Slide 6 of 15

Notes:

• Low stocks and cold weather are behind the current price spike. Low stocks of distillate fuels have left markets in a vulnerable position.

• We began our two biggest distillate demand months, January and February, with very low U.S. distillate stocks -- particularly on the East and Gulf Coasts.
  • Distillate stocks in the U.S. and Europe were in surplus supply as recently as October, but distillate stocks showed atypical drops in October and November and declined more sharply than usual in December.
  • December stocks closed below the low levels of 1996. The unusual draw down, in contrast to the more normal building pattern shown in the fall of 1996, resulted in distillate inventory levels about 7 million barrels lower than end-December 1996.

• Low stocks in the winter create the potential for price volatility. In this situation, unexpected high demand from cold weather or sudden loss of supply can quickly deplete low stocks in local areas for a time, requiring unusual movement of stock from other areas. As buyers search for product, they bid prices up rapidly, which attracts product, but the time lag can cause prices to rise very high briefly before product arrives.