A fairly constructive set of weekly EIA statistics overall showed crude inventories decline by 0.5 mb over the week. Relative to the five-year average, crude stocks fell by 1.1 mb to 34.9 mb. However, the standout feature of this week's release was the continued tightness in product inventories. Product stocks reversed their builds over the past two weeks, primarily due to the sharp decline in distillate inventories, which fell by 3.7 mb. Distillate inventories remain significantly lower than the seasonal average (see Figure 5), by 28.1 mb, with diesel stocks lower by 10.5 mb (see Figure 13) and heating oil stocks lower by 17.6 mb (see Figure 14). Gasoline inventories, meanwhile, built marginally, by 0.1 mb over the week and by 1.2 mb relative to the five year average. However, inventories in the East Coast fell further, to their lowest since October 2008, as various refinery outages continue to put a lid on product supplies. Overall, product stocks (excluding the other oils category) drew by 0.9 mb relative to the seasonal averages and are now 36.2 mb below that average. Cushing inventories built by 0.1 mb last week, reversing three weeks of decline. Given the large refinery maintenance schedule reducing demand, together with the oil sands upgraders returning from maintenance in the second half of October increasing supplies, we expect Cushing inventories to build into year end.
Meanwhile, US oil demand indications improved slightly on the week, with total demand coming in at 18.72 mb/d, the highest reading in three weeks. Nonetheless, US demand is still running lower y/y in September-to-date by 536 thousand b/d (2.8%) at 18.355 mb/d. While gasoline demand growth is marginally negative (62 thousand b/d or 0.7%), it is diesel that is currently the Achilles heel of US oil demand, running lower y/y in September by 5.9%. With economic activity fairly subdued, distillate demand has weakened considerably since June this year and is far weaker than gasoline in the year-to-date.
Despite the broad-based weakness in US demand, product markets remain tight, as US refineries have been marred by unplanned outages. From BP's Whiting refinery in Indiana and Chevron's Richmond refinery in California to Holly's Tulsa refinery in Oklahoma and ExxonMobil's Beaumont refinery in Texas, the list is extensive, totalling well north of 1.2 mb/d of refining capacity. With a dislocated WTI market offering sizeable Midwest refinery margins, many refineries have repeatedly pushed back their scheduled maintenance and, in our view, this goes some way towards explaining the recent spate of outages. Once these refineries, together with the ones down for planned maintenance, return to operation, we expect refinery runs to pick up strongly, as refineries are incentivised by the current stellar margins. This will weaken product balances somewhat into year end.