Tight Diesel Fuel Inventories Reported by the EIA

February 14, 2022

The U.S. Energy Information Administration releases a weekly Petroleum Status report (https://www.eia.gov/petroleum/supply/weekly/). The latest report revealed an uptick in refinery utilization (88.2%) but there were inventory declines for gasoline, distillate fuels and propane/propylene, indicating that demand for at least some crude oil-based products is strong. Of particular interest has been the declining distillate fuel inventories (diesel fuel and home heating oil) over the last year plus.
This past week, distillate fuel inventories decreased by 0.93 million barrels to 121.8 million barrels and are now 19% below the five year average for this time of year. Distillate fuel inventories were at 179.4 million barrels in September of 2020, reflecting an inventory build-up as a result of reduced demand during the height of Covid. Diesel fuel usage is now at pre-pandemic levels and the steadily declining inventories reflect that reality. While not at crisis levels, the distillate fuel days of supply are at 26.7 days, down from 33.7 days in January 2022 and 54.3 days in June of 2020.
Currently, the U.S. has 129 refiners (124 are active). This is down from 135 refiners in 2020, 141 refiners in 2016, and 301 refiners in 1982. A barrel of crude oil is 42 gallons. The standard refining process yields approximately 20 gallons of gasoline, 13 gallons of distillates, 4 gallons of jet fuel, and the balance is used in some type of petroleum-based product, such as liquids, plastics, petroleum jelly, asphalt, etc. Refiners typically have very low profit margins and seek to use every last drop of crude oil in order to generate profits. While refiners have some ability to change the component products produced, there is ultimately a scientific limit. Lower demand by refined oil users in any category impacts the overall profitability for the refining industry. For example, weak demand for jet fuel over the last two years has negatively impacted refining margins and capacity utilization.
The trucking industry, with over $700 billion in annual revenue, is the biggest consumer of diesel fuel and is vitally important to our economy, accounting for approximately 70% of all freight transported. While crude oil prices have risen by 57% over the last year, diesel prices have risen by only 40%. If the Covid supply overhang of diesel fuel continues to evaporate, then we will likely experience sharply higher diesel fuel prices and higher prices for all goods being shipped via trucks. A country-wide shortage of diesel fuel would bring into sharp focus the importance of the trucking industry. Declining distillate fuel inventories merit investor attention.

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