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Weak Diesel Prices Reflect Global Economic Slowdown

Back in September last year, Bloomberg reported that refineries around the world were struggling to keep up with demand for diesel fuel. That imbalance led to soaring diesel prices, with the fuel gaining 60% in Europe and topping $140 per barrel in the U.S.

At the time, there were warnings that economic activity roaring back after the pandemic and the 2022 energy crunch would lead to a diesel fuel shortage and drive higher inflation. Only that didn't happen. Because since then, diesel prices have fallen and now the warnings are about weak oil demand.

Reuters's John Kemp wrote in a recent column that institutional speculators were selling their diesel positions as prices began to decline. That decline, for its part, was a result of the global trade flow adjustments after the string of ship attacks by Yemen's Houthis in the Red Sea.

It took a while for this adjustment to be completed, but now it seems to be a fact, and this fact is pressuring diesel prices. Also, diesel fuel production has apparently ramped up, largely eliminating worries of a shortage. The same, however, cannot be said about economic activity.

The March reading of the U.S. Purchasing Manager Index, a closely followed indicator of growth or decline in the manufacturing sector, disappointed. It stood at 51.9, while forecasts had seen it at 52.5. It was also a decline on February, when the reading stood at 52.2. Now, anything above 50 is a sign of growth, but it appears this growth is weakening and this is being reflected in diesel prices. Related: Saudi Aramco Eyes Stake in Chinese Petrochemical Firm

The situation was very much the same in Europe, which was hardly a surprise given the struggles that the EU's manufacturing sector is going through with higher energy costs and what seems like insufficient help from governments. And this might well be why the diesel fuel market is suffering: because economies run predominantly on diesel.

"There is a genuine weakness in the physical market, as reflected in growing contango in diesel futures contracts," PVM analyst Tamas Varga told Bloomberg last week. "There's a general feeling of souring of sentiment."

Another analyst, James Noel-Beswick from Sparta Commodities, told the publication that there were fundamental reasons for the state of the diesel fuel market: weaker demand in key markets, combined with an increase in diesel-producing capacity.

Yet, it may be a temporary thing. Reuters' Kemp again reported earlier this month that an alternative PMI reading done by the Institute for Supply Management suggested improvement in activity in March, especially in manufacturing. Services, on the other hand, saw weaker activity. It is interesting to note that the services industry includes sectors such as farming, transport, and construction-all heavy users of diesel fuel.

Bloomberg has also suggested that the weakness in diesel demand-and prices-may be a temporary occurrence very similar to the tightness in that market last year, which prompted analysts to warn about potential shortages as recently as six months ago.

That this tightness did not really materialize is, on the one hand, good news. Higher fuel prices get passed on to consumers, hurting purchasing power and contributing to inflation. But the weakness in diesel is also a sign of stuttering economies, which is not such good news, as seen in Europe, where the decline in diesel fuel demand has accompanied extra-weak GDP growth that in key economies such as Germany has turned into a recession. The U.S. economy is growing, per the latest GDP reports, but this has not been enough to shake off a sense of concern among analysts and forecasters.

That's probably because although growth is there, it is slowing down. The gross domestic product reading for the third quarter of 2023 was a robust 4.9%, according to the Bureau of Economic Analysis. That's when there was a lot of talk about diesel shortages. Then, in the fourth quarter, the economy decelerated to 3.4%. Now, forecasts for the final reading for that final quarter of 2023 are for a much lower figure: 2%. And judging from diesel fuel prices, things over the first three months of this year have not changed much.

The Bloomberg report from last week on the price of diesel contained the suggestion that the fuel's price movements harbinger weakness in oil demand, too. However, that might well be wishful thinking for a publication that has actively campaigned for the energy transition for years. Yet even Bloomberg has had to admit on more than one occasion that the transition is not going as planned.

Nowhere was this fact presented as clearly as in a September 2023 report on the outlook for oil demand, which had apparently surprised many. "Until the link between economic growth and rising demand for gasoline, diesel and other oil products can be broken, a peak in crude consumption is likely to remain elusive," Bloomberg's authors wrote in that report. They weren't wrong.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More