LONDON - Global distillate consumption has begun to decelerate in response to high prices and slowing manufacturing and freight activity, which should take some heat out of oil prices in the next few months.
Interest rate rises by the U.S. Federal Reserve and other major central banks will force an even deeper slowdown in manufacturing and freight in the second half of 2022 and the first half of 2023.
The resulting cyclical slowdown will rebuild distillate fuel oil inventories, which have depleted to multi-decade lows in North America, Europe and Asia following the pandemic and sanctions on Russia.
According to estimates prepared by the U.S. Energy Information Administration, the volume of distillate supplied to customers in the United States averaged 3.86 million barrels per day (bpd) in the four weeks ending on July 1.
Distillate supplied was down roughly 100,000 bpd compared with the same period in 2021 and 200,000 bpd from the same period in 2019 ("Weekly petroleum status report", EIA, July 7).
More comprehensive and accurate monthly estimates for April, the latest for which data is available, show distillate supplied down 200,000 bpd from 2021 and 300,000 bpd from 2019 ("Petroleum supply monthly", EIA, July 5).
Distillate supply growth correlates closely with expansion of manufacturing activity in the purchasing managers' surveys conducted by the Institute for Supply Management (ISM).
The manufacturing expansion has slowed significantly, with the ISM index falling to 53.0 in June (52nd percentile for all months since 1980) down from 58.8 in December (90th percentile).
In tandem, distillate supply growth has decelerated to 1.5% in the three months from February to April compared with the same period a year earlier, down from 4.1% in November-January and more than 8% at this point in 2021.
U.S. distillate inventories remain at the lowest seasonal level for more than 15 years but the almost continuous depletion apparent since September 2020 appears to have ended in late April or early May 2022.
U.S. distillate stocks stood at just 111 million barrels on July 1, the lowest for the time of year since 2003, which has helped push prices for diesel and similar fuels sharply higher.
But the downward trend in stocks appears to have ended two months earlier and inventories have started to accumulate gently.
Some of the increase is seasonal. Distillate inventories usually build over the summer as refineries ramp up crude processing to meet the elevated demand for gasoline from holiday drivers.
But some is likely attributable to faltering diesel demand as manufacturers and freight hauliers try to conserve increasingly expensive fuel by rationalising production schedules and consolidating loads.
Something similar occurred at this point in 2008, when softening manufacturing activity coincided with record crude prices to encourage maximum fuel conservation and diesel demand began to fall.
Transocean freight carriers have already started to trim their sailing schedules to cope with falling demand ("Ocean carriers blanking sailings to mitigate dip in demand", GCaptain, June 30).
And rail freight was down by more than 3% in the first half of 2022 compared with a year ago, with the intermodal segment most closely associated with manufacturing down 6%, according to the Association of American Railroads.
Distillate consumption data for Europe and Asia are much less comprehensive and available only with lengthy delays.
But manufacturing surveys show an even sharper deceleration in business activity in the other two major diesel-using regions which is likely to translate into lower fuel consumption there as well.
Distillate inventories in Singapore have stabilised in recent weeks, albeit at the lowest levels since 2008, after drawing down almost continuously since late 2020.
Exceptionally low distillate stocks around the world have left the market very vulnerable to further shocks from unexpected strength in consumption, a further disruption of production, or more severe sanctions on Russia.
But as the major central banks press on with interest rate increases, manufacturing and transport demand is likely to fall, giving the market a chance to build distillate inventories back to a more comfortable level.
John Kemp is a Reuters market analyst. The views expressed are his own
(Editing by David Evans)