Released on June 4, 2008
(Next Release on June 11, 2008)

Nearing the $2 Mark
Retail diesel prices are heading towards a $2 per gallon milestone. Lest you think we’ve turned back the clock to the year 2004, unfortunately we are not talking about the price itself but about the difference between last year’s price and the latest price released this past Monday. With EIA’s retail diesel survey showing diesel prices $1.91 higher than this time last year, many are wondering how much higher prices may climb before U.S. and global demand softens enough to balance markets.

Though gasoline is the transportation fuel that the average U.S. consumer uses directly, diesel fuel consumption reflects more directly the current overall state of the economy. The largest users of diesel fuel in the United States are truckers who move goods and services across the country. With real Gross Domestic Product (GDP) increasing at a slow annualized rate of 0.9 percent in the first quarter of 2008 from the fourth quarter of 2007 according to preliminary estimates released by the Bureau of Economic Analysis, we have seen U.S. demand for distillate fuel (which includes diesel fuel and heating oil) fall so far this year. EIA monthly data shows that distillate demand has fallen over two percent from the fourth quarter of 2007 to the first quarter of 2008. However, since diesel prices have climbed steadily, adding almost $1.40 to the price of a gallon of diesel fuel since New Year’s Eve, high prices may also be slowing demand growth.

As we outlined in an earlier installment of This Week In Petroleum, diesel prices are high because of global distillate demand strength and underpinned by high crude oil prices. Crude oil spot prices are currently trading almost $60 per barrel, or about $1.40 per gallon, higher than this time last year. With the cost of crude oil accounting for more than 60 percent of the retail cost of a gallon of diesel fuel, the difference between this year’s and last year’s crude oil spot price accounts for a large chunk of the difference between current prices and 2007 retail diesel prices.

Strong distillate demand in Europe, Latin America, the Middle East, and Asia continues to add pressure to diesel prices. The softness in the U.S. economy has not yet notably affected these economies, and many of the highest demand growth areas are insulated from petroleum price increases. China and India, for example, have price controls and subsidy programs that shield the consumer from global price increases, while the Middle East is flush with cash from oil revenues. China, in particular, has seen dramatic increases in diesel imports this spring as it prepares for the Olympics later this summer. Additional diesel demand from South America during the spring, as that continent prepares for its winter amid natural gas shortages, has pulled export cargoes from the United States southward (Figure 1).

Figure 2 illustrates how distillate inventories in the developed Asian countries have fallen this year as retail diesel prices in the United States have risen. Market tightness in those countries throughout the 2007/2008 winter months is reflected in stock levels running well-below 10-year average levels.

While the winding down of winter in the Northern Hemisphere has accompanied some recent declines in world distillate prices, relatively high crude oil and distillate prices are expected for the rest of this year, if not longer.

West Coast Gasoline Price Continues Upward Spiral - Diesel Price Slips Slightly
The U.S. average retail price for regular gasoline increased for the tenth straight week. Although its upward momentum slowed, the U.S. average price still climbed another 3.9 cents to hit 397.6 cents per gallon. The average for the East Coast went up by 3.3 cents to 397 cents per gallon; but prices in the Central Atlantic and New England increased by more than 5 cents, climbing past the $4 mark to reach 400.1 and 402.8 cents per gallon, respectively. The average price in the Midwest was essentially unchanged, creeping up by only a tenth of a cent to 395.2 cents per gallon. The average price in the Gulf Coast increased by 1.7 cents to 384.6 cents per gallon and remained the lowest of any region. The price in the Rocky Mountain region went up 3.9 cents to 389 cents per gallon. The price for the West Coast extended its upward surge, jumping another 13.7 cents to strike 416.6 cents per gallon. West Coast prices have risen 28.3 cents over the past two weeks. The average price in California went up even more, shooting to 424.2 cents per gallon, an increase of 14.3 cents from the previous week.

For the first time since May 5, the national average diesel price faltered in its upward climb, slipping by 1.6 cents to 470.7 cents per gallon. Prices dipped somewhat in most regions of the country. The average price on the East Coast dropped by 2 cents to 475.9 cents per gallon. However, in New England, the price went up slightly, gaining three-tenths of a cent to reach 484.6 cents per gallon. In the Midwest, the price went down the most of any region, by only 2.4 cents to 464.3 cents per gallon. The average price in the Gulf Coast was 466.4 cents per gallon, a decrease of nine-tenths of a cent. Contrary to what was happening in the other major regions, the price in the Rocky Mountains increased, growing by 2.7 cents to hit 468 cents per gallon. On the West Coast, the average price slipped by half a cent to 487.8 cents per gallon. The average price in California was unchanged at 502.7 cents per gallon, reflecting an increase of 205.5 cents above the price one year ago.

May Propane Build Slightly Above Average
Primary inventories of propane grew slightly above their 5-year average during May, reaching an estimated 38.0 million barrels by May 30, 2008. The most recent 5-year average build for the Nation’s propane inventories for this month was about 8.0 million barrels, compared with May 2008 build that totaled nearly 8.2 million barrels. Last week’s robust build of 2.3 million barrels contributed to the higher monthly increase. Regional inventories grew in all areas last week as the Midwest led with a build of 1.5 million barrels. Gulf Coast inventories managed a 0.5 million-barrel gain last week while the East Coast showed a 0.2 million barrel gain during this same time. The combined Rocky Mountain/West Coast region posted a similar 0.2 million-barrel rise as well. Propane non-fuel use inventories plunged by 0.4 million barrels to account for a much smaller 4.5 percent share of total propane/propane inventories, compared with the prior week’s 6.0 percent share.

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