West Texas Intermediate (WTI) crude oil at Cushing is languishing back in the low $40s/bbl after a brief period of exuberance in the late spring. The blame for this latest oil-price retreat has shifted from high inventories of crude oil –– both on land and on tankers floating offshore –– to bloated petroleum-product inventories. There is some debate about how concerned the market should be about the increase in product stocks. In the opening episode of this blog series, we take a look at petroleum product cargo flows, and what they are telling us about the health of the market. We start today with middle distillates –– diesel and jet fuel.
Oil market watchers follow the crude oil balance –– the difference between supply and demand –– because that is a primary determinant of price direction. The consumers of crude (the demand side of the equation) are refiners who turn the oil into petroleum products such as gasoline, diesel, and jet fuel. Ultimately, it is demand by the products end-user –– the car or truck driver, the airline –– that determines the level of demand for oil.
Global demand for crude oil has been growing by between 3% and 4% annually, but growth in oil refining –– turning crude into products –– is growing faster than end-user demand. Refiners, tempted by cheap crude and wide processing margins, have been producing increasing volumes of products. Refiners, traders, marketers and others have been squirreling away those barrels. The long run of high refinery output now is coming back to haunt the industry, both in the U.S. and in other markets worldwide.
Some analysts and refining company executives have argued that much of the current product surplus will be worked off during the next refinery maintenance season. In the northern hemisphere, refiners typically shut down units at their plants during spring and fall. These are the periods of relatively low demand for petroleum products, and refiners can afford to sideline production without disrupting the market. To further minimize the impact on prices, refiners stockpile products ahead of maintenance season: gasoline inventory rises ahead of the summer, and stocks of middle distillates (that is, products like jet fuel, kerosene, diesel and gasoil) increase before the onset of winter.
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