LONDON, Oct 27 (Reuters) – US diesel stocks are falling critically low and it is likely to see shortages and price spikes over the next six months unless the economy and fuel consumption slow.
Inventories of diesel and other distilled heating oils were just 106 million barrels on October 21, the lowest for the season since the US Energy Information Administration (EIA) began collecting weekly data in 1982.
Distillate inventories were a whopping 26 million barrels (-20% or -1.94 standard deviations) below the seasonal average over the past decade (Weekly Petroleum Status Report, EIA, 26 Oct).
The deficit has steadily worsened since the beginning of the year when inventories were 15 million barrels (-11% or -1.18 standard deviations) below the 10-year average.
By the end of July, inventories had already fallen to 113 million barrels, the lowest since 1996 and prior to 1954, based on the latest available data from the EIA’s broader monthly surveys.
In terms of consumption, however, stockpiles at the end of July only matched 30 days of demand, the lowest seasonal level in monthly records, dating back to 1945.
Since then, the inventory position has tightened even further, with inventories falling to a seasonal record low of less than 27 demand days in October.
Chartbook: US Distillate Heating Oil Inventories
With fuel shortages deepening, futures prices for ultra-low sulfur diesel (ULSD) to be delivered in New York Harbor in December are trading at a $60 per barrel premium to Brent.
The 12-month calendar spread for ultra-low sulfur diesel futures has widened to backwardation of $50 a barrel from less than $10 this time last year as traders anticipate physical shortages.
As a result, tax-inclusive retail prices for diesel are now $1.45 a gallon higher than gasoline, a record premium from just 24 cents a gallon a year ago.
Distilled fuel oil is mainly used in freight transport, manufacturing, agriculture, mining and the oil and gas industry itself, so consumption is heavily influenced by the economic cycle.
Growth in distillate consumption has been closely correlated with changes in industrial production estimated by the Federal Reserve and manufacturing activity in surveys by the Institute for Supply Management.
The stabilization and subsequent rebuilding of stocks to a more comfortable level will require a significant slowdown in cargo movements and manufacturing activity.
There are early signs that manufacturing and freight activity may have peaked in the third quarter of 2022. If confirmed, it would ease some of the pressure on distillate inventories.
But a deeper and longer-lasting slowdown in the United States and/or Europe and Asia will be needed to boost inventories significantly.
The rebalancing of diesel supply will likely require further hikes in interest rates and tighter financial conditions in the United States and other major economies to bring fuel economy down to more sustainable levels.
Related columns:
– Diesel’s dire message for the global economy (Reuters, Oct. 14)
– A recession will be needed to rebalance the oil market (Reuters 22 Sept)
John Kemp is a market analyst at Reuters. The views expressed are his own
Edited by Kirsten Donovan
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John Kemp
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