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Diesel demand set to fall as economies slide into recession: Kemp


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LONDON — U.S. diesel consumption is expected to decline by 200,000 to 600,000 barrels per day (5% to 15%) over the next year as the economy slows in response to rising oil rates. interest.

The Federal Reserve is not deliberately trying to cause a recession to get inflation under control, central bank chief Jerome Powell told lawmakers on Wednesday.

But he said it was a possible and predictable result of rapid rate hikes – an interesting application of the doctrine of double effect.

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The central bank is hoping for a soft landing but feels it must take a tough risk to bring inflation down to the fastest pace in 40 years.

Distillate fuel oil, a category that includes diesel, gas oil and fuel oil, is the petroleum product most sensitive to changes in the economic cycle and will therefore be the most affected as the growth rate slows.

Even if the central bank can engineer a mid-cycle slowdown, rather than a late-cycle recession, distillate consumption is very likely to decline over the next year.

Both recessions and mid-cycle downturns have tended to reduce distillate consumption by 5-15% year over year (https://tmsnrt.rs/3OwQsd7).

With the volume of distillates supplied to domestic customers in the United States being just over 4 million barrels per day, the expected drop is equivalent to between 200,000 and 600,000 bpd.

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EUROZONE RECESSION

Distillate consumption in Europe is expected to experience a similar or greater decline as the region’s economy slips into recession in response to Russia’s invasion of Ukraine and the impact of sanctions.

Eurozone manufacturers are already on the cusp of a recession, according to preliminary purchasing manager survey data for the first part of June.

The composite index of eurozone manufacturing activity fell to 52.0 (47th percentile for all months since 2006) in early June, from 54.6 (65th percentile) in May and 63.4 (100th percentile) in June 2021.

Rapidly escalating prices for crude, diesel, gasoline, gas and electricity as well as foodstuffs are expected to force households and businesses to cut spending over the coming months, plunging the economy in the recession.

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Lower volumes of manufacturing, construction, and freight transportation activity will in turn reduce diesel and gas oil consumption in the region, likely by an amount similar to that of the United States.

Decreasing distillate consumption is the only way to address shortages caused by the rapid rebound in economic activity from pandemic shutdowns, Russia’s invasion of Ukraine, and US-imposed sanctions. the EU and their allies in response to Russian oil exports.

Over time, reducing distillate consumption will give global refiners a chance to replenish badly depleted inventories and reduce some of the heat from diesel cracking spreads and prices.

Ultimately, the reduction in distillate consumption will level off and then lower fuel prices and transportation costs, resulting in slower inflation later in 2022 and 2023.

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But the transition to lower oil prices and slowing inflation will likely lead to a painful contraction in manufacturing and construction activity and employment in the first place.

The Fed and other major central banks may not intend to cause a recession or a significant mid-cycle slowdown, but that is the logical effect of significantly higher interest rates and conditions stricter financials.

Associated columns:

– Soaring oil prices show economic cycle slowdown is inevitable (Reuters, June 14)

– Global diesel shortages herald impending economic downturn (Reuters, May 19)

– Global diesel shortage drives up oil prices (Reuters, March 24)

– Diesel is the inflation canary of the US economy (Reuters, February 9)

John Kemp is a market analyst at Reuters. Opinions expressed are her own (Editing by Barbara Lewis)

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