LONDON, Oct 27 (Reuters) – U.S. diesel supplies are so low that shortages and higher prices are likely within the next six months unless the economy and fuel consumption slow down.
Diesel and other distillate fuel oil inventories stood at just 106 million barrels on October 21, the lowest for a year since the U.S. Energy Information Administration (EIA) began collecting weekly data in 1982. became.
Distillate inventories were as much as 26 million barrels (-20% or -1.94 standard deviations) below their seasonal average over the past decade (Weekly Situation of Oil, EIA, 26 October).
The deficit has steadily worsened since the beginning of the year when inventories were 15 million barrels (-11% or -1.18 standard deviations) below the 10-year average.
By the end of July, inventories were already down to 113 million barrels, based on the latest data from EIA’s more comprehensive monthly survey.
In terms of consumption, however, stocks at the end of July corresponded to just 30 days of demand, the lowest seasonal level on record for a month dating back to 1945.
Inventory positions have tightened further since then, with inventories estimated to have fallen to a record seasonal low of less than 27 days of demand in October.
Chartbook: US Distillate Fuel Stocks
Reflecting the worsening fuel shortage, futures prices for ultra-low sulfur diesel (ULSD) delivered to the Port of New York in December are trading at a premium of $60 a barrel over Brent.
The 12-month calendar spread for ultra-low sulfur diesel futures has widened to backwardation at $50 a barrel from under $10 last year as traders anticipate a physical shortage.
As a result, the retail price of diesel, including applicable taxes, is $1.45 more than gasoline, a record premium, up from just 24 cents a year ago.
Distillate fuel oils are used primarily in freight transport, manufacturing, agriculture, mining, and the oil and gas industry itself, so consumption is highly cyclical.
Increases in distillate consumption are closely correlated with changes in industrial production estimated by the US Federal Reserve and manufacturing activity in a study by the Institute for Supply Control.
To stabilize inventories and rebuild them to more comfortable levels, cargo movements and manufacturing activity must slow down significantly.
There are early indications that manufacturing and transportation activity has peaked in the third quarter of 2022. If confirmed, it would relieve some of the pressure on distillate stocks.
However, a more severe and prolonged slowdown in the US and/or Europe and Asia is needed to significantly boost inventories.
Rebalancing diesel supplies may require further increases in interest rates and tightening fiscal conditions in the US and other major economies to reduce fuel consumption to more sustainable levels. .
Related columns:
– Diesel’s pessimistic message for global economy (Reuters, Oct 14)
– Recession will be needed to rebalance oil markets (Reuters, Sept 22)
John Kemp is a market analyst at Reuters.the views expressed are his own
Edited by Kirsten Donovan
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