(Repeats story filed on Feb. 23 without changes)
By John Kemp
LONDON, Feb 23 (Reuters) - Global inventories of diesel
and other distillate fuel oils are exceptionally low - meaning
prices will surge higher again quickly if the economy avoids a
recession in 2023.
Inventories have risen modestly from troughs in October and
November 2022 as a result of increased exports from China and
the worldwide slowdown in manufacturing and freight transport.
But stocks in most regions are still close to multi-decade
lows and would deplete quickly in the event the manufacturing
and freight cycle turns up again soon:
* U.S. distillate inventories were -16 million barrels (-12%
or
-0.95 standard deviations) below the prior ten-year seasonal
average on February 17.
* Europe’s distillate stocks were -41 million barrels (-10%
or
-1.43 standard deviations) below the ten-year average at the end
of January.
* Singapore’s distillate inventories were -3 million barrels
(-30%
or -1.53 standard deviations) below the ten-year average on
February 19.
* U.S. jet fuel inventories (closely related to distillates)
were
-4.0 million barrels (-10% or -1.77 standard deviations) below
the average on February 17, at the lowest seasonal level since
1996.
Middle distillates including jet fuel account for roughly a
third of all global petroleum consumption (36 million barrels
per day out of total global consumption of 98 million in 2019).
Distillate fuel oil is the workhorse of the industrial
economy, providing the main fuel used in trucking, railroads,
manufacturing, construction, mining and oil and gas drilling.
Chartbook: Global distillate inventories
For the manufacturing and trade cycle to turn up without
causing a rapid escalation of energy prices and reigniting
inflation, there would need to be excess distillate inventories
and spare capacity in the petroleum refining system.
Neither is currently the case. So far, the slowdown has been
too short and too mild to result in significant inventory
accumulation or leave much refining capacity idle.
At the end of the last three recessions, U.S. distillate
fuel oil inventories stood at 151 million barrels (April 2020),
163 million barrels (June 2009) and 139 million barrels
(November 2001).
By contrast, inventories currently stand at just 122 million
barrels, according to data from the U.S. Energy Information
Administration (EIA).
RENEWED PRICE SURGE
If the manufacturing cycle turns up in the next few months,
fuel shortages and price increases are likely to emerge quickly,
feeding through into renewed concerns about inflation.
China’s abandonment of its coronavirus suppression strategy
and re-opening of domestic and international passenger aviation
is likely to tighten supplies of jet fuel and distillates even
further.
In 2007/08 and 2020/21, policymakers at the U.S. Federal
Reserve and other major central banks were prepared to ignore
inflation driven by energy price rises by characterising it as
transient.
But if energy prices drive inflation sharply higher later in
2023 or 2024, so soon after the worst inflation episode in 2022
for 40 years, it will be harder to ignore.
One inflation shock might be transient, a second starts to
look permanent.
Policymakers seem to grasp this risk intuitively. Minutes
from the last Federal Reserve monetary policy meeting held on
Jan. 31 and Feb. 1 said: “A period of below-trend growth in real
GDP would be needed to bring aggregate demand into better
balance with aggregate supply and thereby reduce inflationary
pressures.”
Interest rate traders expect the Fed to lift its target
interest rate to 5.25% by December 2023, up from a forecast of a
little over 4.50% a month ago and forecast of 4.25% at the end
of the fourth quarter of 2022.
Rate rises and a period of sluggish growth if not an
outright recession are the only way to create enough cyclical
slack to avoid a resurgence of inflationary pressures later in
2023 and through 2024.
Part of that rebalancing will be a rise in distillate and
other petroleum inventories, as well as the creation of enough
slack in the refining system to permit margins to return closer
to long-run levels.
So far, there has been only modest progress in rebuilding
distillate stocks and defanging the inflation threat. Much more
will be needed.
Related columns:
- U.S. distillate stocks start the year critically low
(Reuters, February 2, 2023)
- Recession now or later? Unenviable alternatives for 2023
(Reuters, January 26, 2023)
- Diesel’s gloomy message for the global economy (Reuters,
October 14, 2022)
- Diesel is the U.S. economy’s inflation canary (Reuters,
February 9, 2022)
John Kemp is a Reuters market analyst. The views expressed
are his own
(Editing by Barbara Lewis)
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