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Why Inventories Increased Despite a Fall in US Gasoline Production

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US Gasoline production

US gasoline production decreased from ~10.248 million barrels per day (or MMbpd) in the week ended August 14 to 9.782 MMbpd in the week ended August 21. Gasoline production averaged 10.002 MMbpd over the four weeks ended August 21. That’s ~5.4% higher than the ~9.486 MMbpd average over the corresponding period last year. Compared to the four weeks ended August 14, four-week average supplies increased ~0.3%.

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US gasoline demand

Gasoline demand fell from 9.705 MMbpd in the week ended August 14 to 9.189 MMbpd in the week ended August 21. Gasoline demand averaged 9.567 MMbpd over the four weeks ended August 21. It was ~5.5% higher than the 9.039 MMbpd over the corresponding period last year. Compared to the four weeks ended August 14, the four-week average demand fell by 0.4%.

What does this imply?

As we saw above, production of 9.782 MMbpd exceeded demand of 9.189MMbpd in the week ended August 21, despite both production and demand decreasing on a weekly basis. This difference explains the rise in inventories in the week ended August 21 that we discussed in the previous part. You should note that net trade flows also have a hand in determining gasoline inventory levels.

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US Gasoline consumption forecasts

According to the EIA’s (Energy Information Administration) “Short-Term Energy Outlook” report released on August 11, gasoline consumption will increase by 210,000 barrels per day (or bpd), or 2.3%, in 2015 over 2014 levels.

According to the report, “The effects of employment growth and lower gasoline prices outweigh increases in vehicle fleet efficiency.” However, the STEO forecasts that consumption will remain flat in 2016 owing to a long-term trend toward more efficient vehicles, which will offset the impact of sustained economic growth.

The next STEO is expected to come out on September 9.

Increased long-term gasoline consumption would be bullish for gasoline prices in the long term. Assuming crude oil prices (USO) remain relatively subdued, this would be positive for refiners such as Marathon Petroleum (MPC), Phillips 66 (PSX), and Valero Energy (VLO). These companies make up ~9% of the Energy Select Sector SPDR ETF (XLE). Increased consumption is also positive for midstream MLPs such as MPLX LP (MPLX), Phillips 66 Partners (PSXP), and Valero Energy Partners (VLP) if their refining parents decide to ramp up gasoline production due to higher prices. These MLPs’ revenues are driven by the volumes that they transport.

In the next part of this series, we’ll look at the latest trends in distillate inventories.

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