DRILLING SLUMP SAPS U.S. DIESEL DEMAND- John Kemp Reuters

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12-Jan-2016 15:05:48

 

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

 

    * Diesel sales to U.S. oil industry: http://tmsnrt.rs/1l2UAT6

 

 By John Kemp

    LONDON, Jan 12 (Reuters) - El Nino and the warm winter

weather are being blamed for the weak demand for distillate fuel

oil in the United States, but the slump in oil production is

probably having a bigger impact.

 

    The oil industry was the fastest-growing customer for middle

distillates like diesel between 2009 and 2014, according to the

U.S. Energy Information Administration (EIA).

 

    The oil industry itself accounted for 20 percent of all the

increase in diesel consumption during the five-year drilling

boom.

 

    Businesses engaged in oil drilling, pipelines and refining

consumed 2.1 billion gallons of diesel in 2014, the most recent

data available, up from just 760 million gallons in 2009.

 

    By 2014, oil producers accounted for 3.5 percent of all

distillate fuel oil sales in the United States, up from 1.4

percent in 2009.

 

    Drilling rigs and the massive pumps employed for hydraulic

fracturing all use high-horsepower engines which run 24 hours

per day and consume prodigious quantities of fuel.

 

    The heavy trucks used to haul drill pipe, frac sand and

water to well sites, and carry away crude before the well is

hooked up to gathering pipelines, are all diesel powered.

 

    And since many oil fields are in remote rural areas with

little or no electricity supply from the main power grid, most

of the electricity used for heating and lighting also comes from

diesel generators.

 

    So as the number of active drilling rigs and crews rose

five-fold from around 300 in 2009 to more than 1500 in 2014,

diesel consumption surged as well.

 

    Direct diesel sales to customers in the oil industry rose

from 50,000 barrels per day to almost 140,000 barrels per day

(bpd).

 

    For comparison, in 2014, around 2.5 million bpd of

distillate was were sold as road fuel, while 250,000 bpd were

sold to residential customers, 240,000 bpd to the railroads and

200,000 bpd to farms.

 

    But as drilling activity has plummeted in 2015, the big

increase in diesel consumption in the oil fields has unwound.

 

    Nationwide distillate consumption was flat in the first ten

months of 2015, after growing by more than 5 percent in 2014.

The slowdown started long before unusually warm weather arrived

in the autumn and winter.

 

    The slump in oil and gas drilling, as well as a general

slowdown in freight shipments, some of which is linked to the

drilling slowdown, likely explains much of the weakness in

diesel consumption in 2015.

 

    With no end in sight to the drilling slump, weak diesel

demand looks set to continue through at least the first half of

2016, which will continue to depress refining margins in the

middle of the barrel.  

 

John Kemp 

Senior Market Analyst

Reuters