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Distillate Market Volatility May Spark Oil and Gas Engine


U.S. distillate inventory, which includes diesel fuel, dropped unexpectedly in April, causing an oil price rally. Will future months see additional surprises?

US Distillate Consumption Declined In 2015

Consumption of distillate fuel, which includes diesel fuel and heating oil, fell in the United States in 2015, largely due to warmer winter temperatures and reduced industrial use.

Effect Of VW Scandal

In addition, the Volkswagen emissions cheating scandal reduced U.S. demand for diesel cars. Although diesel has historically played a small part as a U.S. passenger vehicle fuel, the prospect of increasing clean diesel demand had been forecast to make diesel a higher percentage of overall hydrocarbon demand growth in North America.

European Demand Growth Declines

The International Energy Agency reported that European demand for diesel fell in the first quarter of 2016 and has trimmed its forecast but continues to forecast demand growth.  Compared to North America, diesel represents a much higher percentage of the European passenger vehicle fleet, with the percentage increasing from 27 percent in 2005 to 47% in 2015. The VW scandal-induced concerns over clean diesel claims have lead for calls to reduce diesel use, with the Mayor of Paris calling for an outright ban.

Retooling European Refineries

European refineries had retooled in recent years to increase relative diesel production to gasoline in light of expected demand increase but are now rushing to reverse those investments.

Current Diesel Inventory Well-Supplied Due To Chinese Diesel Exports

China continues to import record amounts of crude oil.  Most Chinese passenger vehicles run on gasoline. Chinese refineries are producing more gasoline to meet growing demand from record vehicle sales and increased use of its fleet. Because refining crude oil into gasoline produces a certain irreducible amount of distillate fuel, notably diesel, China is exporting its domestic surplus, bolstering global inventory.

Low Diesel Prices Support Increased Diesel Demand In Emerging Economies

Lower prices usually induce greater consumption. India, for example, is undergoing a surge in hydrocarbon energy use generally. The International Energy Agency forecasts Indian Diesel demand to more than double by 2040.

Long Term Diesel Demand Growth Likely Strong

ExxonMobil’s forecasts that fuel demand for commercial transportation including heavy-duty vehicles, marine, and rail is likely to grow worldwide by 70 percent by 2040, largely by emerging economies investing in the infrastructure necessary to support families moving into the middle class. Diesel fuels the overwhelming majority of commercial transportation, a reality not likely to change soon absent radical technological changes.

While short-term fluctuations in diesel demand will continue to drive volatility as the global supply re-balances, the long-term forecast for diesel demand growth is strong.

Your Turn

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Tom Morgan

Tom Morgan is an Analyst for Drillinginfo. He has 20 years of experience practicing law with a focus on advocating for public policy to advance energy security and private property rights. Tom received his law degrees from Georgetown University and American University law schools. He hosts the weekly Drillinginfo Energy Minute, and you can find and connect with him on LinkedIn as Tom Morgan.