U.S. distillate inventories have started to climb seasonally – which should temper some of the bullishness about oil prices and refining margins in the short term.
Stocks usually increase at this time of year as refineries ramp up their crude processing to produce gasoline for the summer driving season and make more distillates as a co-product.
But even with the recent increase, stocks are still at the lowest seasonal level since 2005, and they are not rising especially rapidly, which is likely to keep prices on an upward trend.
Distillates will remain in short supply until the business cycle slows and there is slower fuel consumption by manufacturers and freight transporters.
Stocks rose by more than 2 million barrels last week to 109 million, according to the U.S. Energy Information Administration (“Weekly petroleum status report”, EIA, June 8).
Inventories have increased in three of the last four weeks, by a total of 5 million barrels, from a low of just 104 million on May 6.
But in the past, distillate inventories have only been rebuilt properly when the economy went into a mid-cycle slowdown (/06 and /15) or end-of-cycle recession (/09).
Until the slowdown occurs, stocks will remain extremely low and could become critical if a hurricane hits one of the major oil refineries along the U.S. coast of the Gulf of Mexico later this year.
On the East Coast, stocks have already become critically low, falling to just 25 million barrels compared with a pre-pandemic five year seasonal average of 45 million.
Regional shortages have recently pushed wholesale distillate prices in New York Harbor to more than $200 per barrel, a record in nominal terms, and they remain above $180.
The most recent week saw some relief, however. Stocks increased by more than 4 million barrels, the largest one-week increase for nearly 30 years, as high prices discouraged consumption and attracted deliveries from other areas.
