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Strong Distillate Inventories Build, Forcing Prices to the Floor

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Jan. 14 2016, Updated 9:53 a.m. ET

Distillate inventories

The EIA’s (U.S. Energy Information Administration) Weekly Petroleum Status Report released on January 13, 2016, reported that US distillate fuel inventories rose by ~6.1 MMbbls (million barrels) to settle at 165.6 MMbbls for the week ended January 8, 2016.

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Distillate production and demand

US distillate fuel production fell by 0.21 MMbpd (million barrels per day) to settle at 4.7 MMbpd for the week ended January 8. This was 6.8% higher than the amount reported in the corresponding period last year.

The EIA also reported that US distillate demand fell from 3.0 MMbpd in the week ended January 1, 2016, to around 2.8 MMbpd in the week ended January 8. Current distillate demand is 1.1 MMbpd, or 28.1% lower than demand in the same period last year.

Mild weather pullback demand

The EIA expected that heating oil usage per household would be more than 600 gallons in the 2015–2016 winter season, but actual usage is just around 530 gallons per household, which represents lower demand for heating oil.

Because of above-normal temperatures, heating oil demand is weak, which impacts distillate demand. Current distillate demand is around 30% lower than last year’s demand.

Distillate demand is weak, but production levels are around 7% more than last year. Due to high refinery margins resulting from low crude oil prices, steady production levels have continued. As a result, inventories have risen, and distillate prices have fallen more than 25% within a year.

Lower distillate prices reduce refinery margins, so the profitability of refineries such as Marathon Petroleum (MPC), CVR Refining (CVRR), Tesoro (TSO), Western Refining (WNR), HollyFrontier (HFC), and Valero Energy (VLO) will fall.

The Vanguard Energy ETF (VDE) tracks 2.5% of its investments from Valero Energy.

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