Released on January 24, 2008
(Next Release on January 30, 2008)

The Cost of Coming in from the Cold
It�s the middle of January, and the temperatures outside remain chilling. It�s the time of year when many people, especially in the Northeast, are relying on heating oil to keep the inside temperatures toasty. However, this year, using heating oil has been a costly proposition.

The national average residential price for heating oil reached nominal records this season for eight consecutive weeks (October 8 to November 26, 2007) and hit the current record price of 339.5 cents per gallon on January 7, 2008. This price is also higher than the record monthly average inflation-adjusted price. Prices over the last month have been even higher in the Northeast (which includes New England and the Central Atlantic states), where about 78% of residential heating oil usage occurs. Central Atlantic prices over the past month have been about 6 to 7 cents higher than the national average, while New England prices have averaged about 1 to 2 cents higher.

Moreover, the national average price for residential heating oil is currently almost $1 per gallon higher than at this time last year. Why are we seeing such a large price increase? Part of the price difference can be explained by weather. December 2006 was marked by unusually mild temperatures in the Northeast, while in December 2007 New England experienced below-normal temperatures and above-normal snowfall. Colder temperatures in this region of high heating oil use ratcheted up the demand for heating oil compared to the year before.

Some observers may also point to lower inventories of high sulfur distillate fuel this year compared to previous years, but these numbers may be misleading. High sulfur distillate (500 parts per million (ppm) of sulfur or more) fuel is often referred to as heating oil because heating has traditionally comprised a large percentage of its use, with the remainder made up of off-road diesel, locomotive, electric power generation, and marine uses. Currently, U.S. high sulfur distillate fuel inventories are 36 percent below last year�s levels, and 32 percent below the 5-year average level. It would seem that these �heating oil� inventories are very low and supply is very tight. However, an EPA ruling effective June 2007 required all off-road diesel, locomotive, and marine demand to be met with low sulfur (under 500 ppm) distillate fuel. As covered in This Week in Petroleum on June 20, this likely reduced the demand for high-sulfur distillate fuel by about half. One would expect in response that high sulfur inventories would be reduced proportionally over time with a corresponding increase in low sulfur inventories, if historical buffer levels were to be maintained. It would appear that this phenomenon is occurring, as low sulfur (less that 500 parts ppm sulfur) inventories are currently almost 19% higher than the 5-year average.

The most obvious and likely reason for higher heating oil prices this year is simply that crude oil prices are higher. Crude oil prices have averaged almost $35 per barrel higher this year versus last year since the beginning of November, which translates to about 83 cents per gallon. According to EIA�s latest Short-Term Energy Outlook, crude oil prices are expected to soften slightly as the winter progresses, but it is unlikely that there will be a large downward correction to last year�s price levels. As a result, consumers should expect heating oil prices to remain higher than previous years for the balance of the heating season.

Residential Heating Fuel Prices Slip Lower
Residential heating oil prices maintained their downward flow for the period ending January 21, 2008. The average residential heating oil price showed a decrease of 3.1 cents last week to reach 333.0 cents per gallon, which was an increase of 99.7 cents from this time last year. Wholesale heating oil prices decreased by 3.7 cents, reaching 258.4 cents per gallon, which was a gain of 103.2 cents compared to the same period last year.

The average residential propane price finally ceased its uphill climb with a slight 0.2 cent per gallon decrease. This was an increase of 57.1 cents compared to the 199.2 cents per gallon average for this same time last year. Wholesale propane prices decreased by 1.6 cents per gallon, from 154.3 to 152.7 cents per gallon. This was an increase of 59.5 cents from the January 15, 2007 price of 93.2 cents per gallon.

Retail Gasoline and Diesel Prices Decline
The U.S. average retail price for regular gasoline fell for the second consecutive week to 301.7 cents per gallon as of January 21, 2008, 5.1 cents lower than last week but 85.2 cents above a year ago. All regions showed price drops with the East Coast losing 4.6 cents to 306.2 cents per gallon. The Midwest fell 5.2 cents to 295.8 cents per gallon, 96.6 cents per gallon more than last year. The lowest regional price occurred in the Gulf Coast which decreased 5.3 cents to 290.4 cents per gallon. The Rocky Mountain price declined 2.1 cents to settle at 292.8 cents per gallon. The West Coast continued as the highest regional price but tallied the largest regional decrease, 5.9 cents, to drop to 315.5 cents per gallon. The average price for regular grade in California was reduced to 322.6 cents per gallon, 6.4 cents less than last week.

The retail diesel fuel price decreased 5.6 cents to 327.0 cents per gallon, 84.0 cents higher than last year. All regional prices were lower with the East Coast down by 4.8 cents to 334.3 cents per gallon, the highest regional price. New England is the only area above $3.50, as the price fell slightly to 359.4 cents per gallon. The Midwest decreased 6 cents to 322.8 cents per gallon. The Gulf Coast had the lowest regional price, declining 4.4 cents to 322.2 cents per gallon. The Rocky Mountain price was reduced by 3.2 cents to 322.9 cents per gallon. The West Coast plunged 9.3 cents to settle at 332.7 cents per gallon. California prices tumbled 9.9 cents to 336.0 cents per gallon.

Propane Inventories Continue Sharply Lower
Cold temperatures in many parts of the Nation continued to put strong pressure on propane stockholders that showed primary inventories moving sharply lower by over 3.2 million barrels last week. As of January 18, 2008, propane inventories measured an estimated 45.4 million barrels, a level that remains well within the average range for this time of year. Strong imports into the East Coast contributed to keep the region�s inventories relatively unchanged last week despite the cold temperatures. However, Midwest and Gulf Coast inventories, in contract, posted sharp declines during this same time, down 1.9 million barrels and 1.2 million barrels, respectively. The combined Rocky Mountain/West Coast region reported a weekly decline of 0.2 million barrels. Propylene non-fuel use inventories reported a weekly increase of 0.1 million barrels, with its share rising to 5.6 percent of total propane/propylene inventories from the prior week�s 5.0 percent share.

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