LONDON, Aug 4 (Reuters) – US inventories of distilled heating oil fall to critically low levels; Either an imminent recession will reduce consumption or prices will likely continue to rise.
Distilled heating oil is the lifeblood of industry and the deepening shortages show that the economy is hitting hard short-term capacity constraints.
Inventories of diesel, heating oil and other distilled fuel oils fell by more than 2 million barrels to 109 million barrels last week, according to the US Energy Information Administration (EIA).
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Distillate inventories have declined by a total of 65 million barrels in 66 of the past 109 weeks since early July 2020 (Weekly Petroleum Status Report, EIA, Aug. 3).
The drop more than offset the 45 million barrels accumulated in the second quarter of 2020 as consumption was hit by the first wave of the coronavirus and widespread lockdowns.
Shares are now only in the 8th percentile for every week since 2000, compared to the 68th percentile at this point last year and a record high in late July 2020.
Inventories are more than 21 million barrels below when they were in 2008, when prices just pulled off a record high, and at their lowest for the season since 1996 (https://tmsnrt.rs/3zWMDZH).
EXPORT DEMAND
Distillate inventories typically rise during the third quarter as refiners ramp up crude oil processing to produce more gasoline for the summer driving season.
But inventories have not risen this year, falling by 2-3 million barrels since late June, the largest seasonal decline since at least 1990.
Domestic demand, as measured by the amount of distillate shipped to the domestic market, is 100,000-200,000 barrels per day below the corresponding point in 2021.
But foreign demand, as measured by net exports, is hovering at very high levels as refiners export to Latin America, Europe and Asia in response to strong consumption and to offset the loss of distillate exports from Russia.
Distilled heating oil net exports have averaged 1.4 million barrels per day over the past five weeks, one of the highest rates in the last five years.
RECESSION AHEAD
Rebuilding distillate stocks will require a reduction in domestic demand through a domestic economic downturn and a reduction in foreign demand through a global recession and/or an easing of sanctions on Russia’s exports.
Rate hikes by the US Federal Reserve are already spreading around the world and are likely to bring about the necessary slowdown in industrial activity at home and abroad.
In the UK, the governor of the Bank of England has forecast that the economy will enter recession before the end of the year (“Bank of England raises rates by most since 1995 even as long recession looms”, Reuters, 4 April 2007). August). Continue reading
The other major European economies are likely to enter recession over a similar period as rising inflation and energy prices dampen household and business spending.
China is struggling with its own worsening cyclical slowdown caused by repeated lockdowns to curb the spread of the coronavirus.
The forces of the recession will also spread to the middle-income countries that are major industrial suppliers to North America, Europe and China – including Brazil, Mexico, Turkey, Thailand, Indonesia and Vietnam.
POWER RESTRICTION
US interest rate traders are now saying that a recession is all but certain as the government bond yield curve between 2- and 10-year maturities is as inverted as it was before the dot-com crash of 2000.
Distillate prices include a high probability that the recession will dampen consumption and rebuild inventories throughout 2023.
The spread on the European gas oil futures calendar between December 2022 and December 2023 has weakened to backwardation of $15 a barrel from more than $32 in mid-June.
Macroeconomists sometimes use a KLEMS model to identify the contributions of capital (K), labor (L), energy (E), materials (M), and services (S) and multifactor productivity to economic growth.
Much of the recent discussion of growth and inflation has focused on the labor component (L), where economists and policymakers are divided on whether there is any spare capacity left.
But the US economy has already hit a mandatory energy constraint (E), reflected in distillate (and to some extent gas and power) shortages and rising inflation, that will force a near-term slowdown in growth.
Related columns:
– Low US oil stocks suggest a deeper economic slowdown will be needed (Reuters, July 28) Read more
– Oil and interest rate futures point to a cyclical slowdown before the end of 2022 (Reuters, July 22) Read more
– Global diesel shortages herald imminent economic slowdown (Reuters, May 19) Read more
– Diesel is the US economy’s inflation canary (Reuters, February 9) Read more
John Kemp is a market analyst at Reuters. The views expressed are his own
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Edited by Kirsten Donovan
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John Kemp
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