By John Kemp, Senior Market Analyst
U.S. distillate fuel oil inventories have fallen to a 14-year low as refiners prove unable to satisfy strong demand from freight hauliers and manufacturers, sending diesel prices surging and pulling crude prices higher in their wake.
Stocks have fallen in 60 of the last 96 weeks by a total of 69 million barrels since the start of July 2020, according to high-frequency data from the U.S. Energy Information Administration.
The depletion has more than reversed a 49-million-barrel build-up during the first wave of the COVID epidemic and lockdowns in the second quarter of 2020.
By last week, stocks had fallen to just 104 million barrels, the lowest since 2008 and before that 2005 (“Weekly petroleum status report”, EIA, May 4).
Distillate stocks are now 31 million barrels, or 23% below the pre-pandemic five-year seasonal average for 2015-2019.
Inventories are on course to fall even further to a projected low of just 102 million barrels before the middle of the year, with a possible range of 97 million to 105 million barrels, based on seasonal trends over the last decade.
The projected inventory outlook has tightened since the start of April, when stocks were on course to fall to a low of 107 million barrels with a range of 96 million to 114 million.
The resulting shortages of distillate are driving prices for both distillate itself and crude sharply higher and are bleeding across into shortages and higher prices for gasoline and jet fuel.
Distillate is mostly used in road and rail freight, manufacturing, construction, farming, mining, and oil and gas extraction, so consumption is very sensitive to the business cycle.
In this instance, shortages are a symptom of the strong rebound in economic activity following the pandemic and its bias towards fuel-hungry merchandise rather than services.
Similar shortages have been observed in the late stages of previous business cycles, with stocks rebuilding once the economy enters a mid-cycle slowdown or an end-of-cycle recession.
The long-term time series shows distillate stocks do not replenish themselves spontaneously; they only recover when the economy goes into a “soft patch” or a full-blown recession.
At present, refiners in the United States and the rest of the world do not have enough capacity to satisfy the high level of demand.
The shortage is likely to be intensified later in 2022 and 2023 as a result of U.S. and European Union sanctions on Russia’s petroleum exports because Russia is a major supplier of distillate fuel oil.
Given that global crude production and refining systems are already stretched to the limit, the only way to stabilise inventories and prices is for consumption to grow more slowly or fall, which will require a business cycle slowdown.