Inflation Concerns Grow As U.S. Diesel Market Tightens

Low distillate inventories in the United States have tightened the diesel market during the harvest season and ahead of the winter heating season. Diesel and heating oil supply could become even tighter and pricier if U.S. manufacturing activity returns to growth soon.   

Economic activity in the U.S. manufacturing sector contracted for the 11th consecutive month in September, according to data from the Institute for Supply Management (ISM). However, the readings—while still showing contraction—were more optimistic than they were in the spring and summer.  

The manufacturing sector contraction continued but at a slower rate and recorded in September its best performance since November 2022, said Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee. 

If manufacturing business activity rebounds soon, diesel demand—strongly correlated with the business cycle—is set to rise, Reuters columnist John Kemp notes

An uptick in diesel consumption could put additional pressure on an already tight diesel market in the U.S., and add to concerns about inflation as higher trucking and logistics costs would raise the prices of delivered goods. 

A return of inflation could make the Fed’s task of managing a soft landing of the economy even more complex, just as fears of higher-for-longer interest rates battered financial and commodity markets this week.  

Amid low inventories, especially in the Northeast, a rebound in the U.S. manufacturing sector would push up the price of diesel and related products. 

In the week to September 29, distillate fuel inventories in the United States fell by 1.3 million barrels and are now about 13% below the five-year average for this time of year, the EIA’s latest weekly inventory report showed

Refinery outages, changed global oil trade flows, a cautiously optimistic freight market in the United States, and inventories at some of the lowest levels in years have tightened the diesel market and are likely to tighten it further in the coming months, especially if a cold winter hits the Northeast, where diesel and other distillate supplies are very tight.  

While the national average diesel prices are lower than at this time last year, prices have risen over the past month with the increase in crude oil prices and the lower inventory levels than usual. As of October 5, the U.S. average diesel price was $4.554 per gallon, up from $4.452/gal a month ago, per AAA data

The market for heating oil, diesel, and other middle distillates in the Northeast is unusually tight right now, just ahead of the winter heating season, with inventories near their five-year lows, analysts at RBN Energy wrote in an analysis this week. Prices have risen while the near-term prospects for rebuilding stocks “are modest at best,” they say. 

In the 2022–2023 winter, nearly 5 million households in the United States used heating oil (distillate fuel oil) as the main space-heating fuel, and about 82% of those households were in the U.S. Northeast, per EIA data. 

A perfect storm of heavy maintenance at refineries in eastern Canada and the U.S., stretched global diesel supplies, and a resilient U.S. economy with decent manufacturing and freight demand would renew upward pressure on diesel and other distillate prices in the coming months. 

“I think we might find ourselves at the end of November with the wolf at the door,” Tom Kloza, global head of energy analysis at Oil Price Information Service, told the New York Times this week, commenting on the U.S. diesel market. 

A higher price of diesel is not good news for inflation in the United States as it could push up consumer prices more than the Fed has expected, creating further obstacles on the central bank’s path toward starting to cut interest rates.