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 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 increased by 1.3 million barrels (or MMbbls) last week to ~127.2 MMbbls. Analysts were expecting inventories to remain unchanged. But, inventories still remained in the lower part of the five-year range.
Inventory movements affect the margins of refineries, like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and HollyFrontier (HFC). When distillate inventories rise, it is bearish for distillate prices, which is a negative for refiners. The opposite is true when inventories fall.
Some of the companies above 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
Distillate production increased to ~4.86 MMbpd (million barrels per day) in the week ended March 27 from 4.73 MMbpd in the week prior. According to the EIA (US Energy Information Administration), distillate products supplied averaged 3.8 MMbpd over the last four weeks, which is 5.9% higher compared to same period last year.
Distillate demand decreased from ~3.96 MMbpd to ~3.82 MMbpd. An increase in production and a decrease in demand caused the increase in inventories.
Outlook for distillates
In the March STEO (Short-Term Energy Outlook) report, the EIA said that it expected US distillate consumption to increase by 80,000 barrels per day (or bpd) in 2015, an increase of 2% over 2014 numbers. The increase would partially be driven by increasing industrial production.
In the next part of this series, we’ll discuss the movement in Cushing inventories last week.