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Ample Distillate Fuel Inventories as Winter 2016 Nears

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Distillate inventories

The EIA (Energy Information Administration) released its Weekly Petroleum Status Report on October 7, 2015, stating that distillate stocks decreased by 2.5 MMbbls (million barrels) to ~149.2 MMbbls in the week ending October 2. But these numbers are still in the middle of the average range for this time of year.

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Distillate production

Distillate fuel production increased during the week ending October 2 as well, averaging about 5.1 MBPD (million barrels per day). During that period, the US East Coast, Midwest, and Rocky Mountain regions collectively produced 75k barrels more than in the previous week. On the other hand, Gulf Coast and West Coast production levels decreased by 14k barrels in comparison to the previous week.

Drivers of distillate demand

Global and Northeast distillate inventories are ample heading into winter and 2016. Slow economic growth in emerging economies has been the key driver of distillate consumption in prior years, reducing the growth in global demand for distillate fuel while enabling consumer access distillate fuel at lower prices.

High gasoline refinement margins during the summer of 2015 encouraged continuous refinery runs. This combination of high refinery runs and slow growth in demand has resulted in high inventory levels in major distillate markets like Asia, northwest Europe, and the US Northeast.

Impact on refiners’ margins

According to EIA stats, distillate stocks in the US Northeast totaled 45.1 million barrels on September 25, 2015—the highest for any week since late 2011.

As discussed above, building global inventories, short-term decreases in distillate stocks, and increasing production levels have become bearish for refiners like Marathon Petroleum (MPC), Phillips 66 (PSX), Valero Energy (VLO), and Chevron Corporation (CVX). These companies collectively account for 21.75% of the Energy Select Sector SPDR ETF (XLE).

Read the other part of this series for a related glance at jet fuel stocks.

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