U.S. diesel supplies are becoming alarmingly low with shortages and price hikes likely to happen in the coming six months unless and until fuel consumption and the economy slow.
Inventories of diesel and other distillate fuel oils were just 106 million barrels on Oct. 21, the lowest for the time of year since the U.S. Energy Information Administration (EIA) began gathering weekly data in 1982.
Distillate stocks were a vast 26 million barrels (-20% or -1.94 standard deviations) lower than the seasonal average for the previous ten years (“Weekly petroleum status report”, EIA, Oct. 26).
The deficit has been increasing steadily since the beginning of the year when inventories were 15 million barrels (-11% or -1.18 standard deviations) lower than the ten-year average.
By the end of July, inventories had already dropped to 113 million barrels, the lowest since 1996 and before that 1954, according to the latest data available from the EIA’s more broad monthly surveys. In terms of consumption, however, stocks at the end of July amounted to just 30 days of demand, the lowest seasonal level in monthly records dating back to 1945.
Since then, the inventory position has worsened even further, with inventories estimated to have dropped to an all-time seasonal low of lower than 27 days of demand in October.
Chartbook: U.S. distillate fuel oil inventories
Resulting from the deepening fuel shortage, futures prices for ultra-low sulphur diesel (ULSD) brought in New York Harbor in December are trading at a premium of $60 per barrel over Brent. The twelve-month calendar spread for ultra-low sulphur diesel futures has extended to a backwardation of $50 per barrel compared to under $10 this time in 2021, as traders expect physical shortages.
As a result, retail diesel prices including applicable taxes are currently $1.45 per gallon more than gasoline, a record premium, a rise from just 24 cents per gallon a year ago. Distillate fuel oil is mainly used in farming, freight transport, mining, manufacturing, and the oil and gas industry itself, so consumption is greatly influenced by the economic cycle.
An increase in distillate consumption has been directly linked with changes in manufacturing activity in surveys by the Institute for Supply Management and industrial production estimated by the U.S. Federal Reserve.
Stabilizing and then rebuilding stocks to safer levels will require a pronounced slowdown in manufacturing activity and freight movements. There are early signs that freight and manufacturing activity peaked in the third quarter of this year. If confirmed that would ease some of the pressure of distillate inventories.
But a deeper and more enduring slowdown in the United States and/or in Asia and Europe will be required to raise inventories significantly.
Rebalancing diesel supply will possibly need a further hike in interest rates and tighter financial conditions in the United States and other advanced economies to lower fuel consumption to more sustainable levels.