Although operating refining capacity in the United States has come under pressure since late July due to a string of unscheduled downtime at domestic facilities, analysts with the Energy Information Administration said last week that they do not expect a repeat of the better than 20-cent price spike for regular gasoline that took place during the month of August 2003.

August is usually a critical time for gasoline markets, providing either new price spikes or a respite from higher prices, as supply levels for the latter half of the peak driving season during the summer months are better known. Nonetheless, the EIA said it remains unclear what direction the gasoline markets will take this month, as the spate of refinery problems point to the potential for higher prices as the next few weeks unfold, but absent any additional major petroleum infrastructure problems, a repeat of the August 2003 price spike is very unlikely.

In August 2003, low supplies, along with refinery and pipeline outages, drove gasoline prices sharply higher, with the U.S. average price of regular gasoline increasing 23.1cts gal in the four-week period from July 28 to August 25, 2003. In contrast, in 2004, the U.S. average retail price actually dropped by 5.5cts gal in the six-week period from July 26 to September 6, 2004 (Labor Day), as higher prices in July spurred additional production and imports, and kept demand from growing substantially in August.

Meanwhile, the current focus on gasoline is expected to shift soon to heating fuels, as the peak summer driving season slowly draws to a close. Typically, the period of April through September is when most primary stockholders replenish their inventories of distillate fuel oil, which includes both heating and diesel fuel, along with propane to adequate levels prior to the start of the next winter heating season. But with only two months remaining in the rebuilding season, primary stockholders at this point should have some indication of where inventories stand in comparison with historical trends over recent years.

Since petroleum product markets may run in cycles lasting longer than a single peak season, it is sometimes important to look back to prior year’s market developments for indications of what may affect the current season said the EIA.

Distillate fuel inventories began the 2004-2005 heating season within the average range, with 123.1 million bbl as of September 30, 2004. Although inventories initially moved lower and trailed near the lower boundary of the average range during October and November 2004, warmer-than-normal weather over most of the East Coast during the peak heating months of December through February eased demand, and contributed to moderate distillate withdrawals. Consequently, by the end of the heating season on March 31, distillate fuel inventories stood at 104.5 million bbl, a level within the average range for that time of year.

In early spring, market observers began to voice concern about the lack of an adequate build in distillate inventories, as some refiners apparently postponed scheduled spring maintenance to take advantage of robust gasoline demand and margins. However, with diesel fuel prices continuing to exceed gasoline prices during this time, refiners quickly began to shift their attention towards distillate fuel supply, which contributed to boost distillate inventories to a level near the upper limits of the average range by late July.

As a result, the overall seasonal stock build in distillate fuel inventories, which runs from April through July, totaled nearly 23.0 million bbl, a cumulative gain of about 35.0 percent above the most recent 5-year average for this period. Barring any major surprises over the next two months, distillate fuel inventories are poised to begin the 2005-2006 heating season at a relatively comfortable level in absolute terms.

The relatively mild 2004-05 winter in the central region of the country also moderated the draw on propane inventories. Stocks were 27.2 million bbl by March 31, a level within the middle of the average range for that period. Since March, U.S. inventories of propane exceeded the average monthly build each month through July, with the overall stock build measuring more than 35.0 million bbl, or 21.0 percent above the most recent 5-year average build for the April through July period.

With propane inventories currently at 62.6 million bbl, if over the next two months propane inventories attain the same build averaged over the last 5 years of 9.0 million bbl, U.S. inventories of propane would reach about 72.0 million bbl by September 30, a relatively comfortable level in absolute terms.

However, even if inventories continue to build inline with historical figures in August and September, propane and heating oil consumers should expect to pay more than last year. Consumers cannot count on another relatively mild winter. With relatively strong demand expected, inventories could be comparatively tight on a days supply basis. And crude oil prices are expected to remain at or near all-time highs (unadjusted for inflation), which will affect the price of all petroleum products.