Distillate Supply/Demand Balance Reflected in Spreads
Notes:
- While crude oil prices will be a major factor impacting distillate prices this winter if no supply disruptions occur, another important factor is the U.S. distillate supply/demand balance, as measured by distillate stocks.
- The distillate supply/demand balance influences the spread between spot distillate and spot crude oil prices. For example, with higher than normal stocks, the spread will be lower than usual. This spread is the price incentive that encourages or discourages changes in supply.
- While high stocks in the distillate market are good news for consumers, an excess is bad news for refiners.
- Distillate spreads during the winter of 1998-99 and throughout most of 1999 were well below average. From time to time, distillate prices on the Gulf Coast dropped below WTI prices. Distillate stocks happened to be very high on top of warm weather keeping demand down.
- Last winter (1999-00) began with high stocks and low distillate margins (4 cents below average in September). Margins stayed fairly weak until the price spike in January.
- In June of this year, distillate margins were weak at 2.5 cents per gallon as a result of crude oil prices increasing, but by July they had strengthened to 6.5 cents per gallon, which implies stocks are not high.