What are Distillates and Why are They Disappearing?

Posted: February 15, 2022

EIA data shows that domestic distillate inventories are rapidly declining outside of ranges that have been witnessed in recent years. While alarming at first it does beg the question: What are distillates? It is a significant portion of the weekly inventory report, but many would not be able to define it if put on the spot. This short periodical aims to identify what exactly distillates are and highlight the growing supply issues worldwide.

What are Distillates?

In the simplest sense, distillates are distilled petroleum products. Refineries make use of distillation to quickly separate crude oil into sub-components based on hydrocarbon size. A large vat of crude oil can be run through a furnace where it is heated to a much higher temperature. This superheated crude is introduced to a “distillation tower.” The lighter components of crude (ethane & methane) will have higher boiling points and end up condensing much later than heavier components of crude (asphaltenes). This allows the heated components to separate themselves naturally by weight. This is the exact same process that brewmasters use to collect alcohol from fermented material when making alcohol.

Are Distillates that Important?

The resulting products can be manufactured into gasoline, diesel, jet fuel, asphalt, and more. As you can probably tell, they are primarily useful for powering engines. This doesn’t only benefit travel, but also construction, manufacturing, and agriculture. This establishes a massive supply chain that can be traced back to crude and distillates. Should crude oil go up in price and distillates down in supply, the dependent products will also become more expensive. A polyester shirt is now more expensive to produce from a synthetic fiber perspective, but the factory also has to pay more for power, and the delivery truck gets less mileage per dollar. Distillates may not be as attractive to follow as crude and natural gas, but they are the backbone of much of the industrial world.

The Current State of Distillates

Even though Putin recently announced that Russian militants would be moving from the border to nearby bases, tensions are still high and interrupting international diesel transports. Russia has supplied plenty of diesel to Europe through the Baltics, but the amount they have been transporting has decreased in recent months. Europe’s diesel imports were at 4.4 million tonnes in January but are predicted to fall to 3.6 million in February. Even Asia is struggling as cracks (refining profit margins) for jet fuel have fallen to as low as $14.69 a barrel which is pennies. Pair this with a quick surge in interest for air travel and you can see why inventories are being quickly depleted. According to the EIA, the distillate inventory is declining at a time it should be increasing.

Even though distillate inventories look like they might run sideways into historically normal territories, one has to remember that the period between February and June has historically shown further declines. If distillate production had fully stopped at this time last year the United States would have had enough distillates for 36 days. Today that number is much closer to 27 days.

While the current distillate situation is less than ideal, it is not a current cause for alarm. Things would have to get much worse before a big problem emerges. The worse we are likely to see from this is further inflation as a result of increasing feedstock prices, so what’s another percentage point or two?