U.S. Diesel Stocks Bounce In Sign Of Economic Slowdown

A slowing manufacturing sector is starting to put a dent in U.S. diesel demand, traders and fuel experts said this week, helping rebuild stocks that were extremely tight a year ago and cooling fuel prices.

U.S. distillate inventories in March climbed to within the five-year average for the first time in more than a year. Stocks totaled 116.7 million barrels in the week ending March 24, up 2.8% year over year, according to U.S. government data.

The gains are a big turnabout from last summer when fears of a fuel shortage prompted the Biden administration to warn it could restrict exports if stocks were not replenished. Now those rebuilding U.S. stocks paint a worrisome picture of a slowing economy.

Stocks have built this year despite production cuts.

U.S. distillate production, which includes diesel and related products, fell 9.1% in the past 12 months to 4.6 million barrels per day in the latest week. About 3 million barrels of refining capacity were lost to closures early in the pandemic and domestic supplies were cut by higher U.S. exports last year.

"The diesel market is getting stepped on because of fears of recession, and products coming out of factories have slowed," said Bob Yawger, director of energy futures at investment firm Mizuho.

FEWER SHIPMENTS

The demand slowdown shows up in trucking. A measure of truck freight called "for-hire trucking ton-miles" is down about 2% year-over-year, primarily from a decline in U.S. manufacturing activity, said Jason Miller, associate professor of logistics at Michigan State University.

Diesel fuel demand is mostly from trucks. In 2021, transportation accounted for about 77%, or 46.82 billion gallons, of the total U.S. distillate consumption, with the remainder used in industrial and power sources.

Industrial production in sectors such as paper, primary metals and wood products are down between 5% and 11% this year, cutting into transportation needs.

"This translates to over a million fewer shipments than last year just from these sectors," Miller said.

Product supplied, a proxy measure for demand, has fallen after March 2022 peaks led to record high diesel prices last year. The four-week average for demand has fallen 10%, to 3.7 million barrels a day, from this time last year.

Trucking continues to weaken. The closely watched Cowen/AFS Freight Index projects truckload rates per mile will fall 11.6% year on year after truckload volumes fell 13.7% annually in the fourth quarter of 2022, due to macroeconomic conditions.

"Last year rates dropped and trucks still ran fewer miles," said Dean Croke, freight market analyst at DAT Freight & Analytics.

MARGINS SLIP

Refiners have less incentive to pump out more diesel. Since January, the NYMEX diesel crack spread - how much profit comes from converting oil to diesel - has weakened by about $7 a barrel, and is expected to fall further, according to Tudor Pickering Holt & Co analyst Matthew Blair.

That decline has come despite less output. U.S. refiners last year had run their plants at near full capacity, staving off shortages at the pump. Spring refinery maintenance and outages have clipped output, making weakening demand a larger factor in rising stocks.

Retail diesel prices are lower, which normally helps demand. They are down 89 cents per gallon from a year-ago to an average of $4.22 per gallon, according to motorist group AAA.

Stocks could see a further boost as refiners end their maintenance period and increase production. Another factor likely to increase supplies is a newly expanded Exxon Mobil refinery in Texas. As it reached full production, it could result in another 100,000 barrels per day of diesel supply.