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Distillate Inventories Increased Last Week: What Drove the Growth?

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Distillate production

Distillate production remained flat in the week ended July 10, at 5.09 million barrels per day (or MMbpd) compared to the week ended July 3. The EIA (U.S. Energy Information Administration) reported that distillate products supplied averaged 5.04 MMbpd over the last four weeks. This is ~0.4% higher than the 5.02 MMbpd over the same period last year. Compared to the prior four weeks ended July 3, the four-week average increased ~0.4%

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Distillate demand

Distillate demand decreased from ~3.79 MMbpd in the week ended July 3 to ~3.46 MMbpd in the week ended July 10. The EIA reported that distillate demand averaged ~3.7 MMbpd over the last four weeks. This is ~2% lower than the 3.78 MMbpd over the same period last year. Compared to the prior four weeks ended July 3, the four-week average demand decreased by ~4%.

What does this imply?

As you can see above, distillate production (5.09 MMbpd) exceeds demand (3.46 MMbpd) by a large margin. This difference explains the build in inventories in the week ended July 10. Note that net exports also affect distillate inventories.

Distillate consumption forecasts

According to the EIA’s July STEO (“Short-Term Energy Outlook”) released on July 7, distillate consumption will increase by 90,000 barrels per day (bbl/d), or 2.3%, in 2015 compared to 2014. It should increase by a further 70,000 bbl/d, or 1.7%, in 2016. This growth will be driven by a rise in manufacturing demand and foreign trade the and use of marine fuel.

Increased distillate consumption is bullish for distillate prices, which boosts revenues for refiners such as Marathon Petroleum (MPC) and Tesoro Corporation (TSO). If crude prices don’t rise as much, these refiners stand to record higher profits too. Crude oil is an input cost for these companies. These companies make up 2% of the iShares U.S. Energy ETF (IYE). Increased consumption should also benefit MLPs (master limited partnerships) such as Phillips 66 Partners (PSXP) and MPLX LP (MPLX)—because they’ll benefit from transporting the larger volumes of distillates that their parents produce to take advantage of better prices.

For the latest updates on the energy sector, be sure to read Market Realist’s Energy and Power page.

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