Released on February 16, 2005
(Next Release on Thursday, February 24, 2005)

An Oil Market Urban Legend
Urban legends (a.k.a. myths in pre-internet days) are widely accepted beliefs that are assumed to be true. What makes them believable is that they usually sound like they make sense and so are treated as facts. One major oil market urban legend that comes up at this time every year is the notion that oil demand falls precipitously in the second quarter of the year (April - June). In fact, in recent days, many OPEC ministers have opined that they may have to cut oil production quotas at their upcoming meeting on March 16 (with the cuts presumably effective April 1) because of the seasonal demand weakness in the second quarter, or else face falling prices. What makes this an urban legend is that, while the demand for oil products does drop in the second quarter, the demand for crude oil does not (see chart below). Thus, any cut in crude oil production from OPEC will likely cause crude oil inventories to be drawn upon much more than normal, making it difficult for refiners to maintain normal output levels.

As can be seen in the chart above, demand for oil products, at least in the developed countries that belong to the Organization for Economic Cooperation and Development (OECD), where accurate data is readily available, does decline in the second quarter. The seasonality in overall oil product demand is mostly related to the demand for heating fuels, which peak in the first and fourth quarters of the year, and are relatively low in the second and third quarters. But crude oil demand in these same countries, defined as crude oil inputs into refineries, varies very little from quarter to quarter. What is happening, of course, is that refiners continue to run at almost the same rate in the second quarter and use this period to replace or rebuild inventories of heating fuels so that they can be used in the fourth and first quarters of the year. For example, heating oil inventories usually reach their nadir at the end of the first quarter, and without a substantial build over the next several months, refineries would not be able to supply enough heating oil to meet subsequent peak demand. If refiners dramatically reduced their crude oil inputs in the second quarter, not only would they not make enough gasoline for its peak demand period, but heating oil inventories would start the next winter season at extremely low levels. With little spare refinery capacity available, refineries need to maintain a steady stream of inputs, as there is little capability to "catch up" or dramatically increase production on a "real-time" basis to meet individual product demand peaks. (Even if more capacity did exist, transportation lags would discourage timely, local inventory builds.) This analysis does not even take into account the crude oil input seasonal pattern in China, which, as the second largest oil product consuming country in the world, has a large influence on crude oil buying patterns. While data for China is not readily available, its crude oil buying patterns are also unlikely to exhibit a large drop in the second quarter.

Crude oil production decisions by leading OPEC members can have a large impact on global oil markets. While it is true that oil products are made from crude oil and that demand for these products drops significantly in the second quarter, it does not follow that crude oil demand also drops, thus necessitating a cut in oil production during this period to prevent prices from falling dramatically. In fact, over the last 10 years (1995-2004), the average spot price for West Texas Intermediate (WTI) crude oil has dropped in the second quarter compared to the first quarter only 5 times, while the other 5 years have seen WTI prices increase over the second quarter. Clearly then, the notion that crude oil prices will fall dramatically in the second quarter of the year due to a drop in oil product demand is an urban legend, as the demand for crude oil is expected to be especially strong in the second quarter this year, with EIA estimating that world oil product demand will be 1.9 million barrels per day higher this second quarter than last year's second quarter. With oil product demand continuing to exhibit such strong annual growth, refiners will need to maintain their input of crude oil at or above its current level in the second quarter of 2005.

U.S. Average Retail Gasoline Falls Another Penny
The U.S. average retail price for regular gasoline decreased this week by 1.1 cents from the previous week to reach 189.8 cents per gallon as of February 14, 25.0 cents higher than this time last year. This is the second week in a row that prices have fallen. Prices were mixed, with the West Coast seeing a gain of 3.5 cents to 204.0 cents per gallon. Prices in California gained 3.8 cents to 209.1 cents per gallon. Retail prices on the East Coast fell 1.4 cents to 189.8 cents per gallon, which is 25.9 cents higher than last year. The Midwest saw prices decrease 3.0 cents to 186.7 cents per gallon.

Retail diesel fuel prices gained 0.3 cent last week to 198.6 cents per gallon. Prices were mixed throughout the country, with the West Coast seeing the largest regional increase of 7.7 cents to 219.0 cents per gallon. Prices in the Midwest lost 0.3 cent to 193.5 cents per gallon. East Coast prices dropped 1.2 cents to reach 201.3 cents per gallon, while prices in New England stayed the highest in the nation, falling 2.5 cents to 219.7 cents per gallon. However, California prices are catching up to New England, increasing by 5.2 cents to 219.6 cents per gallon, which is 33.0 cents higher than this time last year.

Residential Heating Fuel Prices Show Little Change
Residential heating oil prices decreased slightly for the period ending February 14, 2005. The average residential heating oil price decreased by 0.9 cent from last week to reach 198.1 cents per gallon, an increase of 37.0 cents from this time last year. Wholesale heating oil prices increased 2.8 cents to reach 137.3 cents per gallon, an increase of 36.0 cents compared to the same period last year.

The average residential propane price decreased 0.1 cent, from 172.3 cents to 172.2 cents per gallon. This was an increase of 18.7 cents over the 153.5 cents per gallon average for this same time last year. Wholesale propane prices increased 0.5 cent per gallon, from 81.1 cents to 81.6 cents per gallon, a gain of 5.7 cents compared to the same period last year.

Propane Inventories Seasonally Lower
U.S. inventories of propane continued to follow the same seasonal path seen over the past several weeks with inventories falling by 2.7 million barrels, and ending the week of February 11, 2005 at an estimated 36.4 million barrels. This level approximated the prior week's stockdraw in addition to roughly matching the same year-ago reported stockdraw, although the February stockdraw covering most of the first two weeks of the month already equals about two-thirds of the monthly stockdraw averaged over the most recent 5-year period. East Coast inventories fell by 0.4 million barrels last week despite a sharp drop in imports, compared with the prior week's rise, while Midwest inventories continued modestly lower for the second week with a 0.6-million-barrel stockdraw. Gulf Coast inventories sustained the largest weekly stockdraw with a 1.5-million-barrel decline while the combined Rocky Mountain/West Coast regions posted a 0.2-million-barrel loss during this same time. Propylene non-fuel use inventories inched lower by 0.1 million barrels but continued to account for a greater share of total propane/propane inventories, measuring 10.7 percent, compared with the prior week's 10.2 percent share.

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