Signs of an economic slowdown are appearing in the global diesel market.
In China, the number of trucks on the roads has decreased significantly in recent weeks. In Europe, the diesel premium to crude oil futures recently fell to the lowest level in more than a year. In the US, demand is on track to contract by 2% in 2023, S&P Global Inc. says. Excluding 2020, when much of the economy came to a brief halt, that 2 percent drop would be the largest drop in U.S. diesel use since 2016.
We are “in the midst of one of the worst economic climates in recent memory outside of the 2008-2009 financial crisis and the pandemic,” said Debnil Chowdhury, S&P’s Americas head of fuels and refining.
No matter how you do it, demand for the heavy machinery fuel that powers everything from fleets of commercial trucks to construction equipment is weakening in many of the world’s largest economies. Seen as an early sign of weaker industrial activity and reduced consumer spending, the setback has recession watchers on high alert.
“Diesel demand can act as a leading indicator for broader growth as an early sign that household spending is slowing,” said Ben Ayers, senior US economist at Nationwide Economics. “An expected drop in diesel demand fits with recessionary risks across the economy.”
Once the world’s hottest fuel after Russia’s invasion of Ukraine disrupted trade flows, diesel prices have been falling amid concerns that many of the world’s biggest economies have bumpy roads ahead. Economists say there is a 65% chance of a recession in the United States and a 49% chance of a European one over the next year. In China, the risk is lower, but the country’s recovery from its previously tough Covid-19 restrictions will still require a marked improvement in consumer confidence, and quickly.
Much of the pullback in diesel demand can be traced to trucking, which consumes about 60% of diesel in China and more than 70% in the US. The number of trucks traveling on Chinese roads fell 8% in the week ending April 9, according to data tracked by China’s Ministry of Transport. Commercial diesel inventories across the country, excluding state refineries, rose to an eight-month high in early April, according to data from OilChem.
The drop in demand comes after China’s manufacturing activity unexpectedly contracted in March, according to a private survey, prompting a fall in factory gauges across Asia. Emerging markets in the region, including Indonesia, where the government has started to cut fuel subsidies, are also seeing demand weaken as growth slows, said Daphne Ho, senior analyst at Wood Mackenzie.
Similar trends are occurring in other parts of the world.
“European demand has been soft over the winter with muted heating demand, and macro headwinds are clouding the demand outlook,” said Koen Wessels, senior oil products analyst at Energy Aspects Ltd.
In the U.S., truck consumption, and therefore diesel consumption, has been hit by a decline in factory output, home construction and retailers working with high inventories, said Bob Costello, an economist at head of the American Trucking Associations industry group. March truck volume hit the lowest seasonal levels in five years, according to a measure by supply chain intelligence firm FreightWaves.
At the root of the U.S. trucking slowdown is a shift in consumer spending patterns: The steady stream of Internet orders to stave off pandemic boredom has given way to vacations and experiences. As inflation squeezes household budgets, the first things people stop buying are what are known in the trucking industry as “bulk shippers,” or cheap packaged consumer goods like soda.
“Anytime we see consumers stretched because of inflation, that affects the cheaper products that tend to move in high volumes,” said Craig Fuller, CEO of FreightWaves. Individual decisions like skipping soda add up to a macro impact that reduces the total volume of goods moving through the economy.
The drop in US diesel demand will be particularly sharp on the West Coast, where massive layoffs in the tech sector and a developing banking crisis have put the region under financial stress. There, diesel demand will fall 5% this year, more than double the national average, S&P’s Chowdhury said.
US container imports, a gauge of diesel use by the trucks and trains that move them around the country, are also under pressure. In Los Angeles, inbound shipments are at their lowest level since March 2020. In China, which ships many of these cargoes in the first place, container traffic at key ports fell 5% last week end on April 9, according to data. tracked by the Ministry of Transport of China.
“We see more downside than upside to Chinese diesel demand in the second half of the year,” said Mia Geng, head of oil service in China at industry consultancy FGE. “With headwinds in the global economy, especially in the West, China will have to rely on domestic consumption to support its manufacturing activities.”
Of course, it’s not all doom and gloom. European demand for ultra-low sulfur diesel will rise nearly 9% between March and July, supported in part by summer travel, according to Janiv Shah, senior analyst at Rystad Energy. French authorities are likely to replenish strategic reserves over time, having released millions of barrels of oil products in response to widespread labor strikes.
But in the US, absent government stimulus to revive the economy, FreightWaves’ Fuller doesn’t see demand for diesel returning anytime soon. Demand for diesel is different from gasoline, where higher prices cause drivers to retreat to the pump and cheap fuel can bring them back.
People don’t move product simply because it’s cheap to move, Fuller said; they do it because “there is someone on the other end who has placed the order and is there to receive it.”
— With the assistance of Julia Fanzeres.
