US Manufacturers Experience Slow Recovery as Diesel Use Remains Tepid: Kemp, Reuters

By John Kemp

LONDON – U.S. manufacturers are slowly recovering from a prolonged, albeit shallow, slowdown experienced over the past two years. However, this progress has been inconsistent, and their diesel consumption continues to lag, putting downward pressure on oil prices.

The Institute for Supply Management’s manufacturing index fell to 48.7 in May, down from 49.2 in April and a recent high of 50.3 in March. Since March’s reading, which marked the first expansion above the 50-point mark since October 2022, the index has reverted back to contraction territory for the past two months.

The production sub-index of the survey decreased to 50.2 in May from a high of 54.6 in March, reflecting a slowdown in activity rates. Meanwhile, the new orders component plunged to 45.4 in May, indicating a potential continuation of lackluster growth over the next few months.

Manufacturers reported more challenging conditions compared to their counterparts in sectors such as services, real estate, construction, mining, and agriculture. In stark contrast, the ISM non-manufacturing index rose to 53.8 in May, suggesting resilience in the service sector.

Although manufacturing accounts for a smaller share of overall economic output and provides fewer jobs, it is significantly more energy-intensive. The growth in services has driven overall economic activity and employment, but the sluggishness in manufacturing has dampened total energy consumption.

Initial expectations for a manufacturing rebound to boost diesel consumption and prices have not materialized this year. More than three-quarters of all diesel and other distillate fuel oils are utilized in freight transport, manufacturing, and construction, making distillate consumption closely tied to the manufacturing cycle.

However, recent data indicates that distillate consumption has been even weaker than the slow recovery in manufacturing activity over the past six months. In March 2024, the volume of distillate fuel supplied domestically was under 3.7 million barrels per day, the lowest level for that time of year since 1998.

This reflects a 10% decrease compared to the same month in the previous year and a similar decline against the ten-year seasonal average. While supply can fluctuate from month to month, distillate consumption has lagged behind manufacturing upturns for several months.

Some petroleum-based distillate fuels are being substituted with biodiesel and renewable fuel oils, particularly in areas like California. Nevertheless, even when accounting for biodiesel and renewable options, provided volumes were 4-8% lower in March compared to last year and the ten-year average.

Distillate inventories, influenced by muted consumption and elevated refinery processing for gasoline, have been trending upward over the last three months. As of May 31, inventories were still 10 million barrels below the previous ten-year seasonal average, though this figure had improved from an 18 million barrel deficit at the beginning of March.

The increase in stock levels is occurring during a time when they typically decline, and current levels have reached a four-year seasonal high. As a result, prices for diesel and other distillates are dropping more rapidly than those for crude oil, compressing the gross refinery margin.

The crack spread for producing diesel has averaged around $19 per barrel so far in June 2024, down from $46 per barrel in August 2023 and a record $63 in June 2022 following geopolitical tensions. In real terms, this spread has returned to levels consistent with averages from the years prior to the pandemic.

Traders anticipate that diesel supplies will remain abundant in the upcoming months, which should help alleviate inflationary pressures within the supply chain and provide major central banks with more options to lower interest rates.