Released on October 4, 2006
(Next Release on October 12, 2006)

Expectations
With both New York Major League Baseball teams having the best records in their respective leagues this past regular season, many New Yorkers are expecting to see the Yankees and Mets meet each other in the World Series. Whether this expectation is fulfilled will be seen over the next few weeks. Expectations also play an important role in oil markets, and will likely continue doing so for the foreseeable future.

This past summer, U.S. crude oil and petroleum product prices rose, in part due to expectations about the coming hurricane season and the possibility of a supply disruption occurring in any number of countries or regions. The devastating impact last year’s hurricanes had on oil infrastructure, along with forecasts of another strong hurricane season this year, led many oil market participants to buy additional contracts early in the year, with the expectation that prices could be much higher should hurricanes do similar damage this year or supply be disrupted overseas. However, when these expectations did not materialize, the sell off of contracts began and prices plummeted. Now, many market participants are judging that the risk of a supply disruption is very low and that oil demand growth is slowing along with the country’s economy.

However, other market participants have different expectations that would likely lead to a shift in oil prices should these expectations materialize. Some analysts expect to see a fairly large amount of refinery maintenance this month, which could lead to product inventories being drawn down a little bit more than normal. Large volumes of product inventories are one of the many reasons cited for declining prices in recent weeks, and should they begin to be drawn down significantly, this could stop prices from falling further. Some analysts also expect OPEC to react to declining prices at some point by significantly curtailing their production levels, thus putting upward pressure on prices as well.

These different sets of expectations imply very different price paths over the next several months, and even leading into next spring. Only time will tell which expectations will come true and which ones won’t, just as we’ll know soon whether New Yorkers’ expectations of a subway World Series will occur.

A Brief Note on Year-Ago Demand Comparisons
EIA supply data for the four weeks ending September 29, released earlier today, showed that gasoline product supplied (a proxy for demand) was up 3.9 percent compared to the same four-week period last year. However, it is important to remember that last year’s demand data were significantly affected by Hurricane Katrina, making demand this year seem greater in comparison than it would otherwise. Thus, any oil demand comparisons to last year over the next few weeks may seem somewhat larger than typical or expected, due to the effect last year’s hurricanes had in dampening demand temporarily.

Residential Heating Fuel Price Survey Returns With Prices Lower Than Last Year
Beginning this week and continuing into mid-March 2007, prices for wholesale and residential heating oil and propane will be included in This Week In Petroleum as well as in the Weekly Petroleum Status Report and on EIA's Heating Oil and Propane Update web page. As of October 2, residential heating oil prices averaged 239.4 cents per gallon, which is 29.8 cents per gallon lower than last year at this time. Meanwhile, wholesale heating oil prices averaged 176.8 cents per gallon, a decrease of 47.2 cents compared to the same period last year.

Residential propane prices averaged 193.6 cents per gallon, while wholesale propane prices averaged 101.2 cents per gallon as of October 2.

U.S. Average Retail Gasoline Price Declines Almost 7 Cents
The U.S. average retail price for regular gasoline fell 6.8 cents last week to hit 231.0 cents per gallon as of October 2, which is 61.8 cents lower than a year ago. Prices fell for the eighth week in a row, to the lowest national average price since February 27, 2006. East Coast prices fell 8.0 cents to 230.4 cents per gallon, while the Midwest saw prices fall 3.8 cents to 216.9 cents per gallon. The Rocky Mountains saw the largest regional price decrease, as prices fell 10.5 cents to 258.6 cents per gallon. West Coast prices were still the highest in the nation after falling 7.4 cents to 264.4 cents per gallon, the lowest price in that region since March 27. California prices also fell by 7.7 cents to 268.3 cents per gallon, which is 29.0 cents lower than this time last year.

Retail diesel fuel prices fell by 4.9 cents to reach 254.6 cents per gallon as of October 2, 59.8 cents lower than last year. This is the seventh week in a row that prices have fallen, and the lowest national average price since March 13. Prices were down throughout the country, with the Rocky Mountains seeing the largest regional decrease of 14.8 cents to 267.9 cents per gallon. West Coast prices, the highest regional prices in the country, dropped 10.3 cents to hit 278.9 cents per gallon, while California prices lost 7.5 cents to reach 283.5 cents per gallon.

Winter Inventories of Propane Well Positioned
Although blustery winter weather may be months away, this week marks the start of the traditional winter heating season that runs from October through March. U.S. propane inventories as of September 29, 2006, reached an estimated 70.0 million barrels, the highest pre-heating season level since 2002. Overall, propane inventories appear adequate in most of the major regions of the nation at this time, with only East Coast inventories showing levels tracking near the lower boundary of the average range. However, as recently as July of this year, East Coast inventories reported levels near the top of the average range, indicating a possible scenario of an earlier-than-normal shift in inventories from primary to secondary (propane retailers) and tertiary (residential) storage. In contrast, Gulf Coast inventories remained either below or just above the lower boundary of the average range from the end of last winter until August, but moved to the upper boundary of the average range during August and September on strong imports. During this same time, Midwest inventories tracked consistently above the average range and remain at this time at the upper boundary of the average range. From the end of the 2005-06 heating season in March, until September 29, 2006, primary stockholders added about 40.0 million barrels to the nation’s primary supply of propane, a level only slightly above the most recent 5-year average of 39.1 million barrels. Nevertheless, the strong level of imports, particularly into the Gulf Coast region during August and September, contributed to the above-average stockbuild this year.

Last week, U.S. propane inventories gained 1.0 million barrels, pushing the September stockbuild more than 60 percent above the 5-year average for this month. Since the beginning of the traditional build season that spans the April-through-September period, only the May and June stockbuilds were below their respective 5-year averages. Regional stockbuilds were, again, limited mostly to the Gulf Coast area. The continuing strong volume of imports into the region contributed to the 1.2-million-barrel gain last week. Other inventory gains were reported in the combined Rocky Mountain/West Coast regions with a 0.1-million-barrel build, while the East Coast and Midwest regions reported similar 0.1-million-barrel declines. Propylene non-fuel use inventories rose sharply last week by 0.3 million barrels to account for a larger 4.3-percent share of total propane-propylene inventories, compared with the prior week’s 3.9-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.