Released on August 16, 2006
(Next Release on August 23, 2006)

A Tale of Two Summers
As disappointing as it may be to schoolchildren and beach vendors, with less than 3 weeks left until Labor Day, the traditional summer vacation (and, not coincidentally, peak driving season) is nearly over in the United States. Since, in petroleum markets, the major topic of summer conversation is gasoline prices, this seems like a good time to look at what prices did this summer, and what might lie ahead.

First and foremost, in 2006 we have seen the highest summer average gasoline prices on record (not adjusted for inflation), surpassing even last summer, which was the highest to that point. On Memorial Day (May 29 this year), the U.S. average retail regular gasoline price stood at $2.867 per gallon, 77 cents higher than the same week in 2005. Prices have generally trended upward over the summer, with this week’s drop of 3.8 cents the largest one-week decrease since mid-May. However, with a net increase since Memorial Day of just over 13 cents, gasoline prices have been much more stable this summer than last, when they had already risen 45 cents by mid-August (even before Hurricane Katrina struck on August 29).

The differences between gasoline markets last summer and this summer have been well documented, in this space and elsewhere. Last year, crude oil prices rose strongly over the course of the summer driving season, gaining by about $14 per barrel (over 34 cents per gallon) by mid-August. Additionally, strong gasoline demand and scattered refinery outages pushed gasoline “crack spreads” (the difference between spot gasoline and crude oil prices) higher over the same period. This summer, gasoline prices started the season at a much higher level, due again to crude oil prices (as of Memorial Day, nearly $20 per barrel, or 46 cents per gallon, higher than the year before), and refinery issues, many remaining from last fall’s hurricanes. Issues related to the replacement of MTBE with ethanol in reformulated gasoline in many U.S. markets put additional upward pressure on gasoline prices in the spring and early summer this year. However, as the summer has progressed, crude oil prices, though volatile, have not posted significant net increases, refinery operations have generally improved, and gasoline imports have filled the gap between domestic supply and demand.

What, then, can we expect to see in gasoline markets for the remainder of the summer and into the fall? Retail gasoline prices invariably reflect changes in spot and futures prices, with a lag of one to several weeks. Those markets saw a summer peak (to date) in early August, and dropped sharply last week, pointing to a probable significant decline in retail prices over the next few weeks, assuming no major events (such as global geopolitical issues, hurricanes, or major refinery problems) occur to alter their path. Given that the final 3 weeks of summer last year saw retail gasoline prices rise nearly 52 cents (most of that in the final week, due to Hurricane Katrina), we are likely to see prices finally dip below year-ago levels by Labor Day. While this may provide scant comfort to U.S. drivers still paying around $3 per gallon for gasoline, it’s a relief to some who feared prices might have gone even higher this summer.

U.S. Average Retail Gasoline Price Falls 3.8 Cent
The U.S. average retail price for regular gasoline fell 3.8 cents last week to reach 300.0 cents per gallon as of August 14, which is 45.0 cents higher than last year. Prices fell for the first time in seven weeks, staying at or above the $3 mark for the fourth week in a row. East Coast prices softened 2.5 cents to 300.8 cents per gallon, while the Midwest saw the largest regional price decrease of 8.2 cents to 297.2 cents per gallon. West Coast prices remained the highest in the nation, adding 1.9 cents to 313.7 cents per gallon. California prices were 1.9 cents higher to 321.1 cents per gallon.

Retail diesel fuel prices gained 1.0 cent to reach 306.5 cents per gallon as of August 14, 49.8 cents higher than last year and the highest price since October 24. Prices were mixed throughout the country, with the Rocky Mountains and West Coast both seeing increases over 10 cents to 331.1 cents per gallon and 321.8 cents per gallon, respectively. California prices were up 9.0 cents to 322.0 cents per gallon.

Propane Inventories Continue Strong Build
Propane’s weekly inventory build continued strong last week with a 2.3-million-barrel gain that put the nation’s primary supply of propane at an estimated 61.8 million barrels as of August 11, 2006, a level that now tracks well within the average for this time of year. Despite strong imports and a weekly build that totaled 1.7 million barrels, Gulf Coast inventories remain near the lower boundary of the average range, while inventories in the East Coast and Midwest continued to track at or above their respective average ranges during this same period. Last week, East Coast inventories rose by 0.1 million barrels, while Midwest inventories posted a weekly gain of 0.7 million barrels. The combined Rocky Mountain/West Coast regions slipped lower by 0.1 million barrels. Propylene non-fuel use inventories also moved lower last week with a loss of 0.2 million barrels, accounting for a lower 5.2 percent share of total propane/propylene inventories compared with the prior week’s 5.8 percent share.

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