US distillate demand data for August tell a bleak tale, according to Barclays Capital. The latest monthly data available , BarCap analysts report, came out at 3.38mb/d, the lowest reading recorded since July 2000.
The year-on-year rate of decline, meanwhile, was a very significant 7.5 per cent, only marginally better than the 8.9 per cent recorded between January and July. Initial data for September and October traced a very similar picture, according to the analysts.
As BarCap put it:
…the much-awaited restart of movements of goods by truck and rail in the US is yet to kick in, as the long phase of destocking of final goods inventories is yet to leave place to a phase of restocking.
BarCap were a little more optimistic about things once a transition on the restocking side of things finally does come through — saying such an adjustment, which they expect in the next few months, should see US distillates demand improve rapidly.
That said, the moment is not here yet. This is why according to the analysts it would be premature to enter into any long positions in distillates at this point.
Nevertheless, in Europe, things might finally be looking up thanks to the Germans who, having got much of their stock-building done early, are now contributing to a misleading bearish demand picture.
As the analysts conclude, when the German stock-building is accounted for, the figures actually translate into improving European diesel demand. As they explain (our emphasis):
The latest set of JODI numbers places the y/y fall in European distillates demand in August at 0.49mb/d, the largest drop since at least 2003. However, a closer look to the data shows that the underlying trend is not as weak as the headline figure suggests. In Europe, where demand is highly inelastic, a key component of variations in distillates demand is the level of German heating oil demand. This, besides being affected by weather, is also heavily dependent on the timing of German consumers’ stock builds. This year, due to favorable price incentives, heating oil buying has started very early in the season. German heating oil demand has risen at an average pace of 45% between February and May, prompting an unseasonal build in stocks during Q209. This dynamic has started to unfold over the past two months with German heating oil demand plunging as household capacity has been filled.
In August, the pace of contraction reached 64% y/y (or 355kb/d) accounting for 73% of the overall drop in European distillates demand. The flip side of the collapse in German heating oil demand is a much healthier situation for diesel consumption relative to headline figures. Put differently, the timing of inventory builds by German households has been the key driver of the recent weakening of European distillates demand, with diesel consumption instead showing a modest improvement. In such circumstances, we would still see the turn in US diesel demand as the most critical variable to turn more constructive on cracks.
Here’s the chart: