Released on August 23, 2006
(Next Release on August 30, 2006)

A Shift in Focus
With children starting the return to school in parts of the country, the realization that summer is just about over is hard to ignore. For U.S. petroleum product markets, that means a shift in focus from gasoline to heating oil and diesel fuel. With most of August behind us, and with gasoline inventories in the upper half of the average range (Figure 4 in the Weekly Petroleum Status Report), market participants feel reasonably sure that gasoline supplies are ample, absent any major disruption over the next several days. As a result, the NYMEX near-month futures price for reformulated gasoline has dropped nearly 34 cents per gallon between August 1 and August 22. However, as the market has shifted its focus towards heating oil and other distillate fuels recently, there has not been anything close to the same type of price decline in distillate fuels. The near-month futures price for heating oil is relatively unchanged from August 1 to August 22, down about 4 cents per gallon during this period, and up over 14 cents per gallon from the summer low set on June 19. Why have the two products diverged in their respective price paths, and what does this mean for the near-term future?

Part of the reason that distillate fuel products (diesel fuel and heating oil) have not seen the same pattern in spot or futures prices is the move towards ultra-low-sulfur diesel. With the transition from diesel fuel with a sulfur content of up to 500 parts per million (ppm) to diesel fuel with a sulfur content of up to only 15 ppm taking place between June 1 and October 15, some temporary regional dislocations have already occurred. These dislocations can occur for many reasons, including anything from difficulty in making ultra-low-sulfur diesel fuel at a particular refinery, to issues with storage terminals as they may draw down inventory levels of regular diesel fuel to make room for ultra-low-sulfur diesel fuel, to potential problems with the distribution of ultra-low-sulfur diesel fuel through pipeline systems. Even if no major problems surface, the chance that they may occur is high enough to cause market participants to pay a little bit more than they would otherwise, to hedge against the possibility of paying significantly more should a problem occur, thus putting additional upward pressure on prices.

Additionally, the shift in focus from gasoline to distillate fuel in the late summer and early fall, followed by a shift back to gasoline in the late winter and early spring, has been a phenomenon growing in importance over the last few years. With limited spare capacity throughout the supply chain, markets don’t have the luxury of looking too far ahead and instead concentrate on the upcoming cycle. As a result, concerns about the future tend to be magnified for those products the market currently has in its sights.

Oil markets continue to face many uncertainties. While year-to-date hurricane activity has been minimal, hurricane season is far from over. The situation between the United Nations and Iran concerning Iran’s nuclear program continues to dominate oil market headlines, and concerns about a potential oil supply disruption related to Iran continue to affect crude oil prices. Apprehension about crude oil disruptions elsewhere in the world linger as well. Thus, while gasoline prices may continue to drop after Labor Day (absent any major disruption), diesel fuel and heating oil prices may remain elevated, as the market turns its focus from gasoline towards distillate fuel.

U.S. Average Retail Gasoline Price Drops Almost 8 Cents
The U.S. average retail price for regular gasoline fell 7.6 cents last week to hit 292.4 cents per gallon as of August 21, which is 31.2 cents higher than last year. Prices fell for the second week in a row, dropping below the $3 mark for the first time in 5 weeks. East Coast prices lost 7.5 cents to 293.3 cents per gallon, while the Midwest saw the largest regional price decrease of 11.1 cents to 286.1 cents per gallon. West Coast prices, the highest in the nation, fell 3.9 cents to 309.8 cents per gallon, while California prices were 4.9 cents lower at 316.2 cents per gallon.

Retail diesel fuel prices declined 3.2 cents to reach 303.3 cents per gallon as of August 21, 44.5 cents higher than last year and the third week in a row that prices have been over the $3 mark. Prices were mixed throughout the country, with the Rocky Mountains seeing the largest regional increase of 3.8 cents to 334.9 cents per gallon, the highest regional price in the country. East Coast prices fell by 7.4 cents to 295.3 cents per gallon.

Propane Posts Moderate Weekly Build
Following several weeks of robust gains, U.S. propane inventories posted a more moderate build last week that totaled 0.9 million barrels, with inventories reaching an estimated 62.7 million barrels as of August 18, 2006. The first two weeks of August have shown inventories up by about 4.5 million barrels, compared with the most recent 5-year average for August that totaled nearly 5.1 million barrels. However, U.S. propane inventories remain about 2.8 million barrels below the same period last year. Weekly gains were limited to the Midwest and Gulf Coast regions, with increases of 0.7 million barrels and 0.5 million barrels, respectively. During this same time, the East Coast and the combined Rocky Mountain/West Coast regions posted respective inventory declines that totaled 0.2 million barrels and 0.1 million barrels. Propylene non-fuel use inventories fell to 3.0 million barrels last week, lowering its share to total propane/propylene inventories to 4.8 percent from the prior week’s 5.2 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.