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Released on December 27, 2007
(Next Release on January 3, 2008)
Spinning Records
Like recording artists who issue a “Greatest Hits” collection when their creative instincts take a holiday, EIA’s energy analysts prepare a compilation of previously released articles to mark the end-of-year holiday season. The past year is one that oil consumers would rather forget than remember, as retail gasoline prices attained all-time highs (not adjusted for inflation), retail diesel prices reached nine of the “top ten” highest nominal prices ever recorded, residential heating oil prices rose to unprecedented levels, and crude oil prices rose above $90 a barrel. The following are excerpts from This Week In Petroleum’s high price hits of 2007.
Rockin' Down The Highway
It may not be prudent to go "Flyin' down the road with my foot on the floor" like the Doobie Brothers sang because in a matter of four months, retail gasoline prices swung from a 2007 low of $2.165 per gallon (January 22 and 29) to an all-time nominal record high of $3.218 per gallon on May 21. Below are excerpts from two articles in 2007:
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$2 per Gallon? (January 18) - Why have gasoline prices been falling since the beginning of the year? When looking at factors influencing gasoline prices, it is important to look at both the crude oil market and the gasoline market itself. Crude oil prices have dropped precipitously, with the near-month futures price falling from $61 per barrel on the last business day of 2006 to around $51 per barrel earlier this week. Crude oil prices have declined due to several factors, including mild weather across some of the country this month, above normal petroleum product inventory levels, lower than expected apparent compliance by OPEC members with targeted production cuts, and reports that at least one major commodity index has, at least temporarily, reduced the share of petroleum in its portfolio. Recent increases in global surplus production capacity have also put downward pressure on crude oil prices. In addition, the gasoline market itself has loosened up as gasoline inventories have increased by nearly 13 million barrels over the last three weeks. This increase in available immediate supply, combined with a seasonal drop in demand during the month of January, has put downward pressure on gasoline prices, above and beyond any downward pressure from crude oil prices.
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What's In a Name? (May 23) - While [not] everyone agrees that the real price record was set in March 1981, …[even measuring those levels is somewhat uncertain]…the actual level finds less agreement, as the inflation adjustment process can lead to different outcomes. The Lundberg survey released on May 20 reported that the record inflation-adjusted price was $3.15 per gallon, a level which their survey now exceeds. EIA previously had indicated that in real prices, the March 1981 average was $3.223 per gallon, but this was in 2006 dollars, not in today’s dollars. Recalculating in terms of May 2007 dollars, the monthly average price for regular gasoline in March 1981, using the price collected by the Bureau of Labor Statistics for March 1981 and adjusting for inflation by using the Consumer Price Index, is $3.292 per gallon (see this
spreadsheet for the calculation). On this basis, the national average price for regular gasoline just published by EIA of $3.218 per gallon still lies below the real price peak.
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Higher and Higher
Like the title of this Jackie Wilson song, retail diesel prices kept going “higher and higher” as they reached the nine highest prices on record during the past year while residential heating oil prices hit all-time-highs for several weeks with Monday’s price again topping the charts at $3.30 a gallon. Below are excerpts from two editions:
- Price Parity (April 25) - The National Football League draft scheduled for this coming weekend is designed to promote parity by giving the least victorious teams from the past season the highest draft picks, which they can either use to bring in top talent from the college ranks or trade away to bolster their squads with proven professional players. Parity has also become an issue for gasoline and diesel fuel consumers.
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For many years, retail gasoline prices rose seasonally to levels well above diesel throughout the spring and summer months. However, … retail diesel prices since 2005 have challenged this pattern, moving to higher levels than gasoline for many weeks during the peak summer driving season. The situation observed in recent years reflects an underlying change in relative supply/demand balances so pronounced that summer gasoline prices move above diesel only when extraordinary market forces add pressure to gasoline beyond that attributable to seasonality. (See March 2, 2005
edition of This Week In Petroleum for more detail on reasons for the shifting relationship between summer season retail gasoline and diesel prices.) |
- October Is Just the Beginning (October 11) - The Major League Baseball playoffs are now well underway. While fans may hold differing opinions on the fundamental strengths of the remaining teams, all recognize that how hot or cold each team is over the coming weeks will play a critical role in determining the identity of the World Series winner. The New York Yankees and some other teams that hit a cold spell are already home, hoping the winter will be over quickly as they look forward to spring training. Unfortunately, like the rest of us, they should expect higher heating fuel prices and larger bills this winter compared to last winter.
