The diesel market serves as a barometer for the state of the economy because the fuel is widely used in the transportation industry, and the signals it’s giving off in terms of supply, demand and prices don’t point to a very promising future.
“It’s the best fuel to see how the economy is recovering” as it’s a “fuel of industry,” Patrick De Haan , head of petroleum analysis at GasBuddy.
At the supply level, “diesel is far more bleak than gasoline to a refiner,” he says. U.S. gasoline inventories are under their year-ago level, “thanks to strong discipline by refiners,” but supplies of distillates, which include diesel and jet fuel, are running “some 30% above year-ago levels.” That’s “representative of a slowdown in the economy and certainly, air travel,” said De Haan.
For the four-week period ended Oct. 16, jet fuel product supplied, a measure of demand, was down nearly 46% compared with the same period a year ago, according to the U.S. Energy Information Administration. Given the weak demand, many refineries have favored production of diesel over jet fuel.
Diesel demand has taken a hit on reduced economic activity, with fewer trucks on the road, and “thousands of school buses aren’t running,” says De Haan. “Right now, diesel demand is weaker and hasn’t seen the return gasoline has, and that bodes poorly for the situation going forward.”
Still, there have been signs of improving demand, with diesel consumption starting to move toward the four-week average, “potentially indicating that the worst is in the rearview mirror for the economy,” says Denton Cinquegrana, chief oil analyst at the Oil Price Information Service by IHS Markit.
Prices between the two fuels, meanwhile, point to a slow economic recovery. Diesel prices have been generally higher than gasoline prices for the “better part of the last two decades,” in part because a barrel of crude oil typically yields far less diesel than gasoline, says De Haan. However, in “quite a rare feat,” diesel prices have fallen under gasoline in some cases. That hasn’t happened since ultra clean diesel was mandated in 2007 and became more expensive to refine as a result, he says.
At the wholesale level, where refiners sell to retailers, gasoline prices have been higher than diesel’s. Wholesale prices in July for gasoline were at $1.38 a gallon, while diesel for on-highway use was at $1.254, according to the EIA’s latest figures. At the retail level, however, the average gasoline price was at $2.15 as of the week ended Oct. 19, below the $2.388 price for diesel. On the futures market, reformulated gasoline for November delivery
settled at $1.14 a gallon Wednesday.
Retail prices recently saw around a 20-cent difference, the lowest monthly average since September 2017, according to Cinquegrana. The narrow price difference has a lot to do with high U.S. diesel inventories, so he believes it’s “more about hefty supplies than a ‘yay or nay’ vote on the health of the economy.”
It’s also difficult to figure out whether price changes in diesel are due to economic growth or to “changes in jet fuel demand, or demand for heating oil, the latter of which can be influenced by winter weather, says Richard Joswick , head of oil pricing analytics at S&P Global Platts.
“Gasoline demand is slowly recovering, as is diesel, with the economy,” he says. Still, the current relative weakness in diesel is primarily due to the loss of demand for jet fuel, and demand for that is “likely to lag as both business travel and leisure travel will probably be slower to recover than other parts of the economy.”