(Repeats Dec 16 column. John Kemp is a Reuters market analyst.
The views expressed are his own)
* Chart 1: tmsnrt.rs/2h85LZL
* Chart 2: tmsnrt.rs/2h82B8s
* Chart 3: tmsnrt.rs/2h7XYv8
* Chart 4: tmsnrt.rs/2h8alqX
* Chart 5: tmsnrt.rs/2h89oiA
* Chart 6: tmsnrt.rs/2hF3xBR
By John Kemp
LONDON, Dec 16 U.S. refiners are likely to see
stronger demand for middle distillates such as heating oil and
diesel in 2017 after two years of declining domestic
Distillate consumption is forecast to increase by 60,000
barrels per day in 2017, after falling by 120,000 bpd in 2016
and 40,000 bpd in 2015, according to the U.S. Energy Information
Hedge funds have taken notice and bet on higher prices by
building a net long position of 24 million barrels in heating
oil futures and options on the New York Mercantile Exchange.
Hedge fund managers have accumulated the largest net long
position for almost 30 months, according to an analysis of data
published by the U.S. Commodity Futures Trading Commission (tmsnrt.rs/2h85LZL).
Distillate consumption is driven by a combination of heating
demand (the smaller but more variable share) and freight demand
(far larger and more steady) and both look positive, or at least
not negative, in 2017.
Heating demand has been unusually low during 2016 because of
the exceptionally warm winter of 2015/16 and the warm start to
the heating season of 2016/17.
The first three months of 2016 were the second-warmest since
1973. Only the start of 2012 was warmer, according to data from
the U.S. Energy Information Administration.
The outlook for the first three months of 2017 remains
subject to considerable uncertainty but it is unlikely to be
warmer than 2016 which should put a floor below heating oil
On the freight side, the outlook is more clearly positive as
the sector emerges from a two-year long downturn linked to the
decline in oil and gas drilling, high coal stocks, and the build
up of business inventories.
Freight movements have steadied this year after declining
during 2015, according to the U.S. Bureau of Transportation
There are reasons to expect freight movements will start to
grow again during 2017. Oil and gas drilling and related freight
movements have started to increase in response to rising oil and
Drilling will itself provide an increase in demand since
diesel-electric generators are used to provide power for rigs as
well as the pressure pumping equipment used for fracking and all
the auxiliary onsite power.
Coal shipments are also expected to rise next year as higher
natural gas prices cause power producers to run coal-fired power
plants for more hours.
More generally U.S. manufacturers, distributors and
retailers are finally getting to grips with the problem of
excess inventories at all stages along the supply chain.
The ratio of business inventories to monthly sales has
declined steadily since March 2016, after rising since March
2011 and strongly since August 2014 (tmsnrt.rs/2h7XYv8).
Inventory levels remain elevated which will ensure that
businesses remain cautious about placing new orders in the near
But if firms continue their recent progress on inventory
control there is the potential for stronger ordering in the
second half of 2017.
Distillate stocks have remained moderate despite the
unusually warm start to the winter and will likely start 2017
lower than 2016 (tmsnrt.rs/2h8alqX and
U.S. refiners strained to maximise output of gasoline during
2015 and 2016 to meet rapidly-growing demand from private
But domestic gasoline demand growth is likely to moderate
next year ("U.S. gasoline consumption may slow in 2017",
Reuters, Dec. 7).
Refining margins for distillate have been gradually rising
since the second quarter of 2016, starting to reverse the
previous downtrend since 2013 (tmsnrt.rs/2hF3xBR).
Refiners are getting a signal to shift the balance slightly
towards distillates in 2017.
(Editing by Susan Thomas)