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What Does the Decline in Distillate Inventories Mean?

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EIA’s distillate inventories report

In its Weekly Petroleum Status Report released on January 27, 2016, the EIA (U.S. Energy Information Administration) stated that US distillate fuel inventories fell by ~4.0 MMbbls (million barrels) to settle at 160.5 MMbbls for the week ended January 22, 2016.

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Distillate production and demand

US distillate fuel production fell by 0.12 MMbpd (million barrels per day) to settle at 4.7 MMbpd for the week ended January 22. This was 5.2% higher than the production levels reported in the corresponding period last year.

The EIA reported that US distillate demand rose from ~3.6 MMbpd in the week ended January 15 to 4.0 MMbpd in the week ended January 22. The current distillate demand is 0.56 MMbpd, or 12.3%, lower than the demand in the same period last year.

Colder temperatures pushed distillate demand

The rise in distillate demand and fall in production levels contributed to the decline in distillate inventories. The heating oil demand rose in the last week due to colder temperatures in most of the regions of the US. The recent snow storm on the US East Coast especially boosted heating oil demand in the last week.

Because of above normal temperatures, the heating oil demand in the US has been very low in the 2015-2016 winter. However, production levels were at their peak due to heavy refinery margins, which resulted in massive stockpiles, so prices declined. The shift from heating oil to electricity and natural gas usage also resulted in the lower heating oil demand.

The lower distillate demand will add pressure on prices, and declining prices have a negative impact on the margins of the refineries such as Northern Tier Energy (NTI), Phillips 66 (PSX), Western Refining (WNR), Valero Energy (VLO), Holly Frontier (HFC), and Alon USA Partners (ALDW).

The fall in distillate demand affects ETFs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) and the Energy Select SPDR ETF (XLE).

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