This week’s EIA report was strongly bullish; despite a jump in domestic oil production and a slight increase in already-high refinery utilization rates, US stock levels fell for crude oil, gasoline, and jet fuel. However, distillates rose. In fact, they rose considerably – by approximately 2% vs an average draw of 1.1% for the other categories. How to explain this?
In Navarik’s opinion, this was due to a brief reversal of fortunes in US domestic gasoline supply/demand balance vs external diesel supply/demand balance. Despite weeks of higher-than-expected diesel exports earlier in the year, Navarik data shows that PADD 3 diesel exports in EIA week 27 of 2017 were actually marginally lower than 2016 trends (in fact, the two or three weeks previous have also been roughly equal to 2016’s levels as opposed to much higher as was the case earlier in the year). Likewise, weeks of lower-than-expected US final gasoline demand has limited the capacity of the market to consume gasoline, which was instead backing up in storage because of record-high refinery utilization rates. With the continental US having a focus on gasoline engines vs diesel engines (especially in the summer) compared to the typical export regions of US distillates in South and Central America, the draws on gasoline suggest that US consumers may finally be driving enough to use up some of the barrels in storage, just as the relative decline in diesel exports suggests external driving habits may have cooled somewhat and accordingly led distillate barrels to back up in storage instead.
Should investors and traders be worried about this development? Navarik’s forward-looking data set suggests that PADD 3 diesel exports will likely return to higher year-over-year levels in the coming weeks. Moreover, with refinery utilization rates and outputs stabilizing, it may be that the sheer volume of barrels pushed out of the stills by refiners may reduce and this week’s build may be drawn down organically in time through continued exports. Navarik data is uniquely placed to advise if and/or when this happens, even before the boats taking these barrels to their destinations hit the water.
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