The cold weather in the US boosts diesel prices, but masks economic challenges

Since the beginning of the year, the cold temperatures in the Northeast U.S. have led to an increase in demand for heating oil. This has helped to offset the slowdown in recent years due to reduced industrial activity.

The Energy Information Administration (EIA), according to its data, reported that the U.S. inventory of distillate fuels - including diesel and heating oil - fell this month to its lowest seasonal level in 2014.

The sharp increase in heating oil consumption is reflected by the decline.

According to EIA, the four-week average for distillates products supplied is a proxy measure of demand. It has been 3.9 million barrels a day on average since the beginning of the year. This is 9% higher than last year and 6.5% above the five-year average during the same time period.

It is not difficult to understand why heating oil usage has increased. According to American Gas Association statistics, the temperatures in January were approximately 10% lower than the average of last year and more that 5% lower than the average long-term average.

According to the International Energy Agency, cold weather boosted heating fuel demand by 100,000 barrels a day in December and January. The cold weather also helped push the U.S. East Coast Diesel Refining Margins to a 11-month high.

According to Kpler, the analysis firm, the increase in exports from the U.S. Gulf Coast oil refinery hub reached 3.9 million tons of diesel in January, which is almost 20% more than last year.

CONTRACTION ECONOMIC

The negative trend in U.S. consumption of distillates due to a lack growth in energy intensive sectors remains almost unchanged, despite the temporary spike caused by bitter temperatures.

According to the EIA the demand for distillate fuel declined by 70,000 barrels a day in 2024 compared to the previous year, to 4.1 millions bpd. This is the second consecutive decline.

The Institute for Supply Management's (ISM) purchasing managers index (PMI), which measures the performance of U.S. manufacturers, shows that the industry has been in decline for the majority of the past two years.

Diesel consumption can be used to gauge industrial activity, such as automobile manufacturing, steel and cement plants, heavy transport, and construction. All of these industries require a large amount of energy.

In turn, the manufacturing slump has caused a reduction in activity in the U.S. Trucking Industry, which contracted in Decemeber, bringing its tonnage down to its lowest level since January 2024.

EIA predicts that diesel consumption will increase this year and in the next. The PMI survey showed a modest increase in U.S. Manufacturing in January. However, this is likely to be short-lived as President Donald Trump will follow through with his plans to levy new tariffs on China.

RENEWABLES RISING

The growing popularity of clean diesel fuel, especially in California, Oregon, and Washington on the West coast, is a major challenge to fossil-based diesel demand.

Waste cooking oil and grease are used to produce renewable diesel. This can replace traditional heating and transportation oils.

EIA data shows that its consumption increased to 240,000 bpd by 2024, from 190,000. bpd one year before and 50,000. bpd the previous year.

Even though it's no longer an exact proxy for U.S. economy, the distillate demand is still closely related to industrial activity. This is due to the rapid growth in less energy-intensive industries.

This means that distillate fuel usage will likely fall in the coming months, as temperatures increase. Unless Trump reverses his policies which are likely to leave U.S. manufacturers in the cold.

(source: Reuters)