Global Diesel Stock Builds Not As High As Feared

• Diesel refining margins have fallen 50% from autumn-2022 record levels.
• The middle distillate markets flipped from fears of critical shortages at the end of last year to fears of oversupply for the rest of this year.
• In the 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.

The global manufacturing and industrial slowdown this year has been evident in weaker diesel and gasoil demand, which has raised distillate inventories across regions and economies. 

The sentiment in middle distillate markets flipped from fears of critical shortages at the end of last year to fears of oversupply for the rest of this year, which have weighed on refining margins and crude oil prices. 

Distillate stocks have been rising, but they are still below the 10-year averages for this time of the year in key markets, including the U.S., Europe, and Singapore, Reuters market analyst John Kemp notes.

Diesel and gasoil stocks haven’t built as much as expected earlier this year, lending some support to stabilize refining margins that have plunged by 50% compared to the record highs from the autumn of 2022. 

Oil traders have also become less bearish on New York harbor diesel and ICE European gasoil futures over the past month and have reduced their shorts in those two petroleum futures contracts compared to the near-record shorts at the end of April. 

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In the week to June 6, hedge funds and other portfolio managers added long positions and reduced shorts in both ICE European gasoil and New York Harbor ULSD diesel. Both diesel-related contracts saw less bearish positioning, although the net position – the difference between bullish and bearish bets – continues to be a net short in European gasoil. 

This is hardly surprising, considering that both Europe’s biggest economy, Germany, and the Eurozone are now officially in recession. 

In Asia, diesel demand in India, the world’s third-largest crude oil importer, is at a record high and has exceeded expectations this year.

In the top crude importer, China, however, demand is thought to be weaker than initially expected after the reopening. 

But China has just cut a key interest rate and is considering stimulus to support the sputtering economy, which could lead to higher distillate demand in construction and other industries going forward. 

In the United States, 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.

In its latest Short-Term Energy Outlook (STEO), the EIA last week revised down its estimates for the U.S. economy and diesel consumption for this year and next. 

The latest forecasts assume U.S. GDP growth of 1.3% in 2023 and 1.0% in 2024, which is down from last month’s forecast of 1.6% in 2023 and 1.8% in 2024, based on the S&P Global macroeconomic model for the U.S. economy and EIA’s energy price forecasts. 

The reduction in forecast GDP growth has led to lowered estimates for distillate fuel – mostly diesel – consumption. The EIA now expects U.S. distillate consumption to fall in 2024, which is a change from last month’s forecast that had expected distillate consumption to grow next year.  

“Recently, service sector production has been the primary driver of GDP growth, which requires less diesel consumption,” the EIA said in its discussion about diesel consumption and economic growth as part of the latest STEO. 

“We expect this trend to continue; we forecast in our STEO that U.S. diesel consumption in the second half of 2023 will be below the 2015−2019 average before a slight further decline in 2024 despite an expected increase in GDP over the same periods.” 

EIA’s forecast assumes that the Fed’s interest rate increases will slow inflation without causing major disruptions to U.S. employment or economic activity. 

“If GDP growth does decline, we could see a further slowdown in U.S. diesel consumption,” the EIA noted.  

By Tsvetana Paraskova for Oilprice.com

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