Portfolio managers were bullish on purchasing U.S. distillates last week as shortages in diesel and heating oil continue.
Hedge funds and other investment pools bought the equivalent of four million barrels in the six most important petroleum futures and options contracts in the week ending July 26.
John Kemp, senior market analyst at Reuters, said that purchases of Brent (+12 million barrels) and U.S. gasoline (+1 million) were offset by sales of NYMEX and ICE WTI (-17 million) and European gas oil (-1 million).
But the most significant change was the buying of diesel (+9 million barrels). It coincided with ongoing shortages of the fuel used by freight firms, manufacturers, farmers, miners and oil and gas companies themselves.
Distillate fuel oil inventories are rebuilding slowly despite the ramp-up in crude processing activity during the peak summer gasoline demand season.
Overall, the inventories have fallen since late June, especially on the east coast, which includes the delivery point for the NYMEX diesel contract in New York Harbor.
Analysts say distillate fuel oil remains the tightest part of the market and they see no indications that inventories will increase. The stocks are at the lowest this time of year since 2000. Stocks usually go up in the third quarter because refineries manufacture more diesel and heating oil when processing more crude for the summer driving season demand for gasoline.
However, stocks have increased by less than one million barrels this quarter, one of the most minimal raises in the past 40 years. Stocks have climbed by about 400,000 barrels from the end of June compared with an average pre-pandemic seasonal increase of 5.5 million barrels between 2010 and 2019.
"Distillate consumption is the most sensitive part of the fuel market to changes in the manufacturing and freight cycle," Kemp said based on his separate analysis.
He further stated that both manufacturing activity and freight have reduced since the start of the year, alleviating some distillate demand and assisting in steady supplies.
Fuel demand stays strong amid mixed data signals
The senior analyst said the extremely low level of inventories and their failure to rebuild implies that a much deeper and longer economic slowdown will now be required to allow crude and especially fuel stocks to recover. (Related: Widespread diesel shortages to affect everything in America and around the world.)
This was agreed on by U.S. fuel manufacturers. According to them, transport fuel demand remains steadfast despite mixed signals from inventory data gathered by the Energy Information Administration (EIA). Due to the imminent country's economic collapse, crude oil prices have fallen as recessions are usually followed by lower fuel demand for periods of time.
The EIA data showed that gasoline demand has remained below the five-year seasonal average since early June, whereas gasoline demand rebounded by 8.5 percent last week after falling in early July.
"Through our wholesale channel, there's really no indication of any demand destruction in June, we actually set sales records," Valero Energy Corporation Executive Vice President Gary Simmons said during the firm's second-quarter earnings call on July 28.
He said the company sold 911,000 barrels a day in June, exceeding its record in August 2018. "Our seven-day averages now are back to kind of that June level, with gasoline at pre-pandemic levels and diesel continuing to trend above pre-pandemic levels," Simmons said.
Meanwhile, PBF Energy Inc. also said the wholesale demand has remained strong. "We're at the same levels we’ve been for the past 90 days," PBF Chief Executive Tom Nimbley stated.
He added that inventories will need to be replenished from these extraordinary low levels and this will require refineries to continue running at high levels of utilization.
Refiners say that even if the U.S. is to suffer a recession, they will still need to continue to produce fuel for the depleted stocks in the first half of 2022.
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