Released on July 12, 2006
(Next Release on July 19, 2006)

Thinking Of Winter During Summer
Recently, a reader of This Week In Petroleum asked if we would write something about heating oil, as some people who use oil to heat their homes will need to decide soon whether to lock in a set price for the entire winter or pay the prevailing market price each time they fill their tank. The terms of any particular lock-in offer, the fuel use and financial situation of each individual household, and views regarding the projected path of oil prices over the coming winter are all factors that will enter into such decisions. While EIA cannot make any specific recommendation, our current perspective on heating oil markets may be useful to those preparing for the upcoming winter, even as many of us are anticipating, or coming back from, our summer vacations.

Yesterday, EIA released our latest Short-Term Energy Outlook. While we will provide a more exhaustive look at the upcoming winter in three months (when we release our October 2006 edition of the Short-Term Energy Outlook), EIA’s latest spreadsheet, with monthly prices, can be downloaded at: http://www.eia.gov/ftproot/steo/jul06_base.xls. By clicking on the worksheet tab labeled “Distillate by Region”, expected average residential prices for heating oil (including State taxes) for various regions can be found. As of early July, EIA is forecasting residential heating oil prices to be between 5 to 10 cents per gallon higher during the key winter months of December through February than they were last winter. In addition, the forecast expects heating oil prices to be relatively flat this winter with a slight increase in December and January. As the chart below indicates, however, in 3 out of the last 4 years, prices have tended to be higher in the latter part of winter than early or mid-winter, with the exception being last year, when prices were highest at the beginning of the winter season due to the aftereffects from the loss of refinery capacity from Hurricanes Katrina and Rita, and an early, but short-lived cold spell that was followed by a very warm January.

However, there are many factors that could change EIA’s forecast. First, weather is a key factor that will influence heating oil prices, and something that is as hard to predict as oil prices. Should weather turn cold early and use up much of any inventory surplus that may exist heading into the winter, prices could spike early in the season. However, if the weather begins warmer-than-normal and does not turn significantly colder until after the new year, heating oil prices could moderate, like last year, or even decline. Another factor that could impact heating oil prices is the level of inventories heading into the winter season. While heating oil inventories are currently about 4 million barrels (9 percent) above the 5-year average, these stocks could easily be significantly reduced should refiners need to continue emphasizing gasoline production longer into the summer season than usual. In such a scenario, heating oil inventories would not build as much as normal between now and the beginning of winter, and inventories could be relatively low heading into the upcoming winter. Conversely, additional heating oil supplies from domestic refineries or imports that exceed seasonal norms over the next few months would add to inventory levels and put downward pressure on prices. Finally, the global demand for diesel fuel could also impact heating oil prices, as diesel fuel and heating oil are closely related products. With diesel fuel used extensively in Europe and Asia, as well as in the United States, continued strong growth in diesel fuel demand could increase price pressures in U.S. heating oil markets this winter.

Whether heating oil consumers should try and lock in prices, or wait in the hope that they will decline over the coming months, is up to each consumer and the degree of risk they are willing to accept. However, even as some of us relax at the pool or the beach this summer, some people need to begin to plan for the upcoming winter.

U.S. Average Retail Gasoline Price Adds Almost 4 Cents
The U.S. average retail price for regular gasoline increased by 3.9 cents last week to reach 297.3 cents per gallon as of July 10, which is 64.5 cents higher than last year. Prices rose for the second week in a row, with the Midwest experiencing the largest price increase of 5.6 cents to 296.9 cents per gallon. West Coast prices remained the highest in the nation, rising 2.7 cents to 313.5 cents per gallon. California prices were up 3.5 cents to 322.4 cents per gallon. East Coast prices increased 3.8 cents to 296.2 cents per gallon.

Retail diesel fuel prices rose 2.0 cents to reach 291.8 cents per gallon as of July 10, which is 51.0 cents higher than last year. Prices were up throughout most of the country, with the Midwest seeing the largest increase of 3.2 cents to 291.9 cents per gallon. West Coast prices remained the highest in the nation, gaining 0.4 cent to reach 306.0 cents per gallon. California prices fell by 0.6 cent to 311.3 cents per gallon.

Propane Stocks Sharply Higher
U.S. propane inventories posted the largest gain yet of the 2006 build season with a weekly increase that totaled 2.7 million barrels, lifting inventories to an estimated 51.3 million barrels as of July 7, 2006. Despite East Coast inventories that remained relatively unchanged for the third consecutive week, robust inventory gains were reported in all of the remaining regions last week. While Midwest inventories reported a 0.6-million-barrel gain, the Gulf Coast region posted a robust 1.9-million-barrel gain during this same period. The combined Rocky Mountain/West Coast regions also posted strong gains that totaled 0.3 million barrels last week. Combined with last week’s gains, U.S. propane inventories are slowly inching higher with respect to the average range for this time of year, following several months in which inventories remained near the lower boundary of the average range. Propylene non-fuel use inventories moved higher by 0.3 million barrels last week to account for a higher 6.8 percent share of total propane/propylene inventories from the prior week’s 6.6 percent share.

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