Why U.S. Diesel Demand Is Underwhelming

• U.S. diesel demand has been weak due to stagnant manufacturing output, underwhelming trucking activity, and warmer winter weather.
• U.S. diesel demand plunged to its lowest seasonal level in 26-years in May.
• Kemp: U.S. manufacturing output has been essentially stagnant over the past six years.

Lackluster diesel demand in the United States has weighed on oil market sentiment and oil prices in recent months.

U.S. diesel demand has been underwhelming so far this year. Alongside weaker-than-expected gasoline demand, diesel consumption in the first five months of the year signals weakness in manufacturing and the economy, as well as the rise in renewable diesel supply substituting larger volumes of petroleum-derived distillates.

U.S. manufacturing output has been essentially stagnant over the past six years, Reuters columnist John Kemp notes. Despite manufacturing rebounds in 2018 following the trade war with China and the 2020 pandemic, net growth has been underwhelming since 2018. Last year, total distillate supply in the U.S. increased by just 42,000 barrels per day (bpd) – or 1% -- compared to 2018, according to U.S. government data compiled by Kemp.

Manufacturing output and activity have faltered this year, dragging down industry’s diesel consumption. Trucking has also been underwhelming, while a warmer winter in early 2024 reduced the usual volumes of heating oil, leaving overall distillate consumption below expectations.

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U.S. diesel demand plummeted in March 2024 to its lowest seasonal level in 26 years, driven by a significant slowdown in economic growth. According to the US Energy Information Administration (EIA), the product supplied of distillate fuel, essential for trucking, heating, and heavy industry, fell to 3.67 million bpd that month. This figure marks a downward revision from previous estimates, highlighting the severity of the economic deceleration. 

In April, tepid demand for diesel and other distillate products such as heating oil had traders competing for storage tanks on the U.S. East Coast to wait out the current market weakness. A warmer winter in the U.S. has left more heating oil supplies on the East Coast unused, while traders are also looking to store diesel there for future exports to Europe when European demand recovers later this year as we approach the next winter in the northern hemisphere.

U.S. manufacturing has seen mixed data so far this year.

In May, U.S. industrial production rose by 0.9%, and manufacturing output posted a similar gain of 0.9% after declining in the previous two months, the Federal Reserve said last week.

While capacity utilization moved up to 78.7% in May, the rate is 0.9 percentage points below its long-run (1972–2023) average. Capacity utilization for manufacturing moved up in May to 77.1%, a rate that is 1.1 percentage points below its long-run average, the Fed said.

The latest manufacturing PMI report by the Institute for Supply Management (ISM) showed that economic activity in the manufacturing sector contracted in May for the second consecutive month and the 18th time in the last 19 months.

“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” said Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee.

The weakness in manufacturing adds to subdued on-highway trucking—the single-largest end use of distillate fuel oil – to weigh on diesel demand in America.

American Trucking Associations’ For-Hire Truck Tonnage Index fell by 1.2% in April after decreasing 2.2% in March.

“With a rebound in freight remaining elusive, it is likely that additional capacity will leave the industry in the face of continued softness in the market,” said Bob Costello, American Trucking Association's Chief Economist.

The EIA estimated in its latest Short-Term Energy Outlook for June that U.S. consumption of distillate fuel fell about 5% during the first five months of 2024 compared with the same period last year. Consumption could rebound in the second half of the year, but biofuels displacing petroleum distillate will continue amid rising renewable diesel production, which could limit consumption of petroleum-based distillate, the EIA said.

The rise of biodiesel, tepid demand from manufacturing and trucking, and warmer weather have combined to drag U.S. diesel demand lower this year, with repercussions on the international crude oil market.

By Tsvetana Paraskova for Oilprice.com

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