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Distillate inventories stay at the bottom of the 5-year average

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Distillate inventories

Distillate stocks, which include heating oil and diesel, increased by 439,000 barrels last week versus analysts’ expectation for inventories to decrease by 1.25 million barrels.

distillate stocks

The EIA reports that distillate inventories are still below the five-year average at 126.1 MMbbls (million barrels).

Diesel production and demand

Distillate production decreased from 4.9 MMbbls to 4.7 MMbbls last week. Demand decreased to 3.5 MMBpd from 4.1 MMBpd.

Although production was lower, lower demand offset the potential decline in inventories as a result of lower production. This caused inventories to rise last week.

International demand

U.S. refineries export considerable amounts of distillates, including diesel, to China and other developing countries like India and Brazil. Economic conditions in these countries affect diesel demand and therefore affect diesel prices.

Effect on refiners

Diesel prices affect the margins of refineries like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier Corp. (HFC). Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

Outlook for distillates

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Despite the current downside that distillates are experiencing, production is expected to grow by the end of 2014. Refineries have been constructing new capacities to produce more distillates than gasoline in anticipation of strong global distillate demand growth. Many of these units are expected to come online in 2014.

This trend is based on long-term expectations for economic growth—and distillate demand—in emerging countries to remain strong.

Plus, according to the EIA’s STEO report, distillate fuel consumption will increase by 150,000 bpd (barrels per day) or 3.9% in 2014. This expectation reflects colder-than-average weather as well as economic growth.

The following part of this series discusses the movement in Cushing inventories last week.

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