Released on February 1, 2006
(Next Release on February 8, 2006)

Assumptions
With Super Bowl XL just days away, fans of the Pittsburgh Steelers are rooting for, and expect, their team to defeat the Seattle Seahawks. While loyalty to the Steelers may be one reason underlying this sentiment, some fans can provide sound reasons based on their analysis of the teams’ abilities and past performances. Likewise, fans of the Seattle Seahawks expect their team to win and can provide sound reasons, based on their analysis of the teams’ abilities and past performances. Obviously, both sides can’t be right, as only one of the two teams will ultimately win. But that doesn’t necessarily mean that the reasons given by the losing team’s fans are invalid. It just implies that the assumptions they used in their analysis may not pan out.

The same is true for oil markets. Expectations of the future are based on the assumptions made about the future. In oil markets, those analysts and traders that are forecasting oil prices to remain at or near the currently high levels are assuming that demand growth, both globally and here in the United States, will remain strong. While the latest weekly data shows that U.S. oil demand over the past four weeks is down 0.8 percent from a similar period last year, many analysts attribute that, in part, to the abnormally warm weather experienced in much of the country in January. The assumption is that as temperatures approach more normal levels, demand will once again rise relative to year-ago levels. Combined with the assumption that the U.S. economy will continue to grow at a moderately strong pace, EIA’s January 2006 Short-Term Energy Outlook (STEO), which will be updated next week, projected U.S. oil demand to increase by 1.7 percent in 2006, even with crude oil prices remaining above $60 per barrel for the entire year. Globally, the January STEO projected demand to rise by 1.6 million barrels per day, which is more than the expected increase in non-OPEC supply, thus putting added pressure on OPEC to supply the world’s growing oil needs. These assumptions are critical in EIA’s expectation of continued high oil prices through 2006 (and even in 2007).

On the other hand, analysts and traders expecting prices to drop substantially this year have different assumptions. They may be assuming weaker rates of economic activity and that oil prices are high enough to ultimately offset much of the demand growth that would be ordinarily expected, absent the price rise to current levels. These analysts may also be assuming a greater supply response, especially from non-OPEC sources, given today’s price levels. In the past, high oil prices have indeed led to slower demand growth and an increase in oil production, and some analysts expect the same to occur following this cycle of rising prices. When this response occurs, and to what degree, is highly uncertain, but a presumption of a relatively strong near-term response would seem to underpin expectations of crude oil prices declining to $50 per barrel or lower later this year.

Regardless of the forecast for oil prices in 2006, key assumptions concerning supply and demand are critical in shaping expectations. When evaluating a particular forecast, it is important to understand the underlying assumptions behind the forecast. While fans of the Steelers and the Seahawks hope their assumptions about the Super Bowl pan out, how the game actually ends is unknown at this time. So, too, is the future of oil markets unknown. However, if EIA’s view of the future is correct, high oil prices will be with us for some time to come.

U.S. Average Retail Gasoline Prices Rise Another 2 Cents
The U.S. average retail price for regular gasoline was up 2.1 cents to 235.7 cents per gallon as of January 30, which is 44.6 cents higher than last year. Prices were mixed throughout the country, with the East Coast and Gulf Coast seeing decreases under a penny to 239.4 cents per gallon and 227.6 cents per gallon, respectively. California prices gained 8.9 cents to 251.3 cents per gallon, and the West Coast as a whole added 7.0 cents to 245.6 cents per gallon, the highest regional price in the nation. The Midwest also saw a price increase, gaining 3.2 cents to 231.4 cents per gallon.

Retail diesel fuel prices increased by 1.7 cents to reach 248.9 cents per gallon as of January 30, which is 49.7 cents higher than last year. Prices were up throughout the country, with the largest price increase occurring in the Rocky Mountains, gaining 3.9 cents to 247.4 cents per gallon. West Coast prices rose 3.2 cents to 264.0 cents per gallon, still the highest regional prices in the country. East Coast prices increased 1.4 cents to 253.0 cents per gallon, but New England prices fell 0.7 cent to 266.1 cents per gallon.

Residential Heating Fuel Prices Experience Slight Decrease
Residential heating oil prices decreased for the period ending January 30, 2006. The average residential heating oil price dropped by 0.2 cent last week to reach 246.1 cents per gallon, an increase of 44.3 cents from this time last year. Wholesale heating oil prices decreased by 3.6 cents to reach 183.5 cents per gallon, an increase of 43.8 cents compared to the same period last year.

The average residential propane price decreased 0.9 cent, to reach 200.3 cents per gallon. This was an increase of 27.5 cents compared to the 172.8 cents per gallon average for this same time last year. Wholesale propane prices decreased 7.6 cents per gallon, from 108.5 cents to 100.9 cents per gallon. This was an increase of 18.8 cents from the January 31, 2005 price of 82.1 cents per gallon.

Propane Inventories Much Lower
U.S. inventories of propane moved sharply lower last week following a weekly draw totaling 4.0 million barrels, a larger draw that was in stark contrast to the smaller draws seen over the past weeks. With last week’s stockdraw, U.S. inventories of propane fell to an estimated 48.3 million barrels as of January 27, 2006, putting inventories at a position slightly above the normal range for this time of year. Moreover, with propane production and imports trending lower in recent weeks, propane markets relied more heavily on inventories in meeting propane supply requirements. Regional declines were seen in all areas last week with East Coast inventories moving lower by 0.8 million barrels, while Midwest and Gulf Coast inventories posted respectively larger declines of 1.6 million barrels and 1.4 million barrels. The combined Rocky Mountain/West Coast regions lost 0.3 million barrels during this same period. The sub category of propylene non-fuel use inventories gained 0.2 million barrels last week to account for a larger 8.7 percent of total propane/propylene inventories, compared with the prior week’s 7.6 percent share.

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