Column: Global Diesel Demand Begins to Slow as Economy Weakens

By on July 8, 2022 0

An employee holds a diesel fuel nozzle at a gas station in Nice, France, October 13, 2021. REUTERS/Eric Gaillard

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LONDON, July 8 (Reuters) – Global distillate consumption has started to slow in response to high prices and slowing manufacturing and freight activity, which is expected to dampen oil prices over the coming months.

Interest rate hikes by the US Federal Reserve and other major central banks will lead to an even more pronounced slowdown in manufacturing and freight in the second half of 2022 and the first half of 2023.

The resulting cyclical downturn will replenish distillate fuel stocks, which have slumped to multi-decade lows in North America, Europe and Asia in the wake of the pandemic and sanctions on Russia.

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According to estimates prepared by the US Energy Information Administration, the volume of distillate supplied to customers in the United States averaged 3.86 million barrels per day (bpd) in the four weeks ending July 1.

Distillate supplied was down about 100,000 bpd from the same period in 2021 and 200,000 bpd from the same period in 2019 (“Weekly oil status report”, EIA, July 7).

More complete and accurate monthly estimates for April, the latest for which data is available, show that distillate was supplied down 200,000 bpd from 2021 and 300,000 bpd from 2019 (“Petroleum supply month », EIA, July 5).

Distillate supply growth is closely correlated with expanding manufacturing activity in purchasing manager surveys conducted by the Institute for Supply Management (ISM).

Manufacturing expansion has slowed considerably, with the ISM index falling to 53.0 in June (52nd percentile for all months since 1980) from 58.8 in December (90th percentile).

Meanwhile, distillate supply growth slowed to 1.5% in the three months from February to April compared to the same period a year earlier, from 4.1% in November-January and more than 8 % at this point in 2021.


U.S. distillate inventories remain at seasonally low levels in more than 15 years, but the near-continuous depletion apparent since September 2020 appears to have ended in late April or early May 2022.

U.S. distillate inventories stood at just 111 million barrels on July 1, the lowest for the time of year since 2003, helping to push up prices for diesel and similar fuels sharply.

But the downward trend in stocks appears to have ended two months earlier and stocks have started to slowly build up.

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Part of the increase is seasonal. Distillate inventories typically build up over the summer as refineries ramp up crude processing to meet high gasoline demand from vacation drivers.

But part of it is likely attributable to falling demand for diesel as manufacturers and freight haulers try to conserve increasingly expensive fuel by streamlining production schedules and consolidating loads.

Something similar happened at this point in 2008, when the slowdown in manufacturing activity coincided with record crude prices to encourage maximum fuel conservation and diesel demand began to decline.

Transoceanic cargo carriers have already started cutting sailing times to cope with falling demand (“Ocean carriers cancel sailings to ease falling demand,” GCaptain, June 30).

And rail freight is down more than 3% in the first half of 2022 from a year ago, with the intermodal segment most closely associated with manufacturing down 6%, according to the Association of American Railroads.

Data on distillate consumption for Europe and Asia are much less complete and are only available with long delays.

But manufacturing industry surveys show an even sharper deceleration in business activity in the other two major diesel-consuming regions, which should also translate into lower fuel consumption.

Distillate stocks in Singapore have stabilized in recent weeks, albeit at the lowest levels since 2008, after declining almost continuously since late 2020.

Exceptionally low distillate stocks around the world have left the market very vulnerable to further shocks from unexpectedly strong consumption, further production disruption or tougher sanctions against Russia.

But as major central banks continue their interest rate hikes, manufacturing and transportation demand are expected to fall, giving the market a chance to rebuild distillate inventories to a more comfortable level.

Associated columns:

Global business cycle begins to slow (Reuters, June 30) read more

– Diesel demand set to fall as economies slide into recession (Reuters, June 23) read more

– Global diesel shortages herald impending economic slowdown (Reuters, May 19) read more

– Diesel is the inflation canary of the US economy (Reuters, February 9) read more

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

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Editing by David Evans

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