heating oil price increased 0.3 cent from last week to reach 241.3 cents per gallon, an increase of 46.6 cents from this time last year. Wholesale heating oil prices decreased by 2.4 cents to reach 175.1 cents per gallon, an increase of 51.1 cents compared to the same period last year.

The average residential propane price rose by an increment of 1.7 cents, to 195.6 cents per gallon. This resulted in a price that was 24.3 cents over the 171.3 cents per gallon average for this same time last year. Wholesale propane prices increased 6.8 cents per gallon, from 108.5 cents to 115.3 cents per gallon. This was an increase of 29.8 cents from the December 13, 2004 price of 85.5 cents per gallon.

U.S. Retail Gasoline Price Increases Almost 4 Cents
The U.S. average retail price for regular gasoline gained 3.8 cents to 218.5 cents per gallon, rising for the first time in ten weeks. Prices were mixed throughout the nation, with the Gulf Coast seeing the largest increase of 6.7 cents to 214.4 cents per gallon. The West Coast saw the largest decrease of 6.2 cents to 225.6 cents per gallon, still the highest regional price in the country. California prices fell 5.8 cents to 227.7 cents per gallon. East Coast prices gained 5.6 cents to 218.1 cents per gallon.

Retail diesel fuel prices gained 1.1 cents to reach 243.6 cents per gallon. Price changes were mixed throughout the country, with the Rocky Mountains seeing the largest regional decrease of 7.0 cents to 240.1 cents per gallon. East Coast prices were up 3.0 cents to 245.8 cents per gallon. West Coast prices, the highest in the country, averaged 250.0 cents per gallon after falling 3.8 cents.

Propane Inventories Move Sharply Lower
U.S. inventories of propane moved sharply lower last week with a 3.0-million-barrel decline that lowered inventories to an estimated 68.5 million barrels as of December 9, 2005. The winter storm that swept through the Midwest and East Coast last week sparked the first significant stockdraw of the season that partially offset supply losses due to declines in both propane production and imports, compared with the prior week. Inventories fell in all regions last week, with the Midwest moving lower by 1.3 million barrels, while inventories on the Gulf Coast moved down by 1.1 million barrels. During this same time, East Coast inventories dropped by 0.5 million barrels while the combined Rocky Mountain/West Coast regions declined by 0.1 million barrels. Propylene non-fuel use inventories fell to 3.2 million barrels last week, down 0.2 million barrels to account for a slightly lower 4.7 percent share of total propane/propylene inventories from the prior week’s 4.8 percent share.

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