Falling U.S. Diesel Demand Signals A Recession 

U.S. diesel demand and prices have weakened this year as freight and industrial activities have slowed amid higher interest rates and falling consumer demand for goods. 

Some refiners are already seeing a drag on diesel demand caused by the sticky inflation, while transportation and logistics firms say a "freight recession" is already happening, and smaller trucking companies are folding up. 

Container imports into the U.S. have dropped while freight activity is slowing as consumers shift spending from goods purchases during the pandemic to vacation and travel. 

The benchmark diesel futures for fuel delivered into New York Harbor slumped this week to a 15-month low as the fears of a diesel shortage from last autumn have now turned into fears of weak diesel demand due to a flailing economy. 

Fears of a diesel shortage have receded in recent months despite a drawdown in U.S. distillate inventories which have fallen in the past weeks and are around 11% below the five-year average for this time of the year.  

Selling in diesel futures accelerated in the latest reporting week to April 25, with money managers' net position in ICE gasoil flipping into a net short, while the net long position in ULSD delivered into New York Harbor was slashed to a more than a two-year low. 

"To start, we're in a challenging freight environment where there is deflationary price pressure for an industry that continues to face inflationary cost pressures. Simply stated, we're in a freight recession," J.B. Hunt president Shelley Simpson said on the earnings call last week.

Knight-Swift Transportation Holdings' CFO Adam Miller, said on the company's call last month, 

"Freight demand in the first quarter was below expectations and more persistently soft than typical seasonal patterns. Weak demand pressured volumes and pricing while ongoing inflation was a further headwind on operating income." 

Lower trucking activity and slowing U.S. economic growth, which was 1.1% in the first quarter, down from 2.6% in Q4 2022, don't bode well for domestic diesel demand, analysts say.

In the trucking business, "I think a lot of these little ones are going out of business," Bob Costello, chief economist at the American Trucking Associations, told The Wall Street Journal last week. Trucking companies with fleets of 200-300 vehicles are failing at a rate of about one a week, Costello told the Journal.  

Shipping giant Maersk in March flagged the lowest level of container imports in Los Angeles and Long Beach, the main gateways for U.S. trade with Asia, since March 2020. Container imports to those ports slumped by 38% in February from a year earlier, Maersk said. 

Container imports are seen as a precursor of trucking activity for goods that have to be hauled to consumers from the point of import. 

U.S. refining giant Marathon Petroleum this week warned of slowing diesel demand due to inflation.  

"Now as it relates to some of the sluggishness in demand in the first quarter on the distillate side of the book, as we look domestically, certainly, inflation is creating some degree of drag on demand," Brian Partee, Senior Vice President, Global Clean Products Value Chain at Marathon Petroleum, said on the Q1 earnings call on Tuesday. 

"We're seeing that really pretty consistently across the U.S. on a nominal basis coming off a pretty high clip over the last year or so."

Yet he added, "But it's not something that is a bright red light for us right now. It's something that we're watching closely." 

Another top refiner, Valero, doesn't see diesel demand weakening. 

Gary Simmons, Executive VP and Chief Commercial Officer, said on Valero's Q1 call last week, "In terms of your question on diesel weakness, we're just not seeing it." 

But hedge funds and other money managers are going short on diesel and distillates due to concerns about the economy and the lack of a diesel shortage, which was feared a few months ago when the EU ban on Russian fuel imports was about to come into effect. 

Selling in distillates accelerated in the week to April 25, with ICE gasoil flipping to a net short for only the third time in seven years, and the ULSD long slashed by 44% to a 27-month low, said Ole Hansen, Head of Commodity Strategy at Saxo Bank, commenting on the commitment of traders report on the most important petroleum futures.  

By Tsvetana Paraskova for Oilprice.com

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