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Analysis: US distillate stock build trumps crude inventory draw

New York — A larger-than-expected rise in US distillate stocks trumped a decline in crude inventories Wednesday, helping to pull the oil futures complex lower.

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US distillate stocks rose 2.7 million barrels to 136.23 million barrels last week, data from the US Energy Information Administration showed. Analysts polled by S&P Global Platts were looking for distillate stocks to have risen by 220,000 barrels.

The bulk of the stock build was in the US Gulf Coast, where combined low and ultra low sulfur diesel stocks grew 1.64 million barrels to 34.37 million barrels, the EIA data showed.

However, combined low and ultra low sulfur diesel stocks on the US Atlantic Coast fell 657,000 barrels to 40.17 million barrels, leaving inventories at roughly 13% below the five-year average.

That the draw was not supportive for the New York-delivered NYMEX ULSD futures contract may reflect a more bearish tone in the market.

At 1636 GMT Wednesday, NYMEX front-month ULSD was trading down 3.65 cents at $1.8946/gal.

"The market is still in a pattern hemmed in by worries about slowing demand growth," Tradition Energy analyst Gene McGillian said.

US implied demand for distillates fell 330,000 b/d last week to 3.8 million b/d, while distillate exports fell 315,000 b/d to 1.19 million b/d.

In contrast, implied demand for gasoline rose 336,000 b/d to 9.81 million b/d last week, although part of that increase could have been due to an increase in consumption along the US Southeast ahead of Hurricane Dorian.

US gasoline stocks fell 682,000 barrels last week to 228.9 million barrels, while stocks on the USAC fell 1.35 million barrels to 63.66 million barrels.

That still left the USAC with a roughly 6% surplus above the five-year average, which may have softened any bullish impacts of the stock draw on the New York-delivered RBOB contract.

CRUDE DRAWS 6.9 MILLION BARRELS

US crude inventories fell 6.9 million barrels last week to 416.07 million barrels, the EIA data showed.

The draw exceeded expectations. Analysts polled by Platts were looking for crude stocks to decline by 3.6 million barrels, on average.

US crude inventories have tightened by 69 million barrels since early June, and are now at a slight deficit to the five-year average.

That the inventory draws have not been more supportive for NYMEX crude futures reflect concerns that global demand growth may be slowing.

The EIA Tuesday cut its outlook for 2019 global demand growth by 100,000 b/d to 890,000 b/d, the seventh consecutive month it has lowered its growth forecast.

At 1636 GMT, NYMEX front-month crude was trading $1.65 lower at $55.75/b. Crude was also lower on a news report from Bloomberg that the US President Donald Trump had talked about easing sanctions on Iran prior to the departure of National Security Advisor John Bolton.

The bulk of the crude draw last week was on the US West Coast, where inventories fell 2.57 million barrels, and the USGC, where stocks fell 2.44 million barrels.

US refiners maintained high runs, operating at 95.1% of capacity last week, up 0.3 percentage points.

In the key refining centers, Midwest refiners were operating at 100.1% of capacity last week, and USGC refiners were at 96.6% of capacity, according to the EIA data.

US refining margins have remained strong, driven by diesel prices and relatively inexpensive crude supply. This should encourage those refiners not bringing units down for fall maintenance to maintain high runs.

The Midwest coking margin for Western Canadian Select has averaged $16.05/b so far in September, while the US Gulf Coast coking margin for Mars crude has averaged $8.85/b.

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

US crude imports edged lower by 179,000 b/d to 6.73 million b/d, with declines on the USAC and USWC offset by an increase into the USGC.

Crude exports jumped 234,000 b/d last week to 3.3 million b/d, showing that international demand remains strong for US barrels.

The arbitrage for US light crudes into northwest Europe and the Mediterranean remained open, according to Platts Analytics calculations. While the arbitrage for US light crudes into Asia also remained open, the arbitrage for heavier grades, such as Mars, has closed.

-- Jeff Mower, jeff.mower@spglobal.com

-- Janet McGurty, janet.mcgurty@spglobal.com

-- Edited by Manish Parashar, newsdesk@spglobal.com

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