Distillates, another major refined product of crude oil, include fuels like heating oil and diesel. Distillates are also an important group of fuels for transportation and heating purposes.
Like gasoline, distillate’s demand and inventories drive crude oil demand and crude oil prices. As a result, energy investors watch distillate inventories closely. Distillate inventories offer a handy snapshot of distillate demand and supply trends.
Distillate inventories remained unchanged last week at ~126 MMbbls. Analysts were expecting inventories to decline by 1 million barrels.
Inventories remained in the lower part of the five-year range.
Inventory movements affect refineries’ margins—like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier (HFC). When distillate inventories rise, they’re bearish for distillate prices, which is a negative for refiners. The opposite is true when inventories fall.
All these companies are part of the Energy Select Sector SPDR ETF (XLE). XLE holds VLO, PSX, and MPC, which make up ~7.5% of the ETF.
Factors that affected inventory movement
Factors that affected inventory movement include distillate production and demand. Distillate production declined from 4.8 MMbbls/d in the prior week to 4.73 MMbbls/d in the week ended March 20.
According to the EIA (US Energy Information Administration), total distillate products supplied averaged 3.9 MMbbls/d over the last four weeks. This is ~4.5% higher than in the corresponding period last year.
Distillate demand increased from ~3.77 MMbbls/d to ~3.96 MMbbls/d.
Net changes in trade flows could have balanced out the effect of a decline in production and an increase in demand.
Outlook for distillates
In the March STEO (“Short-Term Energy Outlook”) report, the EIA expects US distillate consumption to increase by 80,000 barrels per day, or bpd, in 2015—an increase of 2% over 2014 numbers. This increase should be driven partially by increasing industrial production.
In the next part of this series, we’ll discuss the movement in Cushing inventories last week.