Another weekly increase in U.S. distillate stocks would ease any concerns about potential shortages when the summer is over, but also could prove bearish for ultra-low sulfur diesel (ULSD) prices and the oil complex more broadly, according to a preview of the U.S. Energy Information Administration (EIA) data by S&P Global Platts. Reason: Some refiners are already heard to be cutting refinery runs because of poor margins.
Survey of Analysts Results:
Distillate stocks expected to rise 875,000 barrels
Gasoline stocks expected to decline 625,000 barrels
Crude oil stocks expected to decrease 1.25 million barrels
Refinery utilization expected to increase 0.1 percentage point
S&P Global Platts- Analysis:
Analysts surveyed Monday by S&P Global Platts expect distillate stocks to show a rise of 875,000 barrels for the latest reporting week, which, if confirmed, would mark the second consecutive weekly build.
For the week ended July 8, distillate stocks saw the largest increase since early January, rising 4 million barrels, according to U.S. Energy Information Administration data.
The size of that build largely caught the market by surprise and overshadowed a draw in crude oil stocks. Oil futures fell sharply in the wake of last week’s EIA data release.
Distillate stocks have increased four of the last six weeks, undermining a sense of tightness in the ULSD market that emerged this spring when inventories declined seven straight reporting periods through late May.
Those steady drawdowns pushed the ULSD crack spread against Intercontinental Exchange (ICE) Brent to around $13.50- to $14.00 per barrel (/b), a level around which it hovered until last week.
The ULSD crack was trading Monday for around $11.90/b, which was almost identical to the reformulated blend stock for oxygenate blending (RBOB) crack spread.
As a consequence, refiners could reconsider shifting yields toward distillates, a possibility floated earlier when the ULSD crack spread was gaining ground against the RBOB crack spread.The ULSD crack spread surpassed the RBOB crack starting July 1, reaching a premium of as much as $2.32/b on July 7.
That relationship was unusual for this time of year when gasoline demand peaks because of the summer driving season. For example, the RBOB crack spread averaged a premium of $8.30/b over the ULSD crack spread last July.
A shift toward distillate production would certainly allay any supply concerns ahead of heating demand season later this year, especially if temperatures prove lower than last year’s mild winter. But high inventories are already cutting into refinery margins.
Atlantic Basin refineries made vulnerable to weaker margins by their lack of complexity have already cut back on runs, trade sources said. Philadelphia Energy Solutions recently cut runs between 10%-12% at its 335,000 barrels per day (b/d) refinery, the largest in the U.S. Atlantic Coast (USAC). And Delta has also lowered rates at its 190,000 b/d Trainer, Pennsylvania, refinery owned by its Monroe Energy subsidiary.
USAC stocks of low and ultra-low sulfur diesel equaled 53.59 million barrels the week ending July 8, a 74% surplus to the five-year average for the same time of year. Gulf Coast stocks of low and ULSD diesel equaled 41.9 million barrels the week ending July 8, a 16% surplus.
Interest has grown for shipping cargoes across the Atlantic to Europe after the arbitrage was heard to have reopened last week. Greater exports would help drain USGC inventories.
Platts assessed Gulf Coast ULSD last Friday at New York Mercantile Exchange (NYMEX) ULSD minus 6.10 cents/gal, its lowest since April 11. More cargoes were placed on subjects Friday with the falling basis.
GASOLINE STOCKS SEEN DRAWING
USAC gasoline stocks totaled 72.1 million barrels, a 22.4% surplus to the five-year average for the same reporting period.
Despite what EIA estimated was record-high weekly demand in June, USAC gasoline stocks have been unable to shed their excess barrels. The region’s surplus to the five-year average has averaged 18.6% over the last ten weeks.
Analysts are looking for gasoline stocks to have decreased 625,000 barrels last week, slightly more than the average draw of 159,000 barrels seen from 2011-15 for the same time period.
With the U.S. Fourth of July holiday already passed, analysts have begun looking to the end of the summer, and the start of the autumn turnaround season.
An eventual drop in refinery utilization should help tighten reined product markets, but also means less crude demand.
Analysts expect refinery utilization to show a 0.1-percentage-point increase in the latest reporting week to 92.4% of capacity. If confirmed, the utilization rate would trail the year-ago level by 3.1 percentage points, extending a period of relatively sluggish refinery activity that has mitigated seasonal crude oil drawdowns.
Crude oil stocks have declined eight weeks in a row, but the surplus to the five-year average has actually risen to 34.7% during this interval.
Analysts expect the EIA data to show a drawdown of 1.25 million barrels for last week, which would be a drop just shy of the 1.8 million-barrel average drawdown for 2011-15 during the same reporting period.
Front-month NYMEX crude prices have slipped to around $45/b recently after having been in the upper $40s for most of June.
Source: S&P PlattsPrevious Next
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