September 19, 2018 / 7:41 PM / a month ago

U.S. Midwest distillate stocks reach record high ahead of harvest

NEW YORK (Reuters) - Inventories for distillates, which include products such as diesel and jet fuel, are at their highest on record in the U.S. Midwest as the region gears up for heavy refinery maintenance and a strong soybean and corn harvest, market participants said.

Clouds hover above a corn field in Dubuque, Iowa, U.S., July 26, 2018. REUTERS/Joshua Lott

The area has seen strong refinery runs this summer as a supportive 3:2:1 crack spread, an indicator of refinery profit, incentivized refiners to run at full tilt, said Matt Smith, director of commodities research at ClipperData. This has helped drive up stockpiles in the area.

“All the while, refineries are likely geared towards producing ultra-low sulfur diesel as much as possible, given wider margins than gasoline, as well as their diet of heavy Canadian crude,” Smith added.

Heavier crudes tend to produce a higher yield of middle distillates.

(For a graphic on Midwest refinery runs, see: tmsnrt.rs/2NUePVL)

Midwest distillate stocks totaled 37.6 million barrels in the week to Sept. 14, according to data released Wednesday by the U.S. Energy Information Administration. [EIA/S]

(For a graphic on Midwest distillate inventories, see: tmsnrt.rs/2OETqwT)

The record inventory level “should shield regional strength in what is expected to be a heavy fall refinery maintenance season amid strong harvest-related demand,” said Anthony Headrick, energy market analyst at brokerage firm CHS Hedging LLC.

The fall season is when refiners typically undergo planned maintenance, and the outages reduce supply.

Meanwhile, strong yields of corn and soybeans across the Midwest will lead to increased demand for diesel compared to previous years, said Paul Mitchell, a professor of agricultural and applied economics at the University of Wisconsin-Madison. Farmers will need more of the product to haul crops to market.

The Midwest harvest season is generally in full throttle in October.

The high distillate supply has pushed cash differentials in the region lower, traders said.

Cash prices for ULSD in Group Three, a region that encompasses several Midwestern states, are at the lowest seasonally since 2015.

Chicago ULSD prices on Thursday hit their lowest for this time of year since 2014, except for a two-day period in September 2017.

(For a graphic on Midwest ULSD cash differentials, see: tmsnrt.rs/2OAeqF6)

Reporting by Stephanie Kelly; Editing by Cynthia Osterman

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