Energy Pricing Information for Canadian Consumers

Crude Oil and Petroleum Products

Current Market Conditions
October-November 2006

The World Oil Market

Oil prices typically decline in the Fall, usually after the Labour Day weekend with the conclusion of the summer driving season. This year, the price decline was in early September, prior to the Labour Day weekend, largely due to strong inventory levels in the U.S. for gasoline and crude oil, which removed any fears that there would be difficulty meeting U.S. gasoline demand. Oil prices have continued their decline because of persistent inventory builds, easing tensions in the Middle East and a U.S. hedge fund collapse. Recent weakness in the U.S. housing market has raised concerns that the U.S economy may be heading into a recession. This has resulted in many analysts revising their oil demand forecast downward for the remainder of the year and 2007. On the flip side, declining oil prices could very likely stimulate oil demand.

It is unlikely that prices will make huge gains in October and November as these are shoulder months for oil demand (i.e. between gasoline and heating oil). There continues to be risks to supply in Iraq, Nigeria and Iran however, these tensions have eased and to date, there has been minimal impact to supply. In addition, it appears that supply disruptions due to a major hurricane are unlikely. The market was able to bear temporary losses of oil supply from Alaska's Prudhoe Bay and while prices did increase temporarily the supply disruption was less than what was originally anticipated and prices fell in response.

U.S. crude oil and distillate stocks are well above the levels witnessed in the last five years; however, stocks are likely to be drawn down in October with refinery turnarounds and an increase in distillate exports to Europe. The wildcard that could add strength to crude oil and distillate prices in the next several months is cold weather.

The price of WTI is currently around US$60 per barrel. Many analysts are forecasting that crude oil will be between US$60 and US$65 per barrel for the remainder of the year. Any supply disruption, or cold weather could quickly propel prices higher. On the other hand, growing inventories and warm weather could lower prices.

Petroleum Products

The winter months are the highest demand season for heating oil. Of the 107 million households in the U.S., 8.1 million (8 percent) of those homes use heating oil for heating purposes. Of those 8.1 million homes, almost 80 percent of these are located in the U.S. northeast. In 2004, the U.S. consumed almost 7 billion gallons (25 153 000 cubic metres) of light fuel oil for residential heating. In 2005, Canada consumed 4 587 000 cubic metres of light fuel oil (includes No. 2 and No. 3). Quebec consumed (36 percent), followed by Atlantic Canada (30 percent) and Ontario (27 percent).

Listed below are the main factors that have an impact on heating oil prices. The arrow indicates upward or downward pressure on price or in the case of a horizontal arrow, uncertainty. With crude oil prices above US$61 per barrel, and heating oil stocks in the U.S. at 5-year highs, there is some uncertainty if heating oil prices will rise. However, it is likely that they will be higher than last year. However, this could change if the winter is warmer than normal.

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