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

LONDON- U.S. diesel consumption is declining as manufacturing output shrinks and the volume of freight falls, intensifying downward pressure on oil prices but smoothing the introduction of new marine fuel regulations.

U.S. consumption of diesel and other distillate fuel oils was down almost 3% in the three months between July and September compared with a year earlier, according to data from the U.S. Energy Information Administration.

Diesel consumption has been hit much harder than gasoline, which was down by just 0.3% in July-September compared with a year ago.

Most distillates are used by trucking firms, railroads, manufacturers, construction firms, oil and gas drillers, and farmers, so diesel consumption is tightly coupled with the manufacturing cycle.

By contrast, gasoline is used mostly by private motorists, so consumption is more geared towards performance of the much larger service sector and economy-wide employment.

The drop in diesel relative to gasoline reflects the slump in manufacturing while the service sector continues to generate slow but steady growth: the twin-speed U.S. economy is increasingly reflected in twin-speed fuel demand.

 

REFINERY RUN CUTS

Disappointing diesel demand has forced U.S. refiners to trim their crude processing to avoid a buildup of unwanted stocks and a collapse in margins.

Diesel production has averaged 12,000 barrels per day (bpd) more in the first 48 weeks of 2019 compared with the same period in 2018.

But at one point earlier in the year, before refineries trimmed their processing rates, the gap was running at almost 280,000 bpd.

By cutting runs and using their fluid catalytic cracking units to prioritise gasoline production, refiners have been able to avoid flooding the market with unneeded diesel.

The diesel slowdown is not confined to the United States. The global manufacturing and freight downturn has ensured the distillate market is weak worldwide.

Consumption growth has slowed across most major consuming centres in response to a weaker economy, including China, India, the Middle East and the EU.

There is one unexpected benefit from slack demand: it has created room to absorb the transition to new IMO fuel regulations, which will see many ships switching from high-sulphur fuel oil to diesel from the start of 2020.

The cyclical slowdown has come at just the right time to smooth the transition in the shipping industry while avoiding a surge in diesel prices for everyone else.

(Editing by Susan Fenton) ((john.kemp@thomsonreuters.com and on twitter @JKempEnergy))