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Rising Distillate Inventories Put Pressure on Diesel Prices

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Diesel prices

The EIA’s (U.S. Energy Information Administration) weekly gasoline and diesel fuel price update released on January 11, 2016. It showed that diesel prices averaged $2.17 per gallon. This represents a fall of ~1.5 % from the previous week’s price of $2.21 per gallon on January 4, 2016. The current diesel prices are about 40.2% lower than the same period last year.

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Diesel prices by region

The average diesel price in the West Coast region was $2.42 per gallon. The Rocky Mountain, Midwest, and East Coast regions’ average diesel prices were $2.13 per gallon, $2.09 per gallon, and $2.22 per gallon, respectively. The Gulf Coast’s retail diesel price was $2.08 per gallon.

Mild weather and less consumer spending

Diesel prices are mainly impacted by heating oil demand, mild weather, individual spending, and refinery margins. Diesel prices fell more than 40% compared to same period last year. Long-term lower crude oil prices and mild weather conditions impacted the demand and supply. Refineries are operating at maximum operable capacities due to lower crude oil prices (USO). This resulted in huge distillate inventory builds. Huge inventory builds impact the prices.

Due to mild weather, the heating oil demand is weak. The same oil is used to produce diesel and heating oil. There’s less demand for heating oil. As a result, plenty of oil is available to produce diesel. Diesel prices are cheaper due to lower production costs. The recent interest rate hike also impacted diesel prices. Diesel is used in large trucks. The trucks are mainly used for transportation. Individual spending fell due to the interest rate hike. This has a negative impact on crude oil prices.

Distillate inventories rose by 6.3 MMbbls (million barrels) for the week ending January 1, 2016. The demand fell by 0.6 MMbpd (million barrels per day). This put pressure on heating oil prices. Diesel prices fell in the last week.

A fall in the diesel prices will reduce refineries’ margins. Refineries’ profitability will fall. Integrated refineries include ExxonMobil (XOM), Chevron (CVX), Western Refining (WNR), Holly Frontier (HFC), Alon USA Energy (ALJ), Marathon Petroleum (MPC), and Phillips 66 (PSX).

Together, ExxonMobil and Chevron account for ~30% of the Energy Select SPDR (XLE).

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