NLIS 1
October 8, 2004
(Government Services)
 

The following is being distributed at the request of the Petroleum Pricing Office: 

Diesel prices see early adjustment by Petroleum Pricing Office 

Distillate fuel (diesel and home heat) supplies haven�t rebounded as quickly as the markets expected, and this is creating another cloak of uncertainty when it comes to meeting current and future demands for these products. 

Consequently, sustained high market pricing in recent days has been sufficient for the Board of Commissioners of the Public Utilities Petroleum Pricing Office (PPO) to use its interruption formula for the second time on diesel prices before October 15. Home heating fuel, though of the same family of petroleum products as diesel, is a separately-traded commodity on the New York Mercantile Exchange (NYMEX), and its pricing behaviour wasn�t enough to trigger an interruption at this time. 

This is the first time since the U.S. war in the Middle East began in March 2003 that the interruption formula has been used so many times in such a short period to make early adjustments to fuel prices in Newfoundland and Labrador. 

David Toms, PPO director (acting), said the recent frequency of price changes is an indicator of the volatile nature of the current market, given that oil has crossed the $50 U.S. mark multiple times. The increased pressures on world oil and refined petroleum product prices continued this past week, and the reported low inventories of distillates before the upcoming winter already has some fuel traders anxious. 

"The interruption formula is never arbitrarily used to make early adjustments in the Newfoundland and Labrador market," he noted. "It was put in place to entrench the objectivity of our regulation system and guarantee that any pricing movements made outside of the regular schedule are supported by a sound and unbiased model. The market is definitely showing its concern about where distillate fuel supplies are in relation to seasonal demand, and fuel-price regulation, such as what we have here in Newfoundland and Labrador, is a means to ensure controls are in place at a local level when none are evident internationally." 

Effective 12:01 a.m. Friday, October 8, the maximum price for diesel will increase by 3.6 or 3.7 cpl � depending on the HST rounding-off effect in a particular pricing zone. 

In keeping with the interruption formula policy criteria, there will be no further pricing interventions for any fuel regulated by the PPO before October 15. 

Some of the recent events that have threatened fuel supply availability and pressured world fuel prices, such as the civil unrest in Nigeria (Africa�s largest oil producer), are slowly abating, but their impact is still being reflected on the markets as concerns linger. 

The side effects of tropical storm damage in the Gulf of Mexico have slowed the process of resuming oil production operations and deliveries. 

Also affecting the supply side are Middle East tensions, especially in Iraq, where threats to the oil pipelines are a constant possibility and a bombing early this week shut down one of the country�s main export pipelines. 

Distillate inventories remain low and supplies are already reported to be substantially below year-ago levels at a time when they are usually rebuilding ahead of the peak demand period. 

But Mr. Toms pointed out that, as always, supply issues are not the only factors affecting world fuel prices. Demand is also a major contributor to market pricing behaviour, especially in the absence of sufficient supply availability and at a time when some U.S. refineries are curtailing operations to perform routine annual maintenance in preparation for the upcoming winter. 

According to the U.S. International Energy Agency, global demand for oil is expected to increase three per cent this year (Bloomberg News, October 4) with China and other expanding economies playing significant roles. 

BACKGROUNDER 

PPO benchmarks are based on the average price of refined petroleum products. Illustrated in the following graph is market-price performance of diesel fuel over recent regularly scheduled periods up to October 4:

The PPO uses its interruption formula whenever market prices for regulated fuels meet a certain criteria, provided making the early adjustment doesn�t interfere with the regular pricing schedule. 

For the interruption formula to be used on gasoline and distillate fuels, the PPO requires the average of market prices to be 3.5 cpl greater or less than the current PPO benchmark prices (except propane which requires +/- 5.0 cpl) over five market business days. 

Media contact: Michelle Hicks, Communications, 1-866-489-8800 or (709) 489-8837 

2004 10 08                                       10:15 a.m.