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The Diesel Crunch Is Finally Causing Demand Destruction

High prices seem to have started to weigh on diesel demand in the United States, where distillate inventories - comprising diesel and heating oil - have been slowly rising over the past few weeks.    American distillate inventories are still below the five-year average, but the gap in stocks compared to previous years has slowly started to narrow, suggesting that high prices are hitting demand, while encouraging more refinery output thanks to solid refining margins.  

In this week's inventory report, the U.S. Energy Information Administration said that distillate stocks rose by 1.7 million barrels in the week to November 18, with production rising to an average of 5.1 million barrels per day (bpd). Distillate fuel inventories are still about 13% below the five-year average for this time of year, but two months ago, they were more than 20% below the five-year average for that time of the year.  

Earlier this autumn, U.S. distillate stocks slumped to their lowest level for this time of the year since 1951, just as the heating season started and a few months ahead of the EU embargo on Russian oil product imports, which goes into effect in February.

Now signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories, contrary to seasonal trends. Distillate inventories in the U.S. rose by 3 million barrels in the six weeks to November 18, according to estimates by Reuters' senior market analyst John Kemp based on EIA data.  

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In products supplied - a proxy of implied demand - distillate fuel product supplied averaged 4.0 million bpd over the past four weeks, down by 3.5% from the same period last year, the EIA data showed. 

However, as implied demand slowed, refineries boosted run rates in the week to November 18, raising overall U.S. refinery utilization to 93.9%, up from 92.9% for the previous week. This compares with 88.6% refinery utilization over the same week last year. 

"Higher refinery runs over the week, along with weaker implied demand for products meant that large builds were seen on the refined product side," ING strategists said this week, commenting on the EIA report. 

Refiners are processing more crude oil to capture the still high refining margins, but demand seems to cool off, not least because of high diesel prices, which haven't come off this year's record high as fast as gasoline prices have. 

As of November 21, the average retail diesel price in the United States was $5.233 per gallon, or $1.509/gal higher than at this time last year. To compare, the average gasoline price in the U.S. on the same day was $0.253 per gallon higher than a year ago, EIA data showed. 

In New England - where distillate inventories were at their lowest level ever at the start of the heating season and where 33% of homes use heating oil as the primary heating fuel - the diesel price is nearly $6/gal, at $5.963 on November 21, or $2.297/gal higher than last year.  

Yet, demand for diesel - the primary fuel of the economy - is already showing signs of weakness, also as a result of high prices. 

However, the recent drop in international crude oil prices and lower implied demand in the U.S. while distillate production is rising have led to a decline in America's diesel prices. 

A total of 47 of the 50 states are seeing average diesel prices drop from their week-ago levels, with diesel prices down over 10c/gal from a week ago in 19 states, Patrick De Haan, head of petroleum analysis at GasBuddy, said on Wednesday.  

Globally, stubbornly high diesel prices fueling inflation as well as slowing economies are expected to lead to a slight decline in diesel demand in 2023, the International Energy Agency (IEA) said in its monthly report last week. Last year, global diesel/gasoil demand growth stood at 1.5 million bpd. This year's growth is expected at just 400,000 bpd, while next year, diesel demand will post a small decline "under the weight of persistently high prices, a slowing economy and despite increased gas-to-oil switching," the IEA said.   

By Tsvetana Paraskova for

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Tsvetana Paraskova

Tsvetana is a writer for with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More