Distillate Inventories Last Week Fall Short of Expectations



Distillate inventories

Distillate stocks decreased by 0.3 MMbbls last week to ~126.9 million barrels (or MMbbl). Analysts were expecting inventories to increase by 850,000 barrels. Inventories remain in the lower part of the five-year range.

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Factors that affected inventory movement last week

Distillate production increased to ~4.99 MMbbl/d in the week ended April 3, from ~4.86 million barrels per day (or MMbbl/d) in the week prior. According to the EIA (U.S. Energy Information Administration), distillate products supplied averaged 3.9 MMbbl/d over the last four weeks. This is 2.7% higher than the same period last year.

Distillate demand increased from ~3.82 MMbbl/d to ~4.21 MMbbl/d in the week ended April 3.

A significant increase in demand seems to have offset the effect of the increase in production, which caused inventories to decline. Net trade flows also likely impacted inventories.

Outlook for distillates

In the April STEO (Short-Term Energy Outlook) report, the EIA expects US distillate consumption this summer to average 4 MMbbl/d, up 3% compared to last summer. According to the EIA, this increase is a result of growth in manufacturing output and foreign trade.

Distillate demand drives crude demand

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.

Inventory movements affect margins for refineries such as Valero Energy (VLO), Phillips 66 (PSX), Tesoro Corporation (TSO), and HollyFrontier Corporation (HFC). When distillate inventories fall, it’s bullish for distillate prices, which is a positive for refiners. The opposite is true when inventories rise.

VLO, PSX, and TSO make up ~8 % of the Energy Select Sector SPDR ETF (XLE).

In the next part of this series, we’ll take a look at last week’s movement in Cushing inventories.


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