U.S. diesel stocks start to normalise as economy slows: Kemp

U.S. inventories of diesel, heating oil and other distillate fuel oils are rising rapidly in response to slowing consumption and a delayed reaction to high prices.

U.S. distillate fuel oil stocks increased by six million barrels over the seven days ending on Dec. 2, according to data from the U.S. Energy Information Administration (EIA).

Distillate inventories have risen by a total of 13 million barrels over the eight weeks since Oct. 7 (“Weekly petroleum status report”, EIA, Dec. 7).

Distillate inventories have accumulated at a time of year when they would normally be depleting, a signal the market balance has shifted decisively.

Stocks depleted by an average of six million barrels over the same period in the ten years before the COVID-19 pandemic.

But in 2022, inventories have risen at the fastest seasonal rate since 2001, when the economy was in recession and transport had been extensively disrupted by the attack on the World Trade Centre.

Chartbook: U.S. distillate fuel oil inventories

Stocks are still 17 million barrels (-13% or -0.83 standard deviations) below the pre-pandemic five-year seasonal average, but the deficit has halved from 34 million barrels (-24% or -2.05 standard deviations) in early October.

In the past, increases in inventories at this time of year have been associated with high prices (2000 and 2005) or a slowdown in the business cycle (2001 and 2008) suppressing consumption.

There are signs the pattern is repeating. The volume of distillate supplied to the domestic market (a proxy for consumption) slowed to just 3.73 million barrels per day (bpd) in the four weeks to Dec. 2, the lowest since 2015.

In a sign of slowing demand from the freight sector, the number of intermodal containers hauled on U.S. railroads in October was the lowest for the time of year since 2013, according to the U.S. Bureau of Transportation Statistics.

Net distillate exports have slowed to around 1.0 million bpd from 1.4 million bpd in September, implying foreign consumption also slackened.

As the global business cycle decelerates, softening consumption of middle distillates in manufacturing and freight transport is starting to rebuild depleted inventories.

Related columns:

- U.S. diesel shortage starts to ease (Reuters, Nov. 24)

- U.S. container freight is shrinking (Reuters, Nov. 16)

- Recession by any other name will still reset the economy (Reuters, Nov. 2)

- U.S. diesel shortage increasingly likely until economy slows(Reuters, Oct. 27)

- Diesel’s gloomy message for the global economy (Reuters, Oct. 14)

John Kemp is a Reuters market analyst. The views expressed are his own