U.S. consumption of diesel, heating oil and other distillate fuel oils has started to fall in response to high prices and a slowdown in manufacturing activity and freight transport.
The volume of distillate supplied to the domestic market (a proxy for consumption) was 4.01 million barrels per day (bpd) in September, down from 4.03 million bpd in the same month a year earlier.
Distillate supplied was lower compared with a year earlier in four of six months between April and September, data compiled by the U.S. Energy Information Administration showed.
Distillate prices have been very high as a result of fuel shortages caused by the strong economic rebound from pandemic lockdowns and a lack of domestic refinery capacity.
Slower diesel exports from China this year and disruptions caused by Russia’s invasion of Ukraine and the sanctions imposed in response have intensified the problem.
Between May and October, monthly average spot prices for heating oil delivered to New York Harbor ranged from $137 to $193 per barrel, adjusted for core consumer price inflation.
In real terms, monthly average prices have been between the 76th and the 98th percentile for all months since the turn of the century.
High prices have created an incentive to conserve fuel, for example by consolidating freight deliveries into fewer truckloads.
The direct impact from prices on distillate consumption has probably been limited, but there have been important indirect impacts from inflation, interest rates and the business cycle.
MANUFACTURING SLOWS
Most distillates are used in freight transportation, manufacturing, construction, farming, mining, and in oil and gas production.
Distillate consumption is therefore highly sensitive to changes in the business cycle, especially the manufacturing and freight sectors.
Consumer spending on merchandise has slowed as the economy re-opens from lockdowns and spending has rotated back to services.
Household expenditure on goods has also declined in response to inflation, falling real incomes and rising interest rates.
Monthly business surveys conducted by the Institute for Supply Management (ISM) have shown a progressive deceleration in manufacturing activity since late 2021 and early 2022.
The ISM manufacturing index fell steadily from an average of 59.0 between November 2021 and January 2022 (91st percentile for all months since 1980) to an average of 52.2 between July and September 2022 (45th percentile).
Over the same period, the year-on-year growth in distillate supplied slowed from an average of +4.4% between November 2021 and January 2022 (79th percentile) to –0.8% between July and September 2022 (31st percentile).
The slowdown in distillate consumption has been close to what would be expected based on the deceleration in manufacturing.
Manufacturing activity slowed even further in October, and declined in November, according to the monthly ISM business surveys, implying distillate consumption is likely to have fallen further in both months.
Reduced distillate use would be consistent with an unusual increase in distillate fuel oil inventories reported over the last seven weeks in weekly surveys conducted by the EIA.
Stocks increased by 7 million barrels between Oct. 7 and Nov. 25, the first increase at this time of year since 2008, and a contrast to an average seasonal drawdown of 9 million barrels in the ten years before the pandemic.
The bottom line is that the slowdown in manufacturing and freight activity is starting to rebalance the distillate market and if it continues will help rebuild depleted inventories in 2023.
Source: Reuters (Editing by Barbara Lewis)