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US Distillate Inventories Down for 7th Consecutive Week

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US distillate inventories

The EIA (U.S. Energy Information Administration) released its Weekly Petroleum Status Report on November 4, 2015. The report noted that US distillate inventories fell by 1.3 MMbbls (million barrels) to 140.8 MMbbls in the week ended October 30, 2015.

Analysts’ expectations had called for a fall of 2 million barrels. Inventories have now been falling seven weeks in a row.

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What this means

When inventories fall less than expected, it’s usually bearish for distillate prices. Lower prices may cause refiners such as Tesoro (TSO) and Valero Energy (VLO) as well as refining MLPs such as Northern Tier Energy (NTI) to lower production of distillates.

Together, Tesoro and Valero Energy account for ~3.5% of the Vanguard Energy ETF (VDE). Lower distillate prices mean lower revenue for these refiners. However, for refiners to see lower profits, crude oil prices (USO) would need to remain steady or rise.

A fall in production volumes for distillates is negative for MLPs such as Tesoro Logistics (TLLP) and Valero Energy Partners (VLP), as they transport refined products. These MLPs stand to make less money by transporting lower volumes.

Last week, inventories saw a smaller-than-expected drop, implying that demand was less than anticipated, or that supply was more than anticipated. These scenarios are bearish for distillate prices. In contrast, if inventories drop more than analysts’ expectations, it implies that the demand was more than anticipated, or that the supply was less than anticipated. This is bullish for distillate prices.

You can follow our weekly recap of diesel prices at US Diesel Prices Rise 3% in the Week Ended October 30.

Background

Distillates are an important group of fuels used for purposes ranging from transportation to heating. Distillate inventories, as discussed above, can drive distillate prices. Distillate demand also drives crude oil demand and crude oil prices, so energy investors tend to watch distillate inventories closely.

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