Distillate Production Was Almost Flat while Demand Increased
Crude Oil Stocks Were Up Last Week, Pressuring WTI
Distillate production
Distillate production fell slightly in the week ended July 17. It fell to 5.07 million barrels per day (or MMbpd) from 5.09 MMbpd in the week ended July 10. The EIA (U.S. Energy Information Administration) reported that distillate products supplied averaged 5.06 MMbpd over the last four weeks. This is 0.7% lower than the 5.1 MMbpd over the corresponding period last year. Compared to the prior four weeks ended July 10, the four-week average production increased ~0.5%.
Distillate demand
Distillate demand increased from ~3.46 MMbpd in the week ended July 10 to 4 MMbpd in the week ended July 17. The EIA reported that distillate demand averaged ~3.79 MMbpd over the last four weeks. This is ~1.5% lower than the ~3.85 MMbpd over the same period last year. Compared to the prior four weeks ended July 10, the four-week average demand increased by ~3%.
What does this imply?
As you can see above, the distillate production of 5.07 MMbpd exceeds the demand of 4 MMbpd by a large margin. This difference explains the build in inventories in the week ended July 17. Net trade flows seemed to have had a hand in why the build was a marginal 0.2 million barrels versus expectations of a 1.8 million barrel build we discussed in the previous part.
Distillate consumption forecasts
According to the EIA’s July Short-Term Energy Outlook, released on July 7, distillate consumption will increase by 90,000 barrels per day (or bpd), or 2.3%, in 2015 compared to 2014. It should increase by a further 70,000 bpd, or 1.7%, in 2016. This growth will be driven by a rise in manufacturing demand and foreign trade and the use of marine fuel. The EIA will release its next STEO on August 11.
Increased distillate consumption is bullish for distillate prices and boosts revenues for refiners such as Marathon Petroleum (MPC) and Tesoro Corporation (TSO). 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 2% of the iShares U.S. Energy ETF (IYE).
Increased consumption should also benefit MLPs such as Phillips 66 Partners (PSXP) and MPLX LP (MPLX), because they’ll benefit from transporting the larger volumes of distillates that their parents produce to take advantage of better prices.
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