This Week In Petroleum

Much is made about the daily changes in the price of oil. Traders and analysts come up with many reasons why prices change from day-to-day. For example, when the near-month futures price for West Texas Intermediate (WTI) crude oil rose by more than $2 per barrel on October 25, traders and analysts stated that the rise reflected a sharp drop in crude oil inventories relative to an expected build, along with a change in the perception of what impact recently announced OPEC production cuts might have on the market. Yet, less than a week later, the near-month futures price for WTI fell more than $2 per barrel. This was explained as a reaction to a number of different factors, including weaker-than-expected oil demand growth in China, selling by funds investing in oil, and the lack of an attack on Saudi Arabian oil facilities over the weekend following a threat of such action towards the end of last week. But unless you are active in trading oil contracts on a daily basis, it is probably more important to understand current trends in oil markets rather than focusing on daily fluctuations.

Weekly data on U.S. petroleum supply and demand, released by EIA every Wednesday morning (Thursday when a holiday falls earlier in the week), are often looked at with great interest as a snapshot of oil markets in the largest market in the world, the United States. And, since Japan, a significantly smaller oil consumer than the United States, is the only other country for which oil information is available on a weekly basis, trends in weekly U.S. oil data are often seen as a potential barometer of current world oil market conditions.

So, what are some of the trends that appear in recent weekly data? One observation appears to be that demand growth for key oil products in the United States has recently accelerated. While demand comparisons to last year are problematic due to the effects of Hurricanes Katrina and Rita, comparisons to 2004 and 2003 might provide a better indication of current oil demand strength. Looking at the three main light product categories (gasoline, distillate fuel, and jet fuel) in combination, demand for the four weeks ending October 27, 2006 averaged over 15.5 million barrels per day. Comparing this to the four weeks ending October 29, 2004, provides an annual average growth rate of 2.2 percent, which is somewhat higher than a typical annual growth rate of about 1.5 to 2.0 percent. Comparing the latest four weeks to the four weeks ending October 31, 2003 yields a similar 2.1 percent annual average growth rate. These growth rates were observed despite higher crude oil prices. The spot price in October 2006 averaged just under $59 per barrel, whereas the WTI spot price in October 2004 averaged around $53 per barrel, and the average price in October 2003 was around $30 per barrel. Even as recently released economic data indicated that U.S. economic growth continued to slow, with a preliminary estimate of 1.6 percent growth in Gross Domestic Product (GDP) in the third quarter of this year, overall economic activity appears to be solid enough to sustain demand growth for gasoline, distillate, and jet fuel.

Another trend relates to crude oil imports. While crude oil imports fell sharply during the week ending October 20 due to a three-day closure at a major port, much may be made of the fact that imports increased for the week ending October 27 as the port returned to service. However, even as crude oil imports have been bouncing up and down over the last couple of weeks, the four-week average for the period ending October 27 is 10.1 million barrels per day. This reflects a decline from peak levels earlier this year of 10.8 million barrels per day, as well as a drop from the nearly 10.3 million barrels per day averaged during the four weeks ending October 29, 2004 and only slightly above the nearly 10.0 million barrels per day averaged during the four week period ending October 31, 2003. Since domestic production has declined in each of the last three years, but demand generally increases every year, the expected trend would be significantly higher crude oil imports now than seen in 2003 or 2004. Yet crude oil imports the last four weeks are roughly equivalent to those seen 2 and 3 years ago (again, last year’s data is ignored for analytical purposes due to the effects from Hurricanes Katrina and Rita). It appears that increased product imports over the years, among other factors, have helped to keep the market in balance. But, the fact that crude oil imports are not even higher than current levels is an important trend that may be lost in looking at week-to-week fluctuations.

Of course, many in the oil analytical community may continue to look at daily changes in prices and concentrate on weekly changes in U.S. oil data. But sometimes it is important to step back from the trees to see the whole forest, which is why it is often best to closely scrutinize the four-week averages, rather than just focusing on the latest weekly data.

Residential heating oil prices decreased for the period ending October 30, 2006, dropping by 0.5 cent last week to reach 238.2 cents per gallon, a decrease of 19.5 cents from this time last year. Wholesale heating oil prices increased by 1.4 cents to reach 175.9 cents per gallon, a decrease of 17.8 cents compared to the same period last year.

The average residential propane price increased marginally by 0.2 cent, to reach 193.5 cents per gallon as of October 30. This was a decrease of 2.7 cents compared to the 196.2 cents per gallon average for this same time last year. Wholesale propane prices gained 1.4 cents per gallon, from 100.6 to 102.0 cents per gallon. This was a decrease of 17.1 cents from the October 31, 2005 price of 119.1 cents per gallon.

As of October 30, the U.S. average retail price for regular gasoline increased for the first time in 12 weeks. Prices rose 1.0 cent to 221.8 cents per gallon. However, the price remains 26.2 cents per gallon lower than at this time last year. East Coast prices rose 0.6 cent to 218.5 cents per gallon. The Midwest saw the largest regional increase, rising 4.9 cents to 219.6 cents per gallon. The average price in the Rocky Mountains and the West Coast decreased, with the Rocky Mountains falling 4.2 cents to 231.0 cents per gallon and the West Coast slipping 4.5 cents to 241.4 cents per gallon.

Retail diesel fuel prices decreased slightly, with prices falling 0.7 cent to 251.7 cents per gallon, 35.9 cents less than at this time last year. East Coast prices fell 0.7 cent to 253.0 cents per gallon and Midwest prices fell 0.1 cent, to 250.1 cents per gallon. The Gulf Coast saw the average price drop by 1.5 cents to 246.2 cents per gallon. West Coast prices fell 2.6 cents to 260.2 cents per gallon. The only region to show an increase was the Rocky Mountains, with prices rising 1.4 cents to 257.7 cents per gallon.

Preliminary estimates of U.S. propane inventories during October showed a modest build of 2.2 million barrels, a level only slightly below the most recent 5-year average for this month of 2.4 million barrels. Strong imports during the month contributed to the monthly rise in inventories that showed inventories gaining an additional 0.2 million barrels last week, raising U.S. inventories up to an estimated 72.2 million barrels as of October 27, 2006. With last week’s gain, U.S. propane inventories are now positioned at the upper end of the average range for this time of year. Regional stock activity remained somewhat mixed; as East Coast inventories remained unchanged, Midwest inventories showed a weekly decline of 0.4 million barrels, while Gulf Coast inventories reported a gain of nearly 0.6 million barrels. During this same time, the Rocky Mountain/West Coast regions posted a modest 0.1-million-barrel increase, while propylene non-fuel use inventories rose by 0.2 million barrels. Propylene non-fuel use inventories, as a share of total propane/propylene inventories, rose to 4.8 percent last week, up from the prior week’s 4.5-percent share.

It will be interesting to see if the decline in crude oil imports is just a blip or will be something that will continue over the next several years.

I don't see how it could remain anything other than a blip. The fundementals driving imports have not changed.

Since domestic production has declined in each of the last three years, but demand generally increases every year, the expected trend would be significantly higher crude oil imports now than seen in 2003 or 2004.

3 posted on 11/01/2006 11:54:58 AM PST by thackney (life is fragile, handle with prayer)

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