uploads/2015/01/US-dist3.jpg

What’s up with distillate stocks?

By

Updated

Distillate stocks

Distillates, which include fuels like heating oil and diesel, are also an important group of fuels for transportation and heating purposes. They too require crude oil to be processed.

So, distillate demand and stock levels drive crude demand and crude prices. Therefore, energy investors closely watch distillate inventories, as they give a handy snapshot of distillate demand and supply trends, particularly near and during winter months, when heating demand can drive energy demand.

Distillate stocks decreased by 3.3 MMbbls (million barrels) to 136.6 MMbbls. Analysts had expected inventories to increase by ~200,000 to ~300,000 barrels. Inventories are now in the middle of the 5-year range.

Article continues below advertisement

Distillate production and demand

Distillate production decreased from ~5.10 MMbbls per day to ~4.76 MMbbls per day last week. Demand increased from ~3.94 MMbbls per day to ~4.52 MMbbls per day in the prior week.

A significant decrease in production and a significant increase in demand caused the decline in distillate inventories. Net changes in exports could also be a possible reason for the inventory pull.

An inventory draw is bullish for distillate prices, which in turn is a positive for major refiners like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier (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 the January STEO report, the EIA said it expects US distillate consumption to increase by 60,000 barrels per day to 4.06 MMbbls per day or 1.5% in 2015 from 2014 on forecast assumptions of economic growth. The EIA estimates that distillate consumption in 2014 was 4 MMbbls per day.

The following part of the series talks about the movement in Cushing inventories last week.

Advertisement

More From Market Realist