Distillate inventories projected to fall this winter

Increased demand for distillate fuel oil this winter is expected to contribute to declines in high distillate inventories in the United States, according to the U.S. Energy Information Administration (EIA). Demand for distillate fuel oil is expected to rise in the agriculture and residential sectors.

Over the summer, distillate inventories were high because production exceeded demand. The high inventories, along with lower crude oil prices, are expected to put downward pressure on distillate fuel oil prices through the 2020-21 winter season.

In March, U.S. refiners decreased production as the effects to mitigate the spread of COVID-19 reduced demand for transportation fuels. Demand fell faster than supply, and this led to large and rapid increases in petroleum product inventories, especially for distillate fuel oil.

By the end of July, weekly distillate inventories rose to a peak of 180 million barrels, which was the largest inventory recorded since December 1982, according to the EIA. Distillate inventories have since fallen to 165 million barrels as of Oct. 9 but remain higher than the five-year average for this time of year.

Most U.S. distillate inventories are in the East Coast and Gulf Coast regions. The East Coast is the largest source of petroleum product demand in the United States, but the region relies on pipelines from the Gulf Coast to meet the demand. The two regions accounted for 65% of U.S. distillate fuel oil storage capacity as of March.

U.S. distillate demand usually rises in the fall when diesel-powered agricultural equipment is used to harvest crops. The 2020 harvest season for corn and soybeans, which are the largest U.S. crops in terms of acreage, is expected to cover a wider area and to produce a higher yield per acre than in 2019, according to the U.S. Department of Agriculture.

Distillate demand often remains elevated through the winter as many homes, especially in the Northeast, use distillate as their primary space heating fuel. The 2020-21 winter is expected to be colder than last winter and slightly colder than the previous 10-winter average, according to the National Oceanic and Atmospheric Administration.