Released on January 11, 2006
(Next Release on January 19, 2006)

Déjà Vu All Over Again?
Gasoline consumers in the United States might be forgiven if they seem to be quoting Yogi Berra when he said, “It’s déjà vu all over again.” After seeing gasoline prices fall in late 2004, consumers saw them start rising again as 2005 began and they seemed to rise almost every week over the first nine months of 2005. As 2006 begins, consumers may be wondering if the same pattern is in store for this year, as the national average price of gasoline has risen 13 cents in the last two weeks. Is this the beginning of another long price increase?

While all projections of future prices are necessarily highly uncertain, EIA’s Short-Term Energy Outlook, which was released yesterday, forecasts that prices will generally increase over the first six months of the year, and that the average for January may be the lowest monthly average of 2006. How high retail prices might get over the course of this year depends on many variables, including how smoothly markets transition as gasoline fuel specifications (highlighted in last week’s edition of This Week in Petroleum) change this year. But why are gasoline prices rising after declining through much of October, November, and some of December?

Retail gasoline prices can change based on both crude oil and gasoline market conditions. In recent weeks, crude oil prices have been generally increasing, reflecting strong global demand growth and continuing geopolitical concerns. Since prices began falling following Hurricanes Katrina and Rita, the near-month futures price for crude oil has fluctuated between $55 and $65 per barrel (see the graph below). The recent rise in crude oil prices towards the upper end of the recent trading range helps to explain some of the recent increase in retail gasoline prices.

However, strong gasoline demand during December may be the largest factor behind the recent increase in gasoline prices. The U.S. average retail price for regular gasoline fell to $2.15 per gallon in early December. While that price was nearly 24 cents per gallon higher than a year earlier, it was 92 cents per gallon lower than the early September price peak following Hurricane Katrina, and 78 cents per gallon lower than the October price peak following Hurricane Rita. While prices near $2 per gallon was considered expensive a year ago, they may not seem so expensive to some consumers following the higher prices that prevailed after the recent hurricanes. Regardless, after showing very little growth for much of the fall, gasoline demand began to show significant growth in December. With gasoline imports tailing off as prices dropped and refiners started to produce more distillate fuel, the growth in demand was enough to keep inventories from growing as much as they did in December 2004, based on weekly data. Between December 2, 2005 and December 30, 2005, total gasoline inventories grew by less than 2 million barrels, significantly less than the over 6-million-barrel rise seen between December 3, 2004 and December 31, 2004. Looking at just finished gasoline inventories, the difference between December 2005 and December 2004 was even more striking, using comparable weekly data. In the four-week period between December 2, 2005 and December 30, 2005, finished gasoline inventories fell by nearly 2 million barrels, while during the similar four-week period in 2004, they rose by nearly 5 million barrels. Thus, with absolute gasoline inventories relatively low compared to December 2004 (and significantly lower in terms of days supply), wholesale prices rose, which eventually found its way to higher retail prices.

So, how long will prices continue to increase? While EIA does expect prices to increase on a monthly average basis for at least the first half of 2006, it appears that prices may increase some more over the next few weeks (albeit by less than the 9-cents-per-gallon jump seen in the past week), but may begin to stabilize some in late January or early February. Of course, this assumes that conditions remain relatively constant for both crude oil and gasoline markets. For now, it does not appear that retail gasoline prices will average below $2 per gallon anytime soon, but barring a bumpy transition to the new gasoline formulations taking place this year or a major supply disruption, nor do we expect to see $3 per gallon either.

U.S. Average Retail Gasoline Prices Rise by 9 Cents
The U.S. average retail price for regular gasoline climbed 8.9 cents to 232.7 cents per gallon as of January 9, which is 53.4 cents higher than last year. Prices were up throughout the country, with the East Coast, the highest regional price in the country, also showing the largest regional increase of 10.6 cents to 237.0 cents per gallon. The Midwest region rose 6.9 cents to 233.2 cents per gallon, while prices on the West Coast gained 9.9 cents to 230.4 cents per gallon.

Retail diesel fuel prices increased by 4.3 cents to reach 248.5 cents per gallon as of January 9, which is 55.1 cents higher than last year. Prices were up throughout the country, with the largest price increase occurring on the West Coast. West Coast prices, also the highest regional prices in the country, were up 5.8 cents to 257.7 cents per gallon. East Coast prices increased 4.7 cents to 252.8 cents per gallon, while the lowest prices could be found in the Rocky Mountains, rising 2.9 cents to 242.1 cents per gallon.

Residential Heating Oil Prices Rise While Propane Prices Drop Slightly
Residential heating oil prices increased for the period ending January 9, 2006. The average residential heating oil price rose by 1.1 cents last week to reach 244.4 cents per gallon, an increase of 49.8 cents from this time last year. Wholesale heating oil prices increased by 3.6 cents to reach 183.3 cents per gallon, an increase of 51.6 cents compared to the same period last year.

The average residential propane price decreased 0.5 cent, to reach 200.8 cents per gallon. This was a increase of 28.0 cents compared to the 172.8-cents-per-gallon average for this same time last year. Wholesale propane prices decreased 5.2 cents per gallon, from 113.9 cents to 108.7 cents per gallon. This was an increase of 27.8 cents from the January 10, 2005 price of 80.9 cents per gallon.

Propane Stockdraw Moderates
Following a string of strong weekly draws on inventories, the relatively mild weather experienced over major portions of the country in recent weeks contributed to moderate the propane stockdraw to 1.6 million barrels last week, pushing inventories lower to 56.0 million barrels as of January 6, 2006. Moreover, the upward trend in propane production that continued last week, as the industry continues to recover from the hurricanes, and higher imports were also factors contributing to moderate the weekly stockdraw on propane inventories. Most of the weekly stockdraw occurred in the Gulf Coast region with a 1.7-million-barrel draw on inventories, followed by the Midwest that reported stocks lower by 0.3 million barrels. During this same period, East Coast inventories gained 0.5 million barrels, while inventories in the combined Rocky Mountain/West Coast regions remained flat. Propylene non-fuel use inventories rose last week by 0.1 million barrels to account for a slightly higher 7.1 percent of total propane/propylene inventories from the prior weeks 6.8 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.