By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at Oilprice.com.
High prices seem to have started to weigh on diesel demand in the United States, where distillate inventories – comprising diesel and heating oil – have been slowly rising over the past few weeks. American distillate inventories are still below the five-year average, but the gap in stocks compared to previous years has slowly started to narrow, suggesting that high prices are hitting demand, while encouraging more refinery output thanks to solid refining margins.
In this week’s inventory report, the U.S. Energy Information Administration said that distillate stocks rose by 1.7 million barrels in the week to November 18, with production rising to an average of 5.1 million barrels per day (bpd). Distillate fuel inventories are still about 13% below the five-year average for this time of year, but two months ago, they were more than 20% below the five-year average for that time of the year.
Earlier this autumn, U.S. distillate stocks slumped to their lowest level for this time of the year since 1951, just as the heating season started and a few months ahead of the EU embargo on Russian oil product imports, which goes into effect in February.
Now signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories, contrary to seasonal trends. Distillate inventories in the U.S. rose by 3 million barrels in the six weeks to November 18, according to estimates by Reuters’ senior market analyst John Kemp based on EIA data.
In products supplied – a proxy of implied demand – distillate fuel product supplied averaged 4.0 million bpd over the past four weeks, down by 3.5% from the same period last year, the EIA data showed.
However, as implied demand slowed, refineries boosted run rates in the week to November 18, raising overall U.S. refinery utilization to 93.9%, up from 92.9% for the previous week. This compares with 88.6% refinery utilization over the same week last year.
“Higher refinery runs over the week, along with weaker implied demand for products meant that large builds were seen on the refined product side,” ING strategists said this week, commenting on the EIA report.
Refiners are processing more crude oil to capture the still high refining margins, but demand seems to cool off, not least because of high diesel prices, which haven’t come off this year’s record high as fast as gasoline prices have.
As of November 21, the average retail diesel price in the United States was $5.233 per gallon, or $1.509/gal higher than at this time last year. To compare, the average gasoline price in the U.S. on the same day was $0.253 per gallon higher than a year ago, EIA data showed.
In New England – where distillate inventories were at their lowest level ever at the start of the heating season and where 33% of homes use heating oil as the primary heating fuel – the diesel price is nearly $6/gal, at $5.963 on November 21, or $2.297/gal higher than last year.
Yet, demand for diesel – the primary fuel of the economy – is already showing signs of weakness, also as a result of high prices.
However, the recent drop in international crude oil prices and lower implied demand in the U.S. while distillate production is rising have led to a decline in America’s diesel prices.
A total of 47 of the 50 states are seeing average diesel prices drop from their week-ago levels, with diesel prices down over 10c/gal from a week ago in 19 states, Patrick De Haan, head of petroleum analysis at GasBuddy, said on Wednesday.
Globally, stubbornly high diesel prices fueling inflation as well as slowing economies are expected to lead to a slight decline in diesel demand in 2023, the International Energy Agency (IEA) said in its monthly report last week. Last year, global diesel/gasoil demand growth stood at 1.5 million bpd. This year’s growth is expected at just 400,000 bpd, while next year, diesel demand will post a small decline “under the weight of persistently high prices, a slowing economy and despite increased gas-to-oil switching,” the IEA said.
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I can understand demand destruction leading to a slight demand in diesel by next year but diesel itself is not a luxury item. It power everything from trucks, farm tractors, trains, boats, and barges and who know what else. So just these examples show that you are talking about food production and the transport system for a country. As diesel supplies drop and hit that minimum vital usage level, would the price not start to rapidly escalate as there is no real substitute for it?
Importantly, diesel is almost identical to home heating oil, which is used by a large percentage of people in the Northeast to heat their home in winter, which has started.
Also, the Imperial Military is heavily dependent upon diesel.
Irving just restarted their refinery in New Brunswick after a 2 month shutdown for repairs/renewal, bringing 320,000 barrels per day of refined fuels onto the Northeast market.
A lot of homes are equipped for heating by multiple fuels (e.g. mine). And most can heat less if they choose to.
And while consumer demand for food and other goods has, I assume, some kind of inflexible floor, many households usually operate well above it, afaict. This is really the first social responsibility of an American: costume.
So I think there is room for price sensitivity on at least these two scores off the top of my head.
In theory a diesel engine is very tolerant of the fuel provided, as long as it goes bang under thermal compression.
Question is how to get it into the cylinders to compress in the first place.
Ages ago i recall reading about a small trend involving retrofitting larger pickups etc to run on NG. Not sure what the fuel efficiency was though.
From what i understand, the efficiency is pretty good. Currently evaluating a (industrial sized) proposal for electricity generation, with the vendor claiming a 20% reduction in costs for NG fueled engines.
I agree. It would seem to be pretty inelastic. River traffic is down due to low water, farmers may be holding back on planting due to drought, and a rail strike is looming. Homeowners may be waiting to fill Up those oil tanks due to warm weather. The demand drop may be temporary.
How can a demand drop be temporary in an increasingly heated world. I live in PNW and have yet to turn on my single heat source. But I have also insulated my windows and other areas that “leak” heat and cold.
The cheapest Diesel I have seen in Months was yesterday, $6.48/ Gallon.
Most stations are at $6.98/Gallon here in Sonoma County.
Regular gas is down to a little more than $5 a Gallon ( Costco was $5.25).
Wouldn’t a drop in freight transport not have the same effect? Look at the reductions touted by FedEx, UPS, and other freight forwarders regarding the drops in economic output/shipping and what those outlooks forecast. That much of a cut would necessarily lead to a reduction of demand for shipping fuels/diesel. If the freight was still there, the demand would continue and the prices would stay high/rise… In this case, the author has it backwards: what we will see is a price drop due to falling demand.
From flyover country… seems like our economy is on shakier fume-y ground, lots of folks I have talked to are basically done for the year by mid-November.
So, tighten belt, hunker down, eat less, who needs diesel right now?
I suspect by mid-January demand will be right back.
Mr. Buffett’s BN lines runs right through the state, one north and one south, carrying grain and Williston Basin oil, MT and WY coal…east to the pacific rim-.
His locomotives run on diesel— whether they have a skeletal staff to run things or not will be seen, soon…
Alice Friedemann’s excellent 2016 book “When Trucks Stop Running: Energy and the Future of Transportation” analyzes the role of diesel on our society and how very quickly a shortage would bring our transportation and distribution systems to a halt. Her website energyskeptic.com “Peak Everything, Overshoot, & Collapse” has published many updates on the diesel situation and why biodiesel from any source (crops, spent oil, algae) and electric trucks etc. cannot make up for this most essential commodity. If Russia had stopped exporting diesel to US and Europe we would already be in much pain.
Thanks for this! I have just ordered the book as it sounds quite prescient considering our current diesel shortfall.
Biden administration has approved plans to build the nation’s largest oil EXport terminal.
https://www.texastribune.org/2022/11/23/texas-oil-export-terminal-approval-biden-climate/
So refreshing to have a president who keeps his promises. The day he was innaugurated, he promised “I guarantee you we’re going to end fossil fuel!”
His choice of sanctioning of American imports of cheap Russian oil, fertilizer and food, are part of that.
People get the politicans that they deserve.