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SWe have seen distillate inventories build substantially
during 2008 and 2009 to extraordinary levels, despite reductions in refined
product supply.
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SIn Europe, distillate production fell more than demand
declined, but imports were strong.
Distillate is the largest volume product from European
refineries. In 2009, while distillate
production dropped with inputs, imports were so strong that inventories rose
substantially.
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SU.S. refiners are more focused on gasoline, which is their
largest volume product produced. While
U.S. refiners avoided large builds in gasoline stocks, they saw distillate
stocks build because
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–Distillate demand fell much more sharply than gasoline
demand,
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–It took some time to shift from the high distillate yields
of 2008 to more traditional distillate yields in 2009,
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–Refiners had more difficulty finding export opportunities
as attractive as in 2008
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–Contango in the futures market (future month prices higher
than nearby prices) encouraged stock building as suppliers were able to lock
in profits.
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SThis overhang in inventories will ultimately need to be
drawn down, and serves as a reminder that while distillate markets may
tighten in the long term, downward price pressure relative to crude oil could
be with us for a while in the short term.
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