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Heating oil customers, in particular, should anticipate paying considerably more to heat their homes this winter (defined here as October through March) compared to last winter. According to EIA projections from the October 2007 Short-Term Energy Outlook (STEO)
, residential heating oil prices are likely to average nearly $2.90 per gallon, 40 cents per gallon (or 16 percent) higher than last winter. In both nominal and real terms, if the projection holds, these are likely to be the highest residential heating oil prices on record for the six-month heating season. The main reason for this projected increase is higher crude oil prices, which are currently averaging close to $80 per barrel for West Texas Intermediate (WTI). Crude oil prices are expected to average about $76 per barrel this winter, or about $17 per barrel (or 40 cents per gallon) more than last winter. |
Another factor that has been pushing heating oil prices higher over the last few years has been the growing global demand for diesel. Heating oil and diesel are both distillate fuels. Increased economic growth in countries such as China and India has raised the demand for distillates and, therefore, added a premium to the price. Gross margins (the difference between the residential price, including taxes, and the crude oil price) reached new highs last winter and, unless economic activity worldwide declines significantly, margins are projected to remain high… |
Ain't No Mountain High Enough
Often this past year, it seemed as though there “Ain’t No Mountain High Enough” to characterize crude oil prices. In a few short months, we went from questioning whether crude prices would hit $80 a barrel to whether they would hit $100 per barrel and, in turn, causing gasoline and diesel prices to top $3 per gallon. Below are excerpts from previous editions about the impacts of crude oil prices:
- Will Crude Oil Prices Reach $80? (July 18) - The price of crude oil has risen considerably since the beginning of the year, with the near-month futures price of light, sweet crude oil traded on the New York Mercantile Exchange (NYMEX) reaching $75 per barrel at one point during trading on Tuesday, July 17, which is only $2 per barrel less than the previous closing day record price of $77.03 per barrel set almost exactly a year ago (July 14, 2006). With the futures price increasing, some people are wondering if crude oil prices will reach $80 per barrel at some point this year. The trick answer to this question, though, is that light, sweet crude oil prices have already reached $80 per barrel, just not for West Texas Intermediate (WTI), which is the light, sweet crude oil traded at the Cushing, OK delivery point for the NYMEX futures contract. Any premium on light, sweet crude oils has implications for retail prices for refined products, such as gasoline and distillate fuel.
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… In analyzing the rise in retail gasoline and diesel prices this summer, much of the analysis has focused on refinery outages, both from maintenance and unplanned events. These refinery outages are a key factor in the rise in retail gasoline and diesel prices. But what has been overlooked by many is the impact high crude oil prices have had, as well. With fuel specifications evolving towards cleaner and cleaner refined products, refiners are looking to purchase more sweet (low sulfur) crude oils, thus putting an increasing premium on these types of crude oils. If not for the primary focus on WTI, this premium would be much more visible, but it exists nonetheless. As a result, a significant portion of the rise in retail gasoline and diesel prices is related to higher crude oil prices, particularly light, sweet crude oils. |
- Why Are Oil Prices So High? (November 7) - One of the most discussed topics in the media today, besides the 2008 Presidential races, is the high price of oil. Crude oil prices have increased dramatically this year, with West Texas Intermediate (WTI) prices climbing from an average of nearly $55 per barrel in January to over $95 per barrel at the beginning of this month. EIA believes that supply and demand fundamentals, including strong world economic growth driving growth in oil use, moderate non-Organization of the Petroleum Exporting Countries (OPEC) supply growth, OPEC members’ production decisions, low OPEC spare production capacity, tightness in global commercial inventories, worldwide refining bottlenecks, and ongoing geopolitical risks and concerns about supply availability, have been the main drivers of oil price movements over the past year.
