(John Kemp is a Reuters market analyst. The views expressed are
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By John Kemp
LONDON, Feb 16 Freight movements across the
United States are showing signs of sustained growth, which
should help push domestic diesel consumption higher this year.
Freight was hit hard in 2015/16 by the switch from coal to
gas-fired power generation, the slump in oil and gas drilling,
and more generally by an unplanned build up in business
The seasonally adjusted volume of freight moved by road,
rail, pipeline, barge and air declined by 3.4 percent between
December 2014 and March 2016, according to the U.S. Bureau of
Transportation Statistics (tmsnrt.rs/2lVAuey).
Nearly all freight transport is powered by diesel so the
freight recession caused a corresponding drop in distillate fuel
Lower freight demand was exacerbated by the record warm
winter in 2015/16, since distillate is also used to heat homes,
offices, and other buildings.
Distillate consumption declined by 4.7 percent between 2014
and 2016, according to the U.S. Energy Information
Administration ("Short-Term Energy Outlook", EIA, Feb. 2017).
U.S. refineries have coped by switching to gasoline
production as far as possible and ramping up diesel exports to
the rest of the western hemisphere.
U.S. refineries have exported surplus distillate to Central
and South America, where local refineries have proved unable to
meet strongly growing demand.
U.S. diesel demand has remained depressed even as gasoline
consumption has passed the previous peak set back in 2007.
But the improvement in the freight outlook should ensure
domestic diesel consumption returns to growth in 2017 (tmsnrt.rs/2lOJ9DD).
FREIGHT MOVING AGAIN
Coal deliveries should rise significantly in 2017 now power
producers have run down excess stocks that accumulated during
Power producers are also expected to run coal-fired units
for more hours in 2017 and burn more coal thanks to the rise in
gas prices, which will give an extra boost to rail movements.
In the first six weeks of 2017, the number of rail cars
loaded with coal increased by 15 percent compared with the same
period in 2016, according to the Association of American
The sustained recovery in oil and gas drilling evident since
the middle of 2016 will also drive an increase in diesel demand
Most drilling rigs an pressure pumping systems use
diesel-electric motors and rely on diesel generators for all
their auxiliary power needs.
And the movement of equipment and supplies to drill sites,
including deliveries of fracking sand and water, is a
significant source of freight demand.
The number of rigs drilling for oil and gas across the
United States has risen by more than 330 (80 percent) since the
end of May 2016.
The active rig count is currently increasing at an average
rate of around 20 per week and is expected to continue rising
through the remainder of the year (tmsnrt.rs/2kNiIdk).
Finally, U.S. manufacturers, distributors and retailers have
at last arrested and begun to reverse the unplanned increase in
stocks of raw materials, work-in-progress and unsold products
that built up in 2014/15.
The economy-wide ratio of business inventories to sales
surged from 1.30:1 in July 2014 to peak at 1.41:1 between
January and March 2016, according to the U.S. Census Bureau.
As a result, freight fell during 2014/15 as manufacturers,
distributors and retailers all cut new orders in an effort to
reduce the stock overhang.
But the inventory-sales ratio has dropped consistently since
April 2016 and by the end of the year had fallen to just 1.35:1
Freight deliveries are currently running below the level
needed to replace sales, resulting in the biggest decline in the
inventory ratio for more than five years.
Inventories remain somewhat elevated but the current draw
down is unsustainable in the medium and long term.
At some point, manufacturers, distributors and retailers
will have to increase orders and deliveries to stabilise stock
Rising coal deliveries, increased oil and gas production,
and the end of the destocking cycle should all combine to
produce a significant increase in diesel consumption in 2017/18.
The U.S. Energy Information Administration currently
projects distillate consumption will rise by around 80,000 bpd
in 2017 and another 110,000 bpd in 2018 ("Short-Term Energy
Outlook", Feb. 2017).
The main uncertainties surrounding the freight outlook come
from the macroeconomic side, where the economic policies of the
Trump administration remain unknown.
The White House has hinted at an ambitious agenda of tax
cuts, increased government spending and deregulation, which
should provide a strong economic stimulus in the medium term.
But it remains unclear how much of this agenda will actually
be enacted and the possible introduction of a border-adjusted
tax or targeted tariff protection could all have a negative
impact on freight.
The Federal Reserve system also appears poised to embark on
the first tightening of monetary policy since 2004-2006.
The political-economic cycle will remain a source of
significant uncertainty for some time but the underlying freight
outlook is stronger than it has been for over two years, which
is a positive for distillate demand.
(Editing by David Evans)