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Why Did US Gasoline Inventories Fall despite a Rise in Production?

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US gasoline production

US gasoline production rose from ~9.3 MMbpd (million barrels per day) in the week ended October 2, 2015, to 9.6 MMbpd in the week ended October 9. Gasoline production averaged 9.5 MMbpd over the four weeks ended October 9. That is ~5% higher than the ~9.1 MMbpd average over the same period last year. Compared to the four weeks ended October 2, the four-week average rose ~1%.

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US gasoline demand

US gasoline demand rose from ~9.0 MMbpd in the week ended October 2 to 9.1 MMbpd in the week ended October 9. Gasoline demand averaged 9.0 MMbpd over the four weeks ended October 9.

Compared to the four weeks ended October 2, the four-week average demand was flat. However, it was ~3.4.% higher than the 8.7 MMbpd recorded over the same period last year.

What does this mean?

As we saw above, production of 9.6 MMbpd exceeded the demand of 9.1MMbpd in the week ended October 9, despite a weekly increase in both production and demand. This difference should have led to an inventory build.

However, as we discussed in the previous part of this series, gasoline inventories declined in the week ended October 9. So, net trade flows, or exports, could be the key to last week’s inventory draw.

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US gasoline consumption forecasts

According to the EIA’s (U.S. Energy Information Administration) STEO (Short-Term Energy Outlook) report released on October 6, 2015, gasoline consumption will rise by 190,000 bpd (barrels per day), or 2.1%, in 2015 compared to 2014.

However, the STEO report forecasts that consumption will remain flat in 2016 due to a long-term trend toward more efficient vehicles, which will offset the impact of sustained economic growth.

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), Tesoro (TSO), and Valero Energy (VLO). These companies account for ~9% of the Vanguard Energy ETF (VDE).

Increased consumption is also positive for midstream MLPs such as MPLX (MPLX), Phillips 66 Partners (PSXP), Tesoro Logistics Partners (TLLP), and Valero Energy Partners (VLP) if their refining parents decide to increase gasoline production as a result of higher prices. The revenues of these MLPs are driven by the volumes they transport.

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

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