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With the rapid rise in prices, oil markets have been drawing increased interest and participation from investors and financial entities without direct commercial involvement in physical oil markets. The role of these non-commercial futures market participants in recent price developments is difficult to assess, particularly over short time intervals. However, general principles favor a focus on fundamentals, rather than consideration of alternative price drivers, when the explanatory power of fundamentals is high. |
Shifting our focus from the rear-view mirror to the year ahead, we can always look forward to a new collection of oil market hits. It remains to be seen whether they are ones that consumers, who are certainly ready for some low notes after the price highs of the last few years, will want to remember fondly or forget.
Residential Heating Fuel Prices See Modest Holiday Increases
Residential heating oil prices gently inched up to a new record high during the period ending December 24, 2007. The average residential heating oil price increased by a mere 0.2 cent last week to reach 330.0 cents per gallon, an increase of 85.6 cents from this time last year. Wholesale heating oil prices rose by 1.4 cents, reaching 269.4 cents per gallon, which was an increase of 86.3 cents compared to the same period last year.
The average residential propane price rose yet again, by 1.5 cents to reach 250.2 cents per gallon, for a twelfth consecutive record high. This was an increase of 52.0 cents compared to the 198.2 cents per gallon average for this same time last year. Wholesale propane prices increased by 0.4 cent per gallon, from 161.1 to 161.5 cents per gallon. This was a gain of 58.8 cents from the December 18, 2006 price of 102.7 cents per gallon.
Retail Gasoline and Diesel Prices Fall
The U.S. average retail price for regular gasoline decreased 1.8 cents to settle at 298.0 cents per gallon as of December 24, 2007, 63.9 cents above a year ago. Prices were down throughout the country, with the Rocky Mountains showing the largest regional decrease of 3.8 cents to 292.8 cents per gallon. The East Coast was lower by a penny to 300.7 cents per gallon. The Midwest price declined 2.5 cents to 291.8 cents per gallon. The Gulf Coast was reduced 1.4 cents to 283.6 cents per gallon, the lowest regional price. The West Coast persisted as the highest regional price while dwindling 2.3 cents to 318.2 cents per gallon. The average price for regular grade in California dropped to 326.1 cents per gallon, 2.4 cents less than last week but 65.4 cents per gallon more than last year.
The retail diesel fuel price fell slightly to 330.8 cents per gallon, 0.1 cent less than last week but still 71.2 cents higher than last year. Regional prices were mixed throughout the country with the East Coast nudged lower by 0.3 cent to 335.6 cents per gallon. The Midwest rose 0.6 cent to 327.7 cents per gallon. The Gulf Coast price was higher by 0.1 cent to 324.6 cents per gallon. The Rocky Mountain region price plunged 5.1 cents to 326.8 cents per gallon. The West Coast stumbled 0.4 cent to 341.1 cents per gallon but California prices were up 0.8 cent to 343.4 cents per gallon.
Propane Inventories Continue Sharp Decline
Propane stockholders continued the sharp drawdown in primary supplies of propane last week with a nearly 1.9 million barrel decline that put total propane inventories at an estimated 56.1 million barrels as of December 21, 2007. With last week’s drawdown, total propane inventories continued on a path near the lower boundary of the average range for this time of year. Most of last week’s declines were centered in the East Coast and Gulf Coast regions that reported respective drops of more than 0.4 million barrels and over 1.2 million barrels. Despite the severe winter weather in the Midwest last week, the region’s inventories reported a relatively modest 0.1 million barrel draw. However, inventories in this area could expect sharper declines over the next few weeks as inventories begin to reflect the effects of severe weather in the region. The combined Rocky Mountain/West Coast region posted the smallest weekly decline that was less than 0.1 million barrels. Propylene non-fuel use inventories gained last week and accounted for a larger 3.1 percent share of total propane/propylene inventories compared with the prior week’s 2.9 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.
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