Released on March 15, 2006
(Next Release on March 22, 2006)

A Buying Spree? At These Prices?
More National Football League (NFL) free agents have been signed in the last few days than ever before over such a short period of time. These players are not coming cheaply either, with some teams, including the Washington Redskins, spending tens of millions of dollars to sign players that they expect will provide dividends in the future. Something similar is going on in oil markets, with companies continuing to bring in crude oil and gasoline imports, even at today’s relatively high prices and with apparently abundant stock levels already. Why? Because they think buying now will yield benefits later.

While it is true that crude oil imports over the past four weeks are down slightly compared to the same period last year, this is happening with crude oil prices $5 to $10 per barrel higher than a year ago, and with crude oil inventories nearly 32 million barrels (more than 10 percent) higher, as well. With prices significantly higher and inventory levels the highest in almost seven years, it may be somewhat surprising that import levels are as high as they are. But to many buyers, $60 crude oil can still be valuable if they expect to be able to sell it later for $65 per barrel, or expect to refine it and sell the refined products for more later in the year. As EIA has written lately, if you expect prices to be higher in the future (due to geopolitical situations in Nigeria, Iran, and other countries; MTBE-to-ethanol transition; ultra-low sulfur diesel fuel; continued strong demand growth; etc.) it can make economic sense to buy now, even if inventories are already high. A deepening contango structure (when prompt prices are less than future deliveries) in crude oil futures markets makes these market expectations transparent and promotes this “buy more now” behavior.

The situation has been somewhat more surprising for gasoline, imports of which have now averaged over 1 million barrels per day for six weeks in a row, the second longest streak ever (the longest streak was a nine-week stretch following Hurricanes Katrina and Rita). Over the most recent four-week period, gasoline imports are over 30 percent greater than those seen during the same period last year, even though gasoline inventories are already above typical levels for this time of year. Some analysts had been expecting gasoline imports to drop significantly, reflecting the recent decline in price differentials between European and United States gasoline markets. But, as is the case with crude oil, many analysts expect gasoline prices to go significantly higher later this year, particularly given the potential for distribution problems related to the transition from MTBE to ethanol in reformulated gasoline (see EIA’s analysis on this issue). In addition, some analysts may expect currently high inventory levels to be drawn down fairly rapidly in the not-too-distant future, if demand remains strong and gasoline production remains low due to refinery maintenance. The bottom line is that if one expects gasoline prices to be significantly higher later this year, then it may make economic sense to buy now, even if that results in adding to what may appear to be already abundant inventory levels.

While some fans wonder if NFL teams are “overpaying” for some of their recent acquisitions, the players are simply getting what the market will bear. The same is true in the current oil market. While the prices being paid for crude oil and gasoline imports may seem too high to some people, especially given the level of inventories, willing buyers are expecting to reap future benefits from the purchases they are now making.

U.S. Average Retail Gasoline Increases 3.5 Cents
The U.S. average retail price for regular gasoline gained 3.5 cents to 236.6 cents per gallon as of March 13, which is 31.0 cents higher than last year. Prices were up throughout the country, with the West Coast seeing the largest increase of 5.5 cents to 247.7 cents per gallon, the highest regional price in the country. California prices also rose 5.2 cents to 253.2 cents per gallon, 24.5 cents higher than this time last year. East Coast prices rose 4.6 cents to 233.3 cents per gallon.

Retail diesel fuel prices decreased by 0.2 cent to reach 254.3 cents per gallon as of March 13, which is 34.9 cents higher than last year. Prices were mixed throughout the country, with the Rocky Mountains seeing the largest regional increase of 2.1 cents to 256.6 cents per gallon. West Coast prices, still the highest in the nation, rose 1.4 cents to 272.5 cents per gallon.

Residential Heating Fuel Prices Dip Lower as Season Draws to a Close
Residential heating oil prices decreased for the period ending March 13, 2006. The average residential heating oil price dropped by 2.4 cents last week to reach 241.9 cents per gallon, an increase of 30.0 cents from this time last year. Wholesale heating oil prices decreased by 12.3 cents to reach 176.8 cents per gallon, an increase of 15.3 cents compared to the same period last year.

The average residential propane price decreased 0.7 cent, to reach 198.4 cents per gallon. This was an increase of 26.3 cents compared to the 172.1 cents per gallon average for this same time last year. Wholesale propane prices decreased 1.9 cents per gallon, from 96.3 cents to 94.4 cents per gallon. This was an increase of 2.1 cents from the March 14, 2005 price of 92.3 cents per gallon.

These prices come from the last survey done for the 2005/06 winter heating season. Weekly retail and wholesale prices for heating oil and propane will restart for the 2006/07 winter season beginning in October 2006.

Propane Inventories Continue to Fall
Total inventories fell by 3.5 million barrels to an estimated 32.8 million barrels for the week ending March 10, 2006. The Gulf Coast experienced the biggest decline with a draw of 2.2 million barrels, followed by the Midwest’s 0.6 million barrels. Inventories in the East Coast and Rocky Mountain/West Coast regions also decreased by 0.5 and 0.1 million barrels, respectfully. Propylene non-fuel use inventories were reduced by 0.6 million barrels last week, moving the total to 3.4 million barrels, which accounts for a 10.4 percent share of total propane/propylene inventories.

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.