Distillates include fuels like heating oil and diesel. Distillates are also an important group of fuels for transportation and heating purposes. They require crude oil to be processed.
Like gasoline, distillate demand and stock levels drive crude demand and crude prices. As a result, energy investors watch distillate inventories closely. Distillate inventories give a handy snapshot of distillate demand and supply trends.
Distillate stocks continued their declining streak. They decreased by 2.7 million barrels, or MMbbls, to 124.7 MMbbls. Analysts were expecting a decline of 3.5 MMbbls.
Inventories are now in the lower part of the five-year range.
Factors that led to the inventory draw
Factors that led to the inventory draw include distillate production and demand.
Distillate production increased from ~4.63 million barrels per day, or MMbbls/d, to ~4.74MMbbls/d last week. According to the EIA (U.S. Energy Information Administration), distillate products supplied averaged 4.1 MMbbls/d over the last four weeks. This is ~11.2% higher—compared to same period last year.
Distillate demand increased from ~4.25 MMbbls/d to ~4.28 MMbbls/d. While the increase in demand wasn’t that significant, net changes in exports could have also offset the increase in production. This would explain the inventory draw.
An inventory draw is bullish for distillate prices. It’s positive for major refiners like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier Corp. (HFC). It’s also positive for the Energy Select Sector SPDR ETF (XLE). XLE holds many of these refiners. They account for ~7% of XLE.
Outlook and international demand
In the February STEO (Short-Term Energy Outlook) report, the EIA expects US distillate consumption to increase by 80,000 barrels per day, or bpd, to 4.07 MMbbls/d in 2015. This would largely be driven by increasing industrial production. In 2014, the EIA estimated that distillate consumption was ~4 MMbbls/d.
In the next part of this series, we’ll discuss the movement in Cushing inventories last week.