Released on September 13, 2006
(Next Release on September 20, 2006)

Oil Prices Continue to Drop
In the last 5 weeks, since August 7, oil prices, both for crude oil and petroleum products, have dropped substantially. The price of West Texas Intermediate (WTI) crude oil has fallen from $77 per barrel to below $64 per barrel. Retail gasoline prices have dropped 42 cents per gallon to $2.62 as of September 11, while retail diesel fuel prices, at $2.86 per gallon, are now about 20 cents per gallon lower than they were 5 weeks ago. Will the declines continue, or will they begin to level off and possibly increase later this year?

According to EIA’s most recent Short-Term Energy Outlook released yesterday, EIA expects the price of WTI crude oil during the fourth quarter of 2006 to average around $70 per barrel, gasoline prices to average below $2.60 per gallon, and diesel prices to approach $2.80 per gallon by the end of the year. EIA is expecting the recent price decline to slow, with prices then leveling off and possibly increasing later this year. This outlook reflects our analysis of the factors driving the current price decline.

For crude oil markets, the global situation is about as rosy as has been the case in the last several months. Almost every concern that existed in crude oil markets this summer is much more benign now. Concerns about a possible oil disruption from Iran have faded, as the diplomatic push to get Iran to halt enrichment of nuclear material has not yet led to sanctions imposed by the United Nations Security Council, and Iran has stated recently its willingness to continue negotiations with the United Nations. Mid-September has arrived without a single hurricane affecting oil facilities in the Gulf of Mexico and with no storms likely to arrive within at least the next week. Nigeria, where significant disruptions have occurred with some frequency over the past several years, has been quiet. The oil situation in Iraq is as positive as it has been in nearly 2 years, with EIA estimating Iraqi crude oil production in July and August at its highest levels since the fall of 2004. Even the one disruption that did make news recently, the BP pipeline leak in Alaska, now appears to be much less of a problem than originally thought. Initially, concerns were raised that Prudhoe Bay production might be stopped altogether, but it was soon determined that only a part of production would have to be taken offline for an extended period. According to the State of Alaska, Prudhoe Bay production for the month of August averaged 189 thousand barrels per day, which is about half of its August 2005 level. BP recently announced plans to begin to bring more production online soon and hopes to have full production restored by the end of October.

For gasoline markets, the price drop that normally arrives after Labor Day and usually extends through the end of the year began a few weeks early, as the market entered the last few weeks of August with no hurricanes threatening petroleum infrastructure, such as refineries or pipelines, and with enough supplies on hand to get through Labor Day. As a result, the sell-off started before Labor Day, as along with the expected seasonal demand drop, rising refinery runs, and high import levels, markets perceived an improving supply/demand balance, pushing down prices. Currently, the near-month futures price of a barrel of gasoline is only $1 to $2 above that of a barrel of crude oil, an unusually low margin that is likely to increase over the coming months. Diesel prices have not dropped as much as gasoline, mostly because diesel demand tends to be strong in the fall with agricultural use of diesel increasing as crops are harvested, and the similarity of diesel to heating oil often causes diesel prices to rise in conjunction with heating oil as the winter approaches. Thus, declines in diesel prices have been limited to those caused by the decline in crude oil prices.

Unless the U.S. economy starts showing signs of a significant slowdown, which would slow oil demand growth, or an unusually warm winter in the northern hemisphere that depresses heating-related demand, the opportunity for further improvement in crude oil markets appears to be limited. The global balance is expected to remain relatively tight as long as global demand continues to increase at a faster pace than non-OPEC supply, limiting gains in global spare production capacity, which implies that the downward trend in prices is likely to stop or reverse if one of the many potential sources of supply trouble flares up or if product pressures from heating fuels pulls up crude oil prices once cold weather begins in earnest. Regardless of what the future holds, U.S. consumers can take some comfort from the fact that U.S. average regular gasoline prices have dropped sharply over the last five weeks, and that crude oil prices are as low as they have been in several months.

U.S. Average Retail Gasoline Price Falls Almost 11 Cents
The U.S. average retail price for regular gasoline dropped 10.9 cents last week to hit 261.8 cents per gallon as of September 11, which is 33.7 cents lower than last year. Prices fell for the fifth week in a row, reaching the lowest national average price since April 3, 2006. East Coast prices fell 9.9 cents to 265.4 cents per gallon, while the Midwest saw the largest regional price decrease of 15.0 cents to 244.8 cents per gallon. West Coast prices were still the highest in the nation after falling 6.0 cents to 290.6 cents per gallon, the lowest price in that region since April 17. California prices were 6.1 cents lower at 294.9 cents per gallon, also the first time the state average has been below the $3 mark since April 17.

Retail diesel fuel prices fell by 11.0 cents to reach 285.7 cents per gallon as of September 11, still 1.0 cent higher than last year. This is the fourth week in a row that prices have fallen. Prices were down throughout the country, with the Midwest seeing the largest regional decrease of 15.0 cents to 278.7 cents per gallon. The Rocky Mountains, which retains the highest regional price in the country, saw a decrease of 8.2 cents to 323.6 cents per gallon. West Coast prices fell 6.20 cents to 313.7 cents per gallon.

Propane Build Posts Sharp Rise
In contrast to typically modest stockbuilds this time of year, U.S. propane inventories posted a surprisingly sharp rise last week, up 1.9 million barrels to an estimated 65.7 million barrels as of September 8, 2006. Last week also saw the continuation of the recent trend in strong imports seen over the past three weeks, with imports finally working their way into primary inventories, a development that was not apparent during prior weeks. This was particularly true in the Gulf Coast, where the lack of a significant build in primary inventories in recent weeks was surprising given the strong level of imports. Gulf Coast inventories posted the largest weekly gain last week with 0.8 million barrels, moving the region closer to the middle of the average range for this time of year. Other regions also posted strong gains last week, with East Coast inventories up 0.4 million barrels, while inventories in the Midwest were higher by 0.5 million barrels during this same time. The combined Rocky Mountain/West Coast regions posted a 0.2-million-barrel gain last week. Propylene non-fuel use inventories continued to account for a smaller share of total propane/propylene inventories with a weekly decline that measured 0.2 million barrels, accounting for a 4.2 percent share compared with the prior week’s 4.7 percent share.

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