If they can maintain recent progress, U.S. oil refiners should be able to bring stocks of diesel and other middle distillates close to normal levels in the first quarter of 2021.
Distillate inventories were still 20% above the five-year average last week, but the surplus was down from 22% at the end of August, 27% at the end of July and 29% at the end of June.
Refining margins for distillate show tentative signs of recovery, based on futures prices for crude and ultra-low sulfur diesel delivered in March 2021, consistent with a normalization of stocks in the first quarter.
Forward margins have turned slightly higher, albeit from a very low level, for the first time since June, when there were still hopes for a rapid recovery in oil consumption after the first wave of the novel coronavirus.
To try to digest excess diesel stocks built up in the second quarter of 2020, refiners continue to restrain crude processing and configure their equipment to maximize gasoline production.
In the last four weeks, refiners have cut crude processing to almost 19% below the five-year average, while the volume of products supplied to the domestic market has been down by 13%.
Distillate production has been running 10% below the five-year average, while consumption is down by around 8% (“Weekly petroleum status report”, EIA, Sept. 30).
The ratio of distillate to gasoline production has remained close to multi-year lows in recent weeks.
The strategy is starting to pay off, with distillate stocks declining in four out of the last five weeks, after being basically flat over the previous two months.
If refiners can hold this course, excess inventories should be mostly absorbed over the next six months, with a resumption of more normal refining activity in the second and third quarters of 2021.
The principal risk is a severe resurgence of coronavirus or a second business cycle downturn over the northern hemisphere winter that cuts industrial diesel consumption and jet fuel demand even further.
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