Must-know: Why gasoline and distillates see outsized draws

Market Realist

Crude oil swings to 6-month lows and natural gas is unpredictable (Part 3 of 7)

(Continued from Part 2)

Gasoline and distillates see outsized draws

Gasoline inventories saw the first drop in five-weeks. Inventories declined by 4.4 million barrels for the week ending August 1 versus analysts’ expectation that inventories would remain relatively unchanged.

Distillates inventory

Distillates inventories, much like gasoline inventories, showed an unexpected decline of 1.8 million barrels versus analysts’ expectation of an addition of 0.6 million barrels.

Why gasoline and diesel stocks saw significant drop last week

The drawdown in gasoline and distillate inventories is likely because of the peak summer driving season leading to increased demand for gasoline and diesel. However, the drop in inventories was more than the market was anticipating.

The more-than-anticipated decrease in diesel and crude inventories gave gasoline and diesel the necessary push to trade at higher prices compared to the prior week’s levels. Gasoline prices climbed to $2.73 per gallon, which was an increase of ~1%, while diesel prices increased by 1% to $2.88 per gallon.

As covered in the previous section, the approach of the close of the summer driving season has caused refineries to slow down their diesel and gasoline production as they anticipate lower demand. Last week, refineries were operating at 92.4% capacity—down 1.1% compared to the prior week’s levels.

Also, while the draw in distillate stocks, which include heating oil, was a surprise given that they usually build in anticipation of the coming winter, lackluster Chinese economic data has raised market speculation about diesel demand in the coming weeks.

This is bad news for U.S. refineries because they export considerable amounts of distillates, including diesel, to China.

However, despite weak global demand, domestic diesel consumption is slated to increase because of an increase in heavy-duty vehicle miles traveled (or VMT). Greater miles traveled causes greater diesel consumption.

Also, because of stringent fuel economy requirements, consumers are likely to shift to distillates, diesel, which might also lead to increased diesel consumption.

Diesel and gasoline demand dynamics affect the margins of refining companies like Valero Energy (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), and HollyFrontier Corp. (HFC). Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

The next section in this series talks about the movement in Cushing crude inventories last week.


Continue to Part 4

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