Released on January 19, 2006
(Next Release on January 25, 2006)

Heating Oil Blues
The December 7, 2005 edition of This Week In Petroleum (TWIP), discussed industry concerns regarding the adequacy of then-current inventories of petroleum heating fuels to meet winter needs. The discussion noted that propane markets had overcome the effects of Hurricanes Katrina and Rita with near-record imports that partially offset production losses from shut-in refineries. Coupled with the relatively mild fall weather, U.S. inventories of propane had risen to more than 71 million barrels by the end of November 2005, assuring an adequate safety net against possible severe winter weather. While the earlier TWIP article focused primarily on the propane market, this article will look at the heating oil market at about the midpoint of the current winter heating season.

Distillate fuel inventories, including heating oil and diesel fuel, followed a roller-coaster path for most of 2005, with inventories tracking near the lower boundary of the average range during the early months of 2005 before rebounding to levels well above the average range by midsummer. Following Hurricanes Katrina and Rita, distillate fuel inventories once again fell, and tracked near the bottom of the average range prior to the start of the 2005-06 heating season in October. At that time, with the approaching winter heating season just a few weeks away, coupled with the extensive damage inflicted on U.S. Gulf Coast petroleum infrastructure from the hurricanes, the general consensus among market observers, including the Energy Information Administration (EIA), was pessimistic for consumers, reflecting the probability of tightening heating oil supplies with prices in the Northeast (the largest heating oil market in the United States) as much as 30 percent higher than last year. Moreover, continued strong gasoline demand during this same time added further pressure on refiners’ ability to supply a strong gasoline market in conjunction with heating oil needs if the country experienced a severe winter.

As events have developed, the winter has proven to be relatively mild to date, as heating oil demand enters its peak period. Heating oil prices this winter are now expected to average 23 percent higher than last winter, according the latest forecast in EIA’s Short-Term Energy Outlook. In addition to relatively mild weather in key heating oil regions of the country, the revised projections reflect, in part, a faster-than-expected return of damaged Gulf Coast refineries and continued strong distillate supply from imports. Although above-average temperatures during October and November essentially were largely offset by colder-than-normal temperatures during December, temperatures during the first half of January have been above normal across all regions of the country. The subsequent weakness in heating oil demand has allowed inventories to build during a time when they would normally decline. Distillate fuel inventories stood at 134.7 million barrels as of January 13, a level 10.3 million barrels above the same week last year and the highest level since August 26, 2005 ( see Figure 5, Weekly Petroleum Status Report).

While the middle of January would hardly qualify as the end of winter, some refiners at this point may assume winter is essentially over in terms of supplying the heating oil market with any major new supply over and above what they would consider adequate for the remainder of a normal winter. Unless any of these key heating-oil-dependent regions experiences sustained cold temperatures in the weeks ahead, refiners instead will most likely begin to focus on refinery maintenance programs and the spring gasoline market. Heating oil consumers will probably continue to feel the blues with high heating oil prices for the remainder of winter, although now the outlook appears somewhat brighter compared with previous price predictions.

Residential Heating Oil Prices Rise While Propane Prices Drop Slightly
Residential heating oil prices decreased for the period ending January 16, 2006. The average residential heating oil price fell by 1.7 cents last week to reach 242.7 cents per gallon, an increase of 46.3 cents from this time last year. Wholesale heating oil prices decreased by 10.0 cents to reach 173.3 cents per gallon, an increase of 34.3 cents compared to the same period last year.

The average residential propane price increased 0.3 cent, to reach 201.2 cents per gallon. This was an increase of 28.7 cents compared to the 172.5 cents per gallon average for this same time last year. Wholesale propane prices decreased 4.8 cents per gallon, from 108.7 cents to 103.9 cents per gallon. This was an increase of 20.5 cents from the January 17, 2005 price of 83.4 cents per gallon.

U.S. Average Retail Gasoline Prices Fall Slightly
The U.S. average retail price for regular gasoline edged down 0.7 cent to 232.0 cents per gallon as of January 16, which is 50.1 cents higher than last year. Prices were mixed throughout the country, with the West Coast showing the largest regional increase of 6.8 cents to 237.2 cents per gallon. California prices gained 8.9 cents to 241.7 cents per gallon. East Coast prices, still the highest regional prices in the nation, increased by 1.1 cents to 238.1 cents per gallon. The Midwest region fell 6.9 cents to 226.3 cents per gallon.

Retail diesel fuel prices decreased by 3.6 cents to reach 244.9 cents per gallon as of January 19, which is 49.7 cents higher than last year. Prices were down throughout the country, with the largest price decrease occurring in the Midwest, falling 4.3 cents to 240.8 cents per gallon. West Coast prices, also the highest regional prices in the country, were down 1.2 cents to 256.5 cents per gallon. East Coast prices decreased 3.9 cents to 248.9 cents per gallon, with New England prices dropping 1.3 cents but still 266.3 cents per gallon.

Propane Inventories Seasonally Lower
Despite above average temperatures during the first half of January, U.S. inventories of propane reported a robust 3.0-million-barrel stockdraw last week that moved inventories down to an estimated 53.0 million barrels as of January 13, 2006. But with temperatures expected to remain relatively moderate through next week, and with the cumulative stockdraw through the first half of January totaling about 4.6 million barrels, the monthly stockdraw may fall short of the 5-year average for January. Inventories continued lower in all regions last week with East Coast inventories declining by 0.1 million barrels, while inventories in the Midwest and Gulf Coast regions posted declines of 0.6 million barrels and 2.1 million barrels, respectively. The combined Rocky Mountain/West Coast regions moved lower by 0.2 million barrels during this same time. Propylene non-fuel use inventories posted a large 0.3-million-barrel gain last week to account for an 8.1 percent share of total propane/propylene inventories, up from the prior week’s 7.1 percent share.

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