Released on January 3, 2008
(Next Release on January 9, 2008)

$100 per Barrel?
Crude oil prices, which settled yesterday at a new nominal record price of $99.62 per barrel, are near $100 per barrel for the second time in recent months. While oil markets are expected to remain tight and the average price of crude oil in 2008 is expected to be well above the average price of about $72 per barrel (for West Texas Intermediate crude oil) seen in 2007, EIA expects average monthly crude oil prices to drop throughout most of 2008, reflecting increases in supply from both OPEC and non-OPEC countries and the impact of slowing economic growth on demand. See EIA’s Short-Term Energy Outlook for details on EIA’s energy market outlook for 2008, and for 2009 after it is updated next Tuesday.

Propane At Midseason
While the 2007-08 winter heating season began a few months ago, most propane consumers recognize that peak heating demand begins about this time of year. Primary inventories of propane as of December 28, 2007 are estimated at 54.4 million barrels. Although inventories are in the lower half of the average range, the absence of the large inventory cushion that was available last winter may lead consumers to wonder how propane markets would perform should the rest of the winter prove to be colder than normal.

The question arises as to what exactly caused propane markets to fall short of building inventories that would have provided a larger cushion. An examination of the supply/demand components for propane during the 2007 build season (April through September) shows imports, particularly waterborne imports, much lower this year, compared with the average over the most recent 5-year period. Compared with last year, imports from Canada during the April through September build cycle were down about 4.1 million barrels, while waterborne imports, mostly from Algeria, Nigeria, and Venezuela, were down nearly 10.5 million barrels. The total drop in imports of nearly 14.6 million barrels exceeds the 12.8 million barrel difference in inventories at the end of September 2007 from the year-earlier level. Most of the decline in waterborne imports this year can be traced to unfavorable arbitrage, or the price differential, between these regions and the U.S. Gulf Coast (see July 5, 2007 issue of This Week In Petroleum for further explanation on this subject).

During 2007, propane demand, measured as product supplied, has followed close to the average demand path set over the most recent 5-year period. The surge in weather related demand seen at the beginning of 2007, if repeated early in 2008, may have a greater impact on propane prices than last year, due to lower inventories (see graph below).

Petrochemical feedstock demand may also impact propane markets this winter. So far this year, petrochemical sector demand for propane has remained robust despite record spot prices. Petrochemical manufacturers typically adjust their use of propane relative to other feedstocks to accommodate peak demand cycles in other sectors by shifting away from propane during the peak heating season. Should this traditional pattern fail to take hold, continued robust demand by petrochemical producers could put additional pressure on propane markets.

From the current level of 54.4 million barrels in primary storage, a typical inventory drawdown over the remainder of the heating season, based on the most recent 5-year average of about 28 million barrels, would see inventories reach about 26 million barrels by the end of March 2008. At that level, primary inventories would end the heating season within range of some of the lower levels seen in recent years, but still in the average range. However, adding a period of sustained colder-than-normal weather to this scenario could result in significantly lower inventories, possibly testing the limits of the propane distribution system. With these concerns hanging in the balance, it’s no wonder all eyes will be watching old-man winter over the next few months.

U.S. Average Retail Gasoline Price Jumps 7 Cents
After six weeks of decline, the U.S. average retail price for regular gasoline jumped 7.3 cents to 305.3 cents per gallon as of December 31, 2007, 71.9 cents above a year ago. Prices increased in all regions except the Rocky Mountains where the price fell 0.7 cent to 292.1 cents per gallon. The East Coast rose 5.8 cents to 306.5 cents per gallon. The largest increase, 11.4 cents, occurred in the Midwest with the price stopping at 303.2 cents per gallon. The Gulf Coast swelled by 8.4 cents to 292.0 cents per gallon, still the lowest regional price. The West Coast maintained the highest regional price while strengthening 3.6 cents to 321.8 cents per gallon. The average price for regular grade in California climbed to 329.8 cents per gallon, 3.7 cents more than last week and 68.8 cents per gallon more than last year.

Rising for the first time since late November, the retail diesel fuel price grew to 334.5 cents per gallon, 3.7 cents over a week ago and 76.5 cents higher than last year. Regional prices were higher throughout the country with the East Coast going up by 4.3 cents to 339.9 cents per gallon. The Midwest rose 3.2 cents to 330.9 cents per gallon. The Gulf Coast price tallied the largest regional increase, rising by 4.7 cents to 329.3 cents per gallon. The Rocky Mountain price edged up by 0.1 cent to 326.9 cents per gallon and became the lowest regional price. The West Coast strengthened 4.0 cents to 345.1 cents per gallon. California prices were up 5.7 cents to 349.1 cents per gallon.

Residential Heating Fuel Prices Continue To Climb
Residential heating oil prices gained steam over the holiday period ending December 31, 2007. The average residential heating oil price gained 4.0 cents last week to reach 334.1 cents per gallon, an increase of 90.7 cents from this time last year. Wholesale heating oil prices increased by 2.8 cents, reaching 272.2 cents per gallon, which was an increase of 97.4 cents compared to the same period last year.

The average residential propane price rose for the thirteenth straight week this season, by 2.2 cents, reaching another nominal high at 252.4 cents per gallon. This was an increase of 54.0 cents compared to the 198.4 cents per gallon average for this same time last year. Wholesale propane prices increased by 5.0 cents per gallon, from 161.5 to 166.5 cents per gallon. This was a gain of 65.2 cents from the December 25, 2006 price of 101.3 cents per gallon.

December Draw On Propane Below Average
With temperatures averaging slightly above normal during December, propane stockholders drew inventories down by 6.6 million barrels last month, a level much lower than the most recent 5-year average of nearly 10.9 million barrels. The weekly draw on propane inventories continued relatively strong at 1.7 million barrels, leaving inventories at an estimated 54.4 million barrels as of December 28, 2007. Last week, Midwest and Gulf Coast inventories posted declines of 1.0 million barrels and 0.9 million barrels, respectively, while combined Rocky Mountain/West Coast inventories remained relatively unchanged during this same time. In contrast, strong imports into the region boosted East Coast inventories up by 0.2 million barrels. Propylene non-fuel use inventories remained unchanged and accounted for 3.1 percent of total propane/propylene inventories, the same as the prior week.

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