LONDON (Reuters) - Consumption of diesel and other middle distillate fuels is likely to be depressed for many months, as stay-at-home orders are lifted but the lingering effects of the epidemic and lockdowns reduce business activity.
Lockdowns are easing in most of the major economies, permitting factories to resume operations; now the problem is the lack of household and business demand, which will weigh on diesel use through the rest of 2020.
In the United States, the volume of distillate supplied to the domestic market is still almost 14% below the same point a year ago.
In contrast to gasoline, most of which is purchased by private motorists, diesel is mostly used in manufacturing, freight transportation, farming, mining and oil and gas drilling.
Gasoline consumption is picking up as travel to work and for leisure starts to resume, but distillate is more closely tied to the business cycle, and will be hit by an enduring downturn in industrial activity.
A full recovery in manufacturing is likely to prove more protracted than many policymakers initially hoped when the major economies went into lockdown in March.
Some consumption should return relatively quickly as factories are allowed to restart and the movement of raw materials, semi-finished items and final products resumes.
Indeed, distillate consumption has already recovered modestly since April, when it was down by around 20% year-on-year.
But manufacturing surveys show output continuing to slide, even as lockdowns relax, as businesses struggle with the build up of unsold inventories along the supply chain and low sales to end users.
The U.S. Institute for Supply Management’s manufacturing survey showed activity fell further last month from the already low level reported in April.
The ISM’s composite activity index was 43 in May, up from 42 in April, but far below the 50-point threshold dividing expanding activity from a contraction.
Sub-indices for production (33), new orders (32) and employment (32) were even worse and point to a continued widespread downturn in activity.
In the eurozone, purchasing managers’ surveys showed a continued drop in manufacturing activity in May (39), albeit not as widespread as April (33), with no sign of recovery yet.
And in China, manufacturers reported a return to growth in March, April and May, after a record slump during February, but growth is not widespread and appears to be losing momentum.
U.S. distillate stocks have already surged by 42 million barrels (34%) over the last seven weeks and are 39 million barrels (31%) higher than a year ago.
Distillate stocks are swelling even further because surplus jet fuel, created by the shutdown of much of global aviation, is being blended down into the distillate pool.
Surplus distillate stocks will be very difficult to re-absorb during the northern hemisphere summer and are likely to overhang the market through the end of the year.
As a result, hedge funds and other money managers are more pessimistic about the outlook for middle distillates than for any other part of the petroleum complex.
Hedge funds’ bullish long positions and bearish short positions are nearly equal for middle distillates while bullish positions outnumber bearish ones by 3:1 in gasoline and almost 6:1 in crude.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Hedge funds turn bullish on crude, remain cautious on fuels (Reuters, June 1)
- U.S. motorists start returning to the road (Reuters, May 7)
- How will recovery shape up? Post-lockdown economic scenarios (Reuters, May 6)
Editing by Barbara Lewis