This Week in Petroleum: October Is Just the Beginning

Retail Gasoline and Diesel Prices Lower

October 11, 2007 -- 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.

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.

Not only are prices expected to be higher but consumption will also likely be higher because this winter is expected to average about 4 percent colder than last winter (although slightly warmer than the 30-year normal). The percentage increase for heating oil expenditures (consumption multiplied by price) is projected to exceed the price increase, growing by nearly 22 percent compared to last winter. This means that it is expected to cost approximately $1,800 to heat an average home with heating oil compared to $1,465 last winter. Expenditures could be lower than projected, however, if the winter turns out to be mild, as heating oil consumption would drop.

If the average temperature was 10 percent warmer than the baseline forecast throughout the entire winter period, according to the STEO projections, heating oil consumption would decrease by 9 percent while prices fall by just 1 percent. Expenditures then would be 10 percent below the baseline projections, but, nevertheless, 10 percent (or $150) above those from last season. Conversely, if the average temperature was 10 percent colder than the forecast, heating oil expenditures would be 32 percent above those from last season. Although colder-than-normal weather would significantly affect heating oil consumption, the effect on residential prices would likely be relatively small because distillate fuel inventories are currently adequate and could act as a temporary buffer to a surge in demand. Also, demand increases can be met within a relatively short period with imports and increased refinery runs. However, a sustained patch of colder-than-normal weather could likely lead to short-lived price spikes, as there is a several week lag time for supplies to adjust.

Even as much of the country basks in warm weather at the beginning of this month, colder winter weather is on its way. While it may be difficult to predict the World Series winner, it does appear very likely that heating fuel expenditures will be higher this winter compared to last winter.

Residential Heating Fuel Price Survey Returns To Meet Higher Prices

Beginning this week and continuing into mid-March 2008, prices for wholesale and residential heating oil and propane will be included in This Week In Petroleum, as well as in the Weekly Petroleum Status Report and on EIA's Heating Oil and Propane Update web page. As of October 8, residential heating oil prices averaged 277.1 cents per gallon, which is 37.5 cents per gallon higher than last year's corresponding period. Meanwhile, wholesale heating oil prices averaged 229.9 cents per gallon, an increase of 53.1 cents compared to the same time last year.

Residential propane prices averaged 212.4 cents per gallon, which is 18.3 cents higher than one year ago. Wholesale propane prices averaged 143.0 cents per gallon as of October 8. This was an increase of 41.8 cents from the same period last year.

Retail Gasoline and Diesel Prices Lower

The U.S. average retail price for regular gasoline dropped 1.8 cents last week to 277.0 cents per gallon as of October 8, 2007, but is still 50.9 cents higher than last year. All regions were lower except on the West Coast where retail regular gasoline prices rose by 1.2 cents to 293.4 cents per gallon, the highest in the nation. The average price for regular grade in California was 299.6 cents per gallon, up 2.3 cents from last week and 39.5 cents per gallon over the previous year. The East Coast price fell 2.0 cents to 274.6 cents per gallon while the Midwest price decreased 2.7 cents to 275.5 cents per gallon, still 60.2 cents per gallon above last year. The region with the lowest price also tallied the largest decrease with the Gulf Coast falling 3.3 cents to settle at 266.7 cents per gallon. The Rocky Mountain region price decreased 0.8 cent to 280.2 cents per gallon.

Retail diesel prices fell for the first time in six weeks, settling at 303.5 cents per gallon, 1.3 cents under last week but 52.9 cents per gallon higher than last year. Regional prices were mixed with the largest increase and highest price occurring on the West Coast where the price soared 7.7 cents to 316.7 cents per gallon. California prices were up 5.4 cents to 319.7 cents per gallon. The Rocky Mountain price rose to 313.9 cents per gallon, a gain of 3.9 cents. The East Coast lost 2.1 cents to settle at 303.1 cents per gallon. The Midwest price dropped 3.3 cents to 302.8 cents per gallon. The Gulf Coast was the only region below the $3 mark, landing at 294.6 cents per gallon.

Propane Inventories Sharply Higher

Total inventories of propane moved sharply higher last week with a build that measured 1.4 million barrels, the largest in several weeks, putting the Nation’s primary supply of propane at an estimated 60.5 million barrels. Nearly all regions reported gains last week, except the combined Rocky Mountain/West Coast region that remained relatively flat. East Coast inventories rose by 0.2 million barrels while the Midwest region showed inventories gained 0.4 million barrels last week. Gulf Coast inventories posted the largest weekly increase of 0.8 million barrels during this same time. Propylene non-fuel use inventories moved lower last week by 0.2 million barrels, with a smaller 3.2 percent share of total propane/propylene inventories compared with the prior week’s 3.6 percent share.

Source: DOE

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