(Bloomberg) — The global diesel market is flashing signs of an economic slowdown.
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In China, the number of trucks navigating highways has fallen noticeably in recent weeks. In Europe, the premium for diesel over crude oil futures recently fell to its lowest level in more than a year. In the U.S., demand is on track to contract 2% in 2023, says S&P Global Inc. Excluding 2020, when much of the economy briefly halted, that 2% slump would be the biggest drop in American diesel use since 2016 .
We anticipate “one of the worst economic climates in recent history outside of the 2008-2009 financial crisis and pandemic,” said Debnil Chowdhury, S&P’s head of Americas Fuels and Refining.
No matter how you put it, demand for the heavy-equipment fuel that powers everything from commercial truck fleets to construction equipment is weakening in many of the world’s largest economies. The pullback, seen as an early sign of weaker manufacturing activity and lower consumer spending, has recession watchers on high alert.
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“Diesel demand can serve as a leading indicator of broader growth as an early sign that household spending is slowing,” said Ben Ayers, a senior US economist at Nationwide Economics. “An expected decline in diesel demand is consistent with the recessionary risks building up across the economy.”
Read more: Economists raise likelihood of US recession on higher interest rates, banking woes
After the world’s hottest fuel disrupted trade flows in the wake of Russia’s invasion of Ukraine, diesel prices have fallen as many of the world’s biggest economies feared the bumpy roads ahead of many of the world’s biggest economies. Economists say there is a 65% chance of a recession in the US and a 49% chance of a recession in Europe within the next year. The risk is lower in China, but the country’s recovery from its once-tight Covid-19 restrictions will still require a significant improvement in consumer confidence, and fast.
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Much of the decline in diesel demand can be attributed to trucking, which consumes about 60% of diesel in China and more than 70% in the US. The number of trucks cruising on China’s highways fell by 8% in the week ended April 9, according to data from China’s Ministry of Transport. Nationwide commercial diesel inventories excluding state refiners rose to an eight-month high in early April, according to OilChem data.
The fall in demand comes after China’s manufacturing activity unexpectedly slowed, according to a private survey in March, prompting a drop in factory ads across Asia. Emerging markets in the region, including Indonesia — where the government has started cutting fuel subsidies — are also seeing demand soften as growth slows, said Daphne Ho, senior analyst at Wood Mackenzie.
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Similar trends are playing out in other parts of the world.
“European demand has been weak over the winter due to subdued heating demand and macro headwinds are clouding the demand outlook,” said Koen Wessels, senior oil products analyst at Energy Aspects Ltd.
In the US, truck consumption — and therefore diesel use — has been hit by a slowdown in factory production, home construction and retailers working off high inventories, said Bob Costello, chief economist for industry group American Trucking Associations. According to a measurement by supply chain intelligence company FreightWaves, truck volume in March hit its lowest seasonal level in five years.
The cause of the US truck traffic slowdown is a shift in consumer behavior: the steady stream of internet orders to ward off pandemic boredom has given way to vacations and experiences. As household coffers get squeezed by inflation, the first thing people do is stop buying things known in the trucking industry as “bulk shippers,” or cheap consumer goods like sodas.
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“Every time we see consumers overwhelmed by inflation, it impacts the cheaper goods, which tend to trade in large volumes,” said FreightWaves CEO Craig Fuller. Individual decisions like skipping soda add up to a macro effect that reduces the overall volume of goods moving through the economy.
The drop in US diesel demand will be particularly pronounced on the West Coast, where massive layoffs in the tech sector and a deepening banking crisis have put the region under financial pressure. There, diesel demand will fall by 5% this year, more than double the national average, said S&P’s Chowdhury.
US container imports, a major contributor to the diesel fuel consumption of the trucks and trains they haul across the country, are also under pressure. In Los Angeles, inbound shipments are at their lowest since March 2020. In China, which primarily ships many of these cargoes, throughput of containers at major ports fell 5% from China in the week ended April 9, according to data Ministry of Transport prosecuted.
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“We see more downsides than upsides for Chinese diesel demand in the second half of the year,” said Mia Geng, head of China Oil Service at industry consultant FGE. “Faced with global economic headwinds, particularly in the West, China will need to rely on domestic consumption to support its manufacturing activities.”
Sure, it’s not all doom and gloom. According to Janiv Shah, a senior analyst at Rystad Energy, Europe’s demand for ultra-low sulfur diesel will increase by nearly 9% between March and July, helped – in part – by summer travel. French authorities are likely to replenish strategic reserves at some point after releasing millions of barrels of petroleum products in response to widespread labor strikes.
But in the US, in the absence of government stimulus to boost the economy, FreightWaves’ Fuller doesn’t see demand for diesel returning anytime soon. Diesel demand differs from gasoline demand, where higher prices cause drivers to step back at the pump and cheaper fuel can bring them back.
People don’t ship products simply because they’re cheap to ship, Fuller said; They do it because “there’s someone on the other end who placed the order and is there to take it.”
—With the support of Julia Fanzeres.
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