Distillates, which include fuels like heating oil and diesel, are also an important group of fuels for transport and heating purposes. They too require crude oil to be processed.
So, distillate demand and stock levels—like gasoline—drive crude demand and crude prices. Energy investors can benefit from watching distillate inventories. They offer a handy snapshot of distillate demand and supply trends, particularly near and during winter months, when heating demand can drive energy demand.
Distillate inventories decreased by 1.5 MMbbls (million barrels) to a six-month low of 113 MMbbls. Such a large draw is typically bullish for distillate and crude prices. Distillate inventories are currently near the bottom of the five-year range
Diesel production and demand
Distillate production increased from~4.8 MMbbls per day to 4.9 MMbbls per day last week. Demand increased to 4.1 MMbbls per day from ~3.79 MMbbls per day in the prior week.
The significant increase in demand offset the increase in production and explains the huge draw in inventories last week.
This should bode well for distillate prices, which in turn is a positive for major refiners like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier Corp. (HFC), and consequently also for the Energy Select Sector SPDR ETF (XLE), which holds a lot of these refiners.
Outlook and international demand for distillates
In its latest short-term outlook report, the EIA expects US distillate consumption to increase by 110,000 bpd (barrels per day), or 3%, in 2014 from 2013, reflecting colder-than-average weather as well as economic growth. It then expects distillate consumption of 100,000 bpd, or ~2.5% in 2015.
US refineries also export considerable amounts of distillates, including diesel, to developing countries like China, India, and Brazil. Economic conditions in these countries affect diesel demand, and thus affect diesel prices.
Analysts expect distillate production 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 from these countries.
The following part of this series discusses the movement in Cushing inventories last week.