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Opinion: Freight recovery offers hope for US diesel demand

US diesel demands

US diesel demands should rise in late 2016 and 2017 as freight shipments increase.  

US diesel demands should be up in late 2016 and into 2017

By John Kemp

LONDON, Aug 17 (Reuters) – Freight shipments are showing tentative signs of a recovery which could underpin faster growth in US diesel demand in 2017.

Freight movements increased by 0.6 percent in June, building on gains of 0.1 percent in May and 1.5 percent in April.

US FREIGHT TRANSPORTATION SERVICES INDEX (1)Monthly shipments are still down by more than 1 percent from their peak at the end of 2014, according to the U.S. Bureau of Transportation Statistics.

But the consecutive increases between April and June were the first time shipments have risen for three months running since December 2014.

Shipments were up 0.4 percent year on year in the second quarter after falling more than 2 percent in the first quarter.

US FREIGHT TRANSPORTATION SERVICES INDEX (2)And freight movements for the first half of the year were up 0.7 percent compared with the same period in 2015.

The bureau’s freight transportation services index captures movements in ton-miles by trucks for-hire, rail, air, inland waterways and pipelines.

The freight index recorded a broad-based improvement in June, with all modes showing increases, except container rail and waterways, where ton-miles declined after significant rises in May.

FREIGHT STALLS

Freight movements have been hit since the end of 2014 by the slump in oil and gas drilling and the switch from coal to natural gas in power production.

Shipments have also been adversely affected by the build up of excessive stockpiles of raw materials and unsold products in many industries all along the supply chain from manufacturers and distributors to retailers.

Stocks of raw materials, semi-processed items and finished products amounted to just 1.30 months worth of sales in August 2014, which was already up from a low of 1.24 months in May 2011.

But the inventory/sales ratio subsequently surged to 1.41 months by January 2016, its highest level since May 2009, when the economy was mired in recession.

US BUSINESS INVENTORY SALES RATIOThe inventory build up has no precedent outside recession during the last quarter of a century, according to data from the U.S. Census Bureau.

Manufacturers, distributors and retailers have all been struggling to reduce unwanted stocks by limiting new orders — with a corresponding impact on freight demand.

TURNING POINT

Businesses seem finally to be getting inventories under control.

The inventory/sales ratio fell to 1.40 months in April and May and then to 1.39 months in June. The decline was the largest for three years.

New stock orders and freight shipments should accelerate if inventory levels continue to fall in the next few months.

In its monthly update, the Bureau of Transportation Statistics also noted an increase in freight movements stemming from oil and gas production.

The increase is consistent with rig counts from oilfield services company Baker Hughes which show an increase in drilling activity from the middle of May.

DIESEL DEMAND

Nearly all freight transportation relies on diesel, ranging from trucks and railroads to inland barges and oil pipelines.

So the slowdown in freight movements had a direct impact on consumption of middle distillates especially diesel.

Consumption of distillate fuel oil fell by 60,000 barrels per day (1.5 percent) in 2015 after growing by 210,000 barrels per day (5.5 percent) in 2014.

The U.S. Energy Information Administration says distillate consumption is forecast to fall by another 100,000 (2.4 percent) in 2016 .

Distillate is used as heating oil as well as diesel fuel so consumption was hit by the warmer than normal winter in 2015/16 linked to El Nino.

But distillate consumption growth started to slow in 2014 and turned negative in May 2015, long before the winter, which suggests it was linked to the freight slowdown as well as weather.

DISTILLATE CONSUMPTION GROWTHDistillate consumption should increase significantly in the next 6-18 months.

The winter of 2016/17 will almost certainly be colder than 2015/16 as El Nino is replaced by La Nina.

Critically, the pick-up in freight movements, if sustained, should boost diesel consumption in late 2016 and especially in 2017.

John Kemp is a Reuters market analyst. The views expressed are his own.

(Editing by William Hardy)

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