London — U.S. stocks of distillate fuel oil are rapidly returning to normal, reversing the prodigious glut that built up earlier in the year during the first wave of the coronavirus epidemic and lockdowns.
The absorption of excess distillates has been made possible because U.S. refiners sharply lowered refinery crude processing and operated their equipment to maximise the production of gasoline.
But now stocks are nearing normal levels, crude processing is likely to accelerate and the extreme tilt towards gasoline is likely to be replaced by a normal balance of refined product output.
Distillate inventories declined by another 1 million barrels last week and have fallen in 12 out of the last 13 weeks by a total of 37 million barrels, according to data from the U.S. Energy Information Administration (EIA).
Distillate stocks are now 9% above the previous five-year seasonal average, down from a surplus of 29% at the start of June (“Weekly petroleum status report”, EIA, Nov. 25).
Crude processing accelerated to 14.3 million barrels per day (bpd) last week, the fastest rate since August, between the first and second wave of coronavirus infections.
But processing is still down 15% compared with the five-year seasonal average while the total volume of petroleum products supplied to the domestic market is down by just 5%.
So U.S. refiners have scope to increase processing and will need to do so over the next few months to prevent a further, but this time unplanned, drawdown in fuel inventories.
Refiners have also started to reverse the extreme tilt towards gasoline at the expense of distillate fuel oil and jet fuel .
Over the past five years, the average ratio of gasoline to distillates and jet production has been 1.48:1.
U.S. refiners were producing at a ratio of 1.57 last week, well above the long-term average, but that was down from a multi-year high of 1.84 in October.
With distillate stocks now only 11 million barrels above the five-year average, down from 38 million barrels in June, the output ratio is likely to fall further to stabilise the distribution of inventories.
(John Kemp is a Reuters market analyst. The views expressed are his own)