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Forget VW: Oil slump more to blame for weak U.S. diesel demand

NEW YORK – Long before Volkswagen AG’s emissions scandal spelled bad times for diesel, U.S. consumption of the fuel was bafflingly weak.

Despite surprisingly robust economic growth, rising truck cargo, and pump prices that fell to parity with gasoline for the first time in six years, U.S. diesel use rose by only 0.2 percent in the first seven months of the year.

That marked a sharp contrast with gasoline demand, which rose nearly 3 percent at the fastest clip since the 1990s, according to Energy Information Administration (EIA) data.

Analysts and traders see several factors at play: lower traffic on diesel-powered railroads due to reduced coal and oil shipments; an economy increasingly tilted to services rather than heavy industry; and the baseline effect from unusually strong heating fuel use during frigid weather in early 2014.

Some also say one of the biggest factors is the U.S. oil industry itself. As crude prices tumbled, drillers cut the number of rigs drilling for oil by almost two-thirds over the past year, reducing the number of fracking rigs, tank trucks, generators and other diesel-guzzling equipment.

“Production is down, drilling is down, and that spreads to the rest of the economy,” said Robert Campbell, head of oil products research at Energy Aspects in New York.

The lackluster figures offer a cautionary sign to bullish oil traders who are counting on cheap fuel prices to fire up global oil demand, helping soak up an over year-long supply surplus and revive the market. U.S. diesel stocks have swollen to their highest for this time of year since 2011.

“This raises the specter of 1998/2009 when distillate storage hit capacity, pushing runs and crude oil prices sharply lower,” Goldman Sachs said in a report this week.

While the United States consumes twice as much gasoline as diesel, at 4 million barrels per day (bpd) U.S. diesel still accounts for more oil use than all of Germany.

Related: U.S. diesel demand flat as freight growth slows: Kemp

NORTH DAKOTA EXAMPLE

Unlike in Europe, where diesel-powered cars are popular, gasoline is the fuel of choice in the United States. About two-thirds of the diesel consumed in America is for highway use, but it powers less than 3 percent of the light vehicles on U.S. roads, according to data from consultancy IHS Automotive.

As a result, the recent fall in U.S. diesel pump prices – down more than $1 a gallon from a year ago – has not had the same effect as cheaper gasoline.

However, flagging demand has been especially evident in areas with significant exposure to energy production, as data from North Dakota’s State Tax Commission illustrates.

In the three months through September, diesel fuel sold or consumed for on-road use in North Dakota tumbled 12 percent from a year earlier, while use of “dyed” diesel – reserved for industrial and agricultural use – tumbled 16 percent, according to Reuters calculations based on the data.

Along U.S. Route 85, just south of the Watford City near the heart of the Bakken, average daily traffic this year has fallen to around 2,500 heavy trucks, down about 17 percent from last year, according to state transport data.

While the state’s total diesel use comes to just over 50,000 barrels per day (bpd), scarcely more than 1 percent of the nation’s total, it highlights the fuel-intensive process that underpins