Crude Oil Inventories Highlight Bearish Week for WTI

(Continued from Prior Part)

Distillate production

Distillate production fell in the week ended August 14 to 5.072 million barrels per day (or MMbpd) from 5.148 MMbpd in the week ended August 7. The EIA (U.S. Energy Information Administration) reported that distillate products supplied averaged 5.085 MMbpd over the four weeks ended August 14. This is ~4.4% higher than the 4.870 MMbpd over the corresponding period last year. Compared to the prior four weeks, which ended August 7, the four-week average production stayed flat.

Distillate demand

Distillate demand increased from ~3.54 MMbpd in the week ended August 7 to 3.895 MMbpd in the week ended August 14. The EIA reported that distillate demand averaged ~3.712 MMbpd over the four weeks ended August 14. This is ~6.6% lower than the ~3.975 MMbpd over the same period last year. Compared to the prior four weeks, which ended August 7, the four-week average distillate demand fell 0.7%.

What does this imply?

As you can see above, distillate production of 5.072 MMbpd exceeds the demand of 3.895 MMbpd by a large margin, despite production falling and demand increasing on a weekly basis. This difference explains the rise in inventories in the week ended August 14 that we discussed in the previous part. You should note that trade flows also have a say in distillate inventory movements.

Distillate consumption forecasts

According to the EIA’s August “Short-Term Energy Outlook,” released on August 11, distillate consumption will increase by 40,000 barrels per day (or bpd), or 1.1%, in 2015 compared to 2014. It should increase by a further 100,000 bpd, or 2.4%, in 2016. This growth will be driven by increased manufacturing activity, the use of marine fuel, and foreign trade.

Increased long-term distillate consumption would be bullish for distillate prices in the long term and would boost revenues for refiners such as Marathon Petroleum (MPC), Phillips 66 (PSX), and Valero Energy (VLO). If crude prices don’t rise as much, these refiners stand to record higher profits too. Crude oil is an input cost for these companies. These companies make up ~9% of the Energy Select Sector SPDR ETF (XLE).

Increased consumption should also benefit MLPs such as Phillips 66 Partners (PSXP), MPLX LP (MPLX), and Valero Energy Partners (VLP), because these companies will benefit from transporting the larger volumes of distillates that their parents produce to take advantage of better prices.

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