U.S. manufacturing activity has been stumbling for most of this year, and with it, the outlook for fuel demand with a focus on diesel. Now, it appears this activity has reached a post-pandemic plateau.
While not the best news in a world where growth still matters, the situation has a silver lining: the risk of a diesel shortage has shrunk.
A year ago, as the European Union prepared its sanctions on Russian oil and fuel exports, it ignited a race with U.S. diesel consumers that saw traders divert cargoes bound for Europe to send to the U.S. East Coast instead.
There was little diesel and a lot of demand. The outlook was grim. But then, both the European economies and the U.S. economy began to slow down as interest rate hikes took their toll, affecting energy demand, and especially diesel demand. A crisis was averted.
Yet the supply situation remained vulnerable to shocks. Proof of this emerged earlier this year when news that Saudi Arabia will extend its voluntary production cuts sent diesel prices sharply higher. Indeed, between May, when the Saudis first mentioned the cuts, to September this year, diesel prices in the U.S. and the EU added 40%, according to Argus data. Related: Nigeria Looks To Attract Saudi Investment In Downstream Sector
Demand, meanwhile, remained resilient, which was only to be expected, really, given how important diesel fuel is for industrial transport. As a result of that resilient demand, inventories of the fuel remained tight even as refiners in the U.S. boosted their distillate output at the expense of gasoline, for which demand has been weakening.
Still, it would take a while for this boost to show any effect on diesel inventories, which, in the U.S, were 21 million barrels lower than the ten-year seasonal average in September, according to Reuters. In Europe, diesel inventories were 25 million barrels below the ten-year average.
In this context, then, the news that U.S. manufacturing activity is slowing down further is not as bad as it might be otherwise. Put crudely, at least now they won’t need so much diesel, and prices won’t skyrocket.
Reuters’ John Kemp reported this week that production in the United States was down by an annual 0.8% in September, with the cumulative growth for the past four years a modest 1.2%. In further support of the plateau argument, freight transport was down by 1.8% in the same month on the year and only increased by a meager 0.7% over the past four years.
Highlighting the trend was the level of energy consumption, Kemp noted in his report, saying that distillate fuel consumption in the manufacturing sector had remained unchanged over the past 12 months. It had also declined slightly over the past four years.
The data cited above suggests this might be a long-term trend, which would be more good news in the diesel supply department. On the other hand, establishing a firm causal link between diesel prices and manufacturing activity might be tricky. As soon as diesel prices rise—due to stronger demand from the manufacturing sector—so does the price of everything else, hypothetically affecting, in turn, manufacturing activity after dampening consumer demand. On the other hand, higher borrowing costs might be equally good candidates for the cause of plateauing manufacturing activity that has driven lower diesel consumption and, as a result, stable prices.
Whatever the cause, however, the effect is clear. Despite the threat of a shortage still hanging over diesel consumers, it is a much less significant threat than it was a year ago due to the tepid fuel consumption of the U.S. manufacturing sector. There is always a silver lining.
By Irina Slav for Oilprice.com
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