Released on October 3, 2007
(Next Release on October 11, 2007)

Preparing for the Future
The Major League Baseball division series start today. Some teams, like the Boston Red Sox, who clinched a berth several days ago, have been preparing for some time now, while others, such as the Colorado Rockies, who needed to win a playoff game to qualify, have had little time to prepare. In oil markets, the degree of preparation is often measured by the amount of inventory of a particular product heading into its peak seasonal demand period. With September marking the end of the typical inventory build season for propane, it is useful to gather around the not-yet-hot stove (furnace?) to assess inventories of this critical heating fuel as we head into the winter season.

On September 28, 2007, primary inventories of propane stood at an estimated 59.1 million barrels. Over the years, some analysts have argued that propane stocks of 60 million barrels prior to the start of the heating season provide a minimum level of immediate supply to meet normal demand requirements over the winter. This level, does not, however, provide much of a safety net should weather conditions turn abnormally cold. The importance of an inventory safety net was the topic of the January 24, 2007 edition of “This Week In Petroleum,” when unseasonably warmer-than-normal temperatures over the first half of the heating season suddenly changed to much colder weather over the second half, generating a surge in demand. With propane inventories well positioned at the upper limits of the average range at the time, extra inventory acted as a safety net, buffering price pressure over the remainder of the heating season despite strong withdrawals. This year, in contrast, inventories are entering the heating season at their lowest level since 1996, about 11 million barrels below the same week last year. As the chart below shows, the seasonal stockbuild this year fell short of recent year volumes (shown by the area between the blue dotted line and the production and net imports or propane supply line).

Compared with the most recent 5-year average stockbuild of nearly 39 million barrels, this year’s stockbuild totaled about 32 million barrels, the lowest since 2002. The below average stockbuild this year can be attributed to relatively low imports during the stock building period, compared with recent years. Imports provide an important supplemental source of supply, particularly during winter peak demand months, and while Canada typically accounts for the largest share of propane imports each year, Canadian imports for the first seven months of 2007 were slightly below year-ago levels. Most of the drop in imports this year stems from waterborne shipments from producing regions in the North Sea, West Africa and the Middle East, due mostly to unfavorable arbitrage between these regions and the U.S. over the spring and summer.

With little time remaining before the arrival of lower temperatures, the likelihood of primary stockholders adding significantly to their inventory cushion over the next several weeks appears low. Any number of potential wildcards may occur to dampen any possible build, including very strong demand for crop drying. The U.S. Department of Agriculture reported that farmers are expecting to produce the largest corn crop in history, possibly setting the stage for a sharp increase in propane demand during the fall harvest season. Thus, propane markets are likely to remain relatively tight this winter compared with last year, with the potential for additional upward pressure on residential propane prices if the U.S. experiences severe winter weather.

Retail Gasoline Price Falls but Diesel Higher
The U.S. average retail price for regular gasoline decreased 2.4 cents last week to 278.8 cents per gallon as of October 1, 2007, but is still 47.8 cents higher than last year. All regions were lower except in the West Coast where retail regular gasoline prices rose by 1.3 cents to 292.2 cents per gallon, the highest in the country. The average price for regular grade in California was 297.3 cents per gallon, up 1.2 cents from last week and 29.0 cents per gallon over the previous year. The East Coast fell slightly to 276.6 cents per gallon, 0.3 cent less than last week. The largest decrease occurred in the Midwest where prices plummeted 7.9 cents to 278.2 cents per gallon, 61.3 cents per gallon above last year. The lowest regional price, in the Gulf Coast, dropped a half cent to settle at 270.0 cents per gallon. Rocky Mountain prices lost 0.7 cent to land at 281.0 cents per gallon.

Retail diesel prices advanced for the fifth consecutive week, settling at 304.8 cents per gallon. The price is 1.6 cents more than last week and 50.2 cents per gallon higher than last year. All regions of the country recorded an increase in price. The largest rise occurred in the Rocky Mountains where the price jumped 7.2 cents to 310.0 cents per gallon, the highest in the country. The East Coast increased 1.5 cents to 305.2 cents per gallon. The Midwest price rose 0.7 cent to 306.1 cents per gallon. The Gulf Coast was the only region below the $3 mark, settling at 297.5 cents per gallon. The West Coast price grew to 309.0 cents per gallon, gaining 3.6 cents. California prices were up 5.0 cents to 314.3 cents per gallon.

September Stockbuild Below Average
The September stockbuild for propane posted a below average 3.9 million barrels, with inventories reaching an estimated 59.1 million barrels as of September 28, 2007. The average stockbuild for this month over the most recent 5-year period totaled about 4.9 million barrels. The weekly gain for propane inventories measured only 0.2 million barrels last week. Regional activity remained mixed with gains in the Midwest and combined Rocky Mountain/West Coast up respectively by 0.3 million barrels and 0.1 million barrels. While inventories in the East Coast fell by 0.1 million barrels, Gulf Coast inventories remained relatively unchanged during this same time. Propylene non-fuel use inventories also fell last week, down 0.2 million barrels to account for a 3.6 percent share of total propane/propylene inventories, compared with the prior week’s 4.0 percent share.

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