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

Deal or No Deal
A new prime time television game show aired during prime time asks a contestant to pick a briefcase in the hope of that particular briefcase winning them a lot of money. During the remainder of the game, as the contestant eliminates other briefcases and discovers how much money they represent, he/she is given the opportunity to sell the briefcase chosen for an amount of money that changes at each stage of the game based on changes in the expected amount of money the briefcase represents, as the contents of the other briefcases are serially revealed. The decisions each contestant makes are based on the degree of risk they are willing to accept and their own probability assessment. This is not too unlike the decisions that gasoline importers need to make.

When making the decision as to whether to import gasoline and at what quantities, importers look at the cost of buying gasoline overseas and bringing it to the United States compared with the returns they expect to realize when that gasoline is sold at a later date. When gasoline prices here are much higher than in Europe, for instance, then the arbitrage (the difference between prices in one market compared to another) provides the opportunity, or market incentives, to import more gasoline. The graph shown below shows the difference between daily spot prices of gasoline in New York Harbor (NYH) and Rotterdam (ARA), the main spot price market for European gasoline supplies. Generally, the price in New York needs to be at least 5-10 cents per gallon more than in Rotterdam in order to cover transportation costs and begin to provide sufficient incentive to attract higher levels of imports. As can be seen from the graph below, during much of the first several weeks of the year this has been the case. However, lately, the difference has declined and based on the arbitrage alone, analysts might expect a steep decline in gasoline imports to be forthcoming. But another factor determining the actual level of imports involves supplier expectations of the future, and this might help to explain why a drop in imports has not been seen yet.

As the graph below indicates, gasoline imports in 2006, to date, have been extremely high compared to levels seen in recent years. (The surge in imports following hurricanes Katrina and Rita last autumn are also very visible.) Except for comparison to one week last year, gasoline imports this year have been much higher than seen in the last few years for this time of year. With the transition away from reformulated gasoline (RFG) with MTBE (a gasoline additive used to make RFG) towards RFG using ethanol, some suppliers may be concerned that the transition may not be seamless in certain regions of the country. Under this scenario, it may make sense to build up inventories now, so that if prices do spike in certain regions, suppliers may be able to fill any gap. As noted in last week’s This Week In Petroleum, concerns about just such a scenario may be part of the reason why gasoline prices on the futures market are much higher for months later in the year than the current spot price.

Depending on how the future unfolds, a contestant on the new game show can win a lot of money, or walk away with very little. Importers bringing in large quantities of gasoline are in a similar situation. If gasoline prices surge over the coming months, they will walk away with handsome returns. If prices do not surge, however, they may be stuck with extra gasoline supplies for which they will be hard-pressed to find buyers at prices high enough to have made it worthwhile for them to import such large quantities in recent weeks. Regardless, gasoline analysts will be closely watching the market and gasoline imports to find out if some importers that have recently been saying “Deal”, will soon be saying “No Deal."

U.S. Average Retail Gasoline and On-Highway Diesel Prices Increase
The U.S. average retail price for regular gasoline gained 1.4 cents to 225.4 cents per gallon as of February 27, which is 32.6 cents higher than last year. Prices were mixed throughout the country, with the Midwest seeing the largest increase of 9.2 cents to 225.9 cents per gallon. East Coast prices dropped 2.1 cents to 223.5 cents per gallon. West Coast prices, still the highest in the nation, were down 2.7 cents to 238.3 cents per gallon, while California prices lost 3.4 cents to 243.9 cents per gallon.

Retail diesel fuel prices increased by 1.6 cents to reach 247.1 cents per gallon as of February 27, which is 35.3 cents higher than last year. Prices were up throughout the country, with West Coast prices seeing the largest increase of 2.9 cents to 262.3 cents per gallon, the highest regional price in the country. Midwest prices gained 1.9 cents to 241.7 cents per gallon, while East Coast prices gained just 0.6 cent to 249.3 cents per gallon.

Residential Heating Oil Prices Increase While Propane Prices Decrease Slightly
Residential heating oil prices increased for the period ending February 27, 2006. The average residential heating oil price rose by 1.5 cents last week to reach 241.2 cents per gallon, an increase of 36.9 cents from this time last year. Wholesale heating oil prices increased by 8.0 cents to reach 179.4 cents per gallon, an increase of 27.5 cents compared to the same period last year.

The average residential propane price decreased 0.2 cent, to reach 199.8 cents per gallon. This was an increase of 28.1 cents compared to the 171.7 cents per gallon average for this same time last year. Wholesale propane prices increased 2.4 cents per gallon, from 96.3 cents to 98.7 cents per gallon. This was an increase of 13.4 cents from the February 28, 2005 price of 85.3 cents per gallon.

Propane Inventories Drift Lower
Persistent cold temperatures over much of the Nation continued to put downward pressure on propane inventories last week with inventories moving lower by 2.6 million barrels to an estimated 37.8 million barrels as of February 24, 2006. Nevertheless, propane inventories at the national level, as well as in the major consuming regions in the East Coast and Midwest, remain above their respective average ranges for this time of year. Regional inventories posted mostly seasonal declines with East Coast inventories lower by 0.4 million barrels, while inventories in the Midwest reported the largest weekly decline of 1.8 million barrels. During this same period, Gulf Coast inventories moved down by 0.4 million barrels while the combined Rocky Mountain/West Coast regions edged lower by a modest 0.1 million barrels. Propylene non-fuel use inventories fell by 0.1 million barrels last week but accounted for a slightly higher 8.5 percent of total propane/propylene inventories, compared with the prior week’s 8.2 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.