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Will Increased Distillate Demand Favor Prices?

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Distillate stocks and production

In its Weekly Petroleum Status Report released on November 18, 2015, the EIA (U.S. Energy Information Administration) reported that distillate fuel inventories fell by 0.8 MMbbls (million barrels) to settle at 140.3 MMbbls for the week ended November 13, 2015. Inventories were 141.1 MMbbls for the week ended November 16. They’re in the middle of the five-year average range for this time of year.

Distillate fuel production increased for the week ended November 13, averaging more than 5.0 MMbpd (million barrels per day). That’s 0.1 MMbpd more than the previous week ended November 6. Distillate fuel products supplied averaged 4.1 MMbpd over the previous four weeks, rising 7.1% from the same period last year.

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Distillate demand

The EIA reported that US distillate demand rose from ~3.8 MMbpd in the week ended November 6, to 4.2 MMbpd in the week ended November 13. Distillate demand for the four-week average is ~4.1 MMbpd for the week ended November 13. That’s 6.9% more than the demand for the previous year.

What does this mean?

Distillate demand has been volatile for the past four weeks. Distillate production and imports for the week ended November 13, 2015, rose collectively by ~0.14 MMbpd. Distillate inventories fell 0.8 MMbbls, which indicates a growing distillate demand as winter approaches.

Distillate prices fell $0.03 per gallon, which indicates that distillate inventories are more than the requirement. Forecasts about less heating degree days also caused distillate prices to tumble. A growing distillate demand is a good sign for refiners.

Who gains? Who loses?

The decrease in distillate inventories and the increase in demand is bullish for distillate prices. It’s a positive sign for refiners. When prices increase, refiners’ revenues increase. But increasing distillate supplies hurts prices, which is negative for refiners such as HollyFrontier (HFC), Valero Energy (VLO), Tesoro (TSO), Marathon Petroleum (MPC), Western Refining (WNR), and Phillips 66 (PSX). The only factor favoring refiners is lower crude oil prices (USO).

Tesoro (TSO) accounts for 3.2% of the Energy Select Sector SPDR ETF (XLE). Phillips 66 (PSX) accounts for 7.5% of the iShares US Oil & Gas Exploration & Production ETF (IEO).

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