LONDON: Slowdowns in manufacturing activity and freight transportation have combined with unusually high refinery run rates to stabilise and rebuild U.S. distillate fuel oil inventories modestly since the start of October.

But stocks of diesel and other distillate fuel oils remain very low by historical standards and will come under pressure again quickly if freight volumes accelerate or refineries are forced to undertake more maintenance.

Distillate inventories amounted to 118 million barrels on Jan. 27, which was 24 million barrels (-17% or -1.43 standard deviations) below the prior ten-year seasonal average.

The inventory deficit has narrowed from 31 million barrels (-22% or -2.05 standard deviations) on Oct. 7 (“Weekly petroleum status report”, U.S. Energy Information Administration, Feb. 1).

The seasonal deficit has shrunk most weeks, except the two weeks at the end of December, when exceptional cold accompanying winter storm Elliott caused heating and electricity generation demand to surge.

U.S. refineries have been running flat out to produce more distillates in response to very high margins for diesel and heating oil (“Petroleum supply monthly”, U.S. Energy Information Administration, Jan. 31).

Refineries produced 5.34 million barrels per day of distillates in November, the latest data available, just 24,000 b/d below the seasonal record set in 2017.

By contrast, distillate consumption has been restrained by high prices and the marked slowdown in the industrial economy.

Distillates supplied to the domestic market, a proxy for consumption, reached just 4.1 million b/d, the lowest for the time of year since 2017, except during the pandemic in 2020.

More than 80% of distillates are consumed by trucking firms, railroads, shipping companies and industrial customers, so use is highly correlated with the business cycle.

Growth in distillate consumption peaked in late 2021 and has been weakening steadily since then, with consumption down year-on-year in most months since April 2022.

The slowdown has corresponded with a similar downturn in the Institute for Supply Management’s purchasing managers’ index over the same period.

Near-record distillate production and a small drop in consumption have eased some of the immediate concern about shortages.

But inventories remain well below normal for the time of year and there is no cyclical slack in the market.

Stocks at the end of November were still the lowest for the time of year since 1951, and the lowest relative to consumption since at least the end of World War Two.

If the economy avoids a full-blown recession, and manufacturing and freight activity pick up again, shortages will re-emerge quickly, triggering price increases and fuelling inflation.

Related columns:

- U.S. manufacturing is in recession (Reuters, February 1, 2023)

- Recession now or later? Unenviable alternatives for 2023 (Reuters, January 26, 2023)

- U.S. manufacturing downturn will cut diesel consumption (Reuters, January 5, 2023)

- Diesel's gloomy message for the global economy (Reuters, October 17, 2022)

John Kemp is a Reuters market analyst. The views expressed are his own (Editing by Jan Harvey)