Middle Distillate Strength May Not Last

Now that DOE data has confirmed SFOT’s view, what next? A couple of things worth nothing. First, inventories in Cushing have drawn by 2mio barrels. Yes that is bullish on its own. However, PADD II, which includes Cushing, saw stocks build by 1.2mio bbl, and excluding Cushing will be well over 3mio barrel of build. Now that is not bullish, as refiners are cutting runs, either by way of turnaround season or idling of units. Crude stocks are being put into storage everywhere else. The monkey business of Cushing stocks and WTI prices is just about the time spreads in the front contract, and it is still weak as of this am. Bear in mind run cuts are happening all over the world as we speak.

Secondly, with regards to distillates. The draw was due to run cuts, as well as exports of diesel which has created this increased demand of over 200kb/d week on week. Hearing from physical traders, these are heading to Europe as european cracks have recovered, and are mostly put into storage again. Is that real demand? As bearish as SFOT might think these data is, flat price are going the other way. He is not about to go against the flow again, and is likely to find more ways to play weakening economics. One thing he likes is to be short product strength, i.e crack spreads.

Below is a chart on Jun09 crack in european gasoil vs Dec09 Ice gasoil. If refiners start to pump up runs to take advantage of this uptick in crack values, we can be sure the stock levels in middle distillate will swell further from the already high level, and cracks in the prompt should suffer relative to the back. The upper chart is the equivalent in US Heat oil.

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