Time to Short Distillates/Heating Oil

Distillate Inventory,YoY

Data Source:  EIA

psw01 2016-4-27

Given rapidly rising heating oil prices over the last several weeks does anyone see a problem?  It looks like distillates and heating oil by proxy (/HO) is ready for a good downturn as we are headed into the time of year when distillate inventories build due to lack of demand.  One can easily see in the chart below that distillate demand sags from June through September.  Distillates supplied averages about 3.8 MM bbl/day from June to September.  This is well below the April/May average which was about 4.1MM bbl/day.  Given a 10% drop in demand producing rapidly rising inventories it looks like distillate prices should fall.  High gasoline demand over the summer can also force refiners to continue to produce at higher rates than they like, storing the excess distillates rather than slowing down.

Distillate Inventory,YoY

Data Source:  EIA

psw01 2016-4-27

In fact in the last week the ratio of gasoline:distillate produced dropped to about 2.02 from 2.1.  This is worrisome for distillates since the pace of production actually accelerated relative to gasoline.  Decades ago US refiners could push the gasoline to distillate produced ratio to 2.35 over the summer limiting excess distillate production, but most refiners are no longer equipped to do that.  So it looks like we are potentially in for a distillate glut that will make last years fall/winter glut look like childs play.

I'll be emphasizing shorting /HO into early October.   Currently short /HO futures.