London — The global shortage of distillate fuels indicates that the business cycle is at its peak, with slowing growth or even an imminent recession to bring consumption back to production.
Price and availability are closely linked to the business cycle, as intermediate distillates such as diesel and diesel are the major fuels used in manufacturing, transportation, trucking, freight rail, mining and agriculture. ..
The post-pandemic economic boom of 2021/22 has exceeded the capacity of refineries and has significantly depleted sufficient refineries and inventories throughout North America, Europe and Asia.
* European distillate inventories fell to 378 million barrels at the end of April. This is the lowest seasonal level since 2008, just before the recession and financial crisis.
* Singapore’s distillate inventories fell to 6 million barrels in the first week of May. This is the lowest seasonal level since 2006.
* US distillate fuel oil inventories were 105 million barrels last week, the lowest annually since 2008.
The resulting shortages and rising prices indicate that the economy is facing binding capacity constraints and needs to enter a slower growth phase until more refining capacity is available. I have.
In particular, sanctions and boycotts on oil exports from Russia, a major exporter of distillates to Europe, have further reduced availability and increased upward pressure on prices.
Since jet fuel comes from the same part of the refining system as diesel, the quarantine restrictions have been lifted, and the rapid resumption of passenger aircraft also exacerbates the shortage.
The shortage is spreading to gasoline as refineries adjust their equipment to increase distillate and jet fuel production and reduce their ability to produce gasoline (https://tmsnrt.rs/3FYvGiO). ).
US gasoline inventories have fallen to just 220 million barrels. This is 12 million barrels (5%) below the seasonal average for the five years before the pandemic, the lowest seasonal level since 2014.
In recent decades, the shortage of distillates has always been resolved by either a slowdown in the middle of the cycle or a recession at the end of the cycle, and there is no reason to think this case is different.
Rising interest rates, tighter credit conditions around the world, and any impact of inflation on households and corporate budgets can trigger a slowdown.
In the United States, the S & P 500’s equity index fell 7% compared to a year ago, down 15% when inflation is taken into account, as investors anticipate an imminent slowdown in the business cycle.
South Korea’s KOSPI-100 equity index, which is closely linked to the global trade and manufacturing cycle, is down 20% compared to this time last year, indicating an imminent slowdown.
Diesel traders also seem to anticipate a slowdown in business cycles and diesel consumption, halving the European crude oil crack beyond Brent from $ 55 at the end of April to $ 27 per barrel.
– US diesel shortage raises refining margin to record levels (Reuters, May 10)
– U.S. Distillery Inventory Drops Significantly (Reuters, May 5)
– Global diesel shortage pushes oil prices up (Reuters, March 24)
– Diesel is an inflationary canary in the US economy (Reuters, February 9)
John Kemp is a Reuters market analyst. The views expressed are his own (edited by Tomasz Janowski)
Global diesel shortage heralds an imminent economic slowdown: Kemp
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