Drop in diesel demand may indicate future recession risk

It’s not all doom and gloom. Europe’s demand for ultra-low-sulfur diesel is set to rise almost 9% between March and July, supported by summer travel, according to Janiv Shah, a senior analyst at Rystad Energy. 

Demand for the heavy-machinery fuel is weakening in many of the world’s largest economies.

In China, the number of trucks running on highways is noticeably down in recent weeks. In Europe, diesel’s premium to crude futures recently plunged to the lowest level in more than a year.

In the US, demand is on track to contract 2% in 2023, S&P Global says. Excluding 2020, when much of the economy briefly came to a standstill, that 2% slump would be the biggest drop in America’s diesel use since 2016.

We are “assuming 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 head of Americas fuels and refining.

No matter how you crunch it, demand for the heavy-machinery fuel that powers everything from commercial trucking fleets to construction equipment is weakening in many of the world’s largest economies. 

Viewed as an early signal of weaker industrial activity and reduced consumer spending, the pullback has recession-watchers on high alert.

“Diesel demand can act as a leading indicator for broader growth as an early sign that spending by households is waning,” said Ben Ayers, a senior economist in the US with Nationwide Economics. 

An expected drop in diesel demand fits with building recession risks across the economy.” 

Once the world’s hottest fuel after Russia’s invasion of Ukraine disrupted trade flows, diesel prices have been coming down amid concerns many of the world’s biggest economies have bumpy roads ahead. 

Economists say there’s a 65% chance of a US recession and a 49% chance of a European one within the next year. In China, the risk is lower, but the country’s recovery from its formerly harsh covid-19 restrictions will still require a marked improvement in consumer confidence, and fast.

Much of the pullback in diesel demand can be tied to trucking, which consumes about 60% of diesel in China and more than 70% in the US. The number of trucks running on Chinese highways fell 8% in the week ended April 9, according to data tracked by China’s Ministry of Transport. Commercial diesel stockpiles nationwide, excluding state refineries, ballooned to an eight-month high in early April, according to OilChem data.

The demand drop comes after China’s manufacturing activity eased unexpectedly in March, according to a private survey, leading a slide in factory gauges across Asia. Emerging markets in the region including Indonesia, where the government has started cutting subsidies for fuel, are also seeing demand weaken as growth slows, said Daphne Ho, senior analyst at Wood Mackenzie.

Similar trends are playing out in other parts of the world.

“European demand has been soft through winter on muted heating demand, and macro headwinds are clouding the demand outlook,” said Koen Wessels, senior oil products analyst at Energy Aspects.

In the US, trucking — and therefore diesel — consumption has been hit by a decline in factory output, home construction and retailers working off high inventories, said Bob Costello, chief economist at industry group American Trucking Associations. 

By one measure from supply chain intelligence firm FreightWaves, March trucking volume hit the lowest seasonal levels in five years.

At the root of the US trucking slowdown is a shift in consumer spending patterns as inflation squeezes household budgets.

The drop in US diesel demand will be especially pronounced on the west coast, where massive tech-sector layoffs and an unfolding banking crisis have put the region under financial stress. There, diesel demand will slump 5% this year, more than twice the national average, said Mr Chowdhury.

US container imports, a bellwether of diesel use from 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.

It’s not all doom and gloom, however. Europe’s demand for ultra-low-sulfur diesel is set to rise almost 9% between March and July, supported by summer travel, according to Janiv Shah, a senior analyst at Rystad Energy. 

French authorities will most likely refill strategic reserves eventually, having released millions of barrels of petroleum products in response to widespread labour strikes.