Distillate Stocks Remain 15% Below 10-Year Averages
July 24, 2023
Oil rigs were down 7 to 530 rigs, the sixth consecutive week of declines. Last year at this time there were 599 oil rigs. The falling rigs and the low stocks, especially of distillates, is getting attention. Jon Kemp of Reuters had an article last week about how the funds were buying into distillates because of the low stock levels. There have also been more comments about supply being short of demand in the back half of the year.
UAE Energy Minister, Suhail al-Mazrouei, said current actions by OPEC+ to support oil markets were sufficient for now and the group is only a phone call away if any further steps are needed. The next OPEC+ policy meeting is not until November, although a panel of key ministers is scheduled to hold a meeting on August 4th to review the market.
According to Reuters analysis, US diesel and other distillate fuel oils have failed to replenish significantly despite a downturn in manufacturing and freight activity that has so far lasted eight months. EIA data showed that distillate fuel oil inventories amount to just 118 million barrels as of the week ending July 14th. Stocks were 21 million barrels or 15% below the prior 10-year seasonal average and the deficit had narrowed only modestly from 27 million barrels or 19% a year ago.
US distillate consumption and inventories are both closely geared to the business cycle since more than three-quarters of distillate fuel oil is consumed by trucking firms, railroads, and manufactures. If the US economy avoids a recession and industrial activity starts to rise, inventory depletion will resume and stocks will quickly fall to critically low levels, putting upward pressure on fuel prices and inflation. This is not a new development and has been a concern for quite a while now but seems to be getting more attention lately. The potential for a US recession has also been a topic for a long time now as well.
The Fed meets this week, and the expectation is that they will raise interest rates 25 points.