Released on December 6, 2006
(Next Release on December 13, 2006)

The Weather Outside is Frightful
The first major cold front of winter crossed much of the country last week, beginning with snow in Seattle during Monday Night Football, continuing with several inches of snow in parts of the Midwest by Thursday, and followed by cold, windy weather along the East Coast this past weekend and the first part of this week. In much of the country, anyone walking their dog at night, recently, understands that winter has arrived. And, as predicted, higher oil prices have arrived with the colder weather.

The near-month futures price for light, sweet crude oil closed below $60 per barrel the day before Thanksgiving. However, with the cold front arriving the following Monday, the price closed above $60 per barrel, and by the end of last week, it had moved above $63 per barrel. While this increase is not as large as increases seen earlier this year, its impact is beginning to be felt on product prices, with the U.S. average retail prices for both regular gasoline and diesel fuel up 5 cents per gallon between November 27 and December 4. As stated in recent issues of This Week In Petroleum (specifically the November 8 and 15 issues), weather will be a key determinant for oil prices this winter, as it is almost any winter. Cold weather increases the demand for heating oil, which will, at some point, require refiners to make more heating oil to either supply the increased demand or replenish inventory levels. As a result, refiners will need to run more crude oil through their refineries, thus increasing the demand for crude oil and putting upward pressure on crude oil prices. As a result of higher crude oil prices, prices for many petroleum products, including gasoline, rise, which is one reason why cold weather in one part of the country can ultimately affect gasoline prices in another part of the country.

But weather is only one factor behind the recent rise in crude oil prices. With news that some OPEC countries may be following through with cuts in production, worries of tighter crude oil supplies in the future also drives up demand for crude in the present, as concerns that prices might be higher later encourage more purchasing now. Additionally, concerns about the possibility of a supply disruption in the future have not been eliminated, especially with an upcoming presidential election in Nigeria early next year and recent problems with Iraqi oil production.

Of course, cold weather in winter is not unexpected. But a prolonged bout of colder-than-normal weather can put a large dent in heating oil supplies and ultimately drive up crude oil prices. However, absent oil supply disruptions, any increase in price will likely be of a smaller magnitude than that seen earlier this year, and the price of West Texas Intermediate crude oil is not expected to reach $70 per barrel, nor is the average price for regular gasoline expected to reach $2.50 per gallon, anytime soon.

Residential Heating Fuel Prices See Their First Major Increases
Residential heating oil prices increased significantly for the period ending December 4, 2006. The average residential heating oil price rose by 6.2 cents last week to reach 244.1 cents per gallon, which was an increase of 3.1 cents from this time last year. Wholesale heating oil prices increased by 14.8 cents to reach 188.0 cents per gallon, an increase of 10.5 cents compared to the same period last year.

The average residential propane price increased by 2.1 cents, to reach 197.1 cents per gallon. This was an increase of 3.2 cents compared to the 193.9 cents per gallon average for this same time last year. Wholesale propane prices saw an increase of 6.5 cents per gallon, from 102.4 to 108.9 cents per gallon. This was an increase of 0.4 cent from the December 5, 2005 price of 108.5 cents per gallon.

Retail Gasoline Price Rises for Fourth Consecutive Week
The U.S. average retail price for regular gasoline rose 5.1 cents to 229.7 cents per gallon as of December 4, 15.0 cents per gallon higher than at this time last year. East Coast prices were up 6.6 cents to 229.3 cents per gallon. In the Midwest, prices rose 5.5 cents to 226.1 cents per gallon. Gulf Coast prices were up 6.1 cents to 218.2 cents per gallon, while Rocky Mountain prices rose 1.3 cents to 224.8 cents per gallon. The West Coast saw an increase of 1.0 cent to 248.5 cents per gallon, with California prices increasing by 0.3 cent, to 249.6 cents per gallon.

Retail diesel fuel prices also increased this week, with average nationwide prices rising 5.1 cents to 261.8 cents per gallon. Prices are now 19.3 cents more than at this time last year. Regionally, East Coast prices were up 7.3 cents to 261.0 cents per gallon. The Midwest price rose 2.4 cents to 257.8 cents per gallon. The Gulf Coast saw the average price go up 4.7 cents to 253.7 cents per gallon. Rocky Mountain prices rose 2.7 cents to 270.7 cents per gallon. Prices on the West Coast increased 10.0 cents to 286.0 cents per gallon, while prices in California were up 15.0 cents to 286.0 cents per gallon. California prices are 37.4 cents per gallon higher than at this time last year.

November Stockdraw Is Above Average
Despite above-average temperatures reported in many parts of the Nation during November, U.S. propane inventories slid by over 2.6 million barrels during the month, surpassing the most recent 5-year average of 2.0 million barrels. Last week, propane inventories fell by 0.9 million barrels to 68.8 million barrels as of December 1, 2006, which, based on weekly data is about 2.7 million barrels below the same week last year, when inventories were at their highest level in seven years. Midwest inventories contributed to partially offset the overall weekly decline with a surprising 0.5-million-barrel stockbuild. During this same time, the Gulf Coast reported the largest drop in inventories that measured 1.2 million barrels, while inventories in the East Coast reported a relatively modest 0.2-million-barrel decline. Inventories in the combined Rocky Mountain/West Coast regions remained unchanged last week, while propylene non-fuel use inventories similarly reported a 0.1-million-barrel stock change during this same time. Propylene non-fuel use inventories accounted for a 5.0 percent share of total propane/propylene inventories, slightly lower than the prior week’s share.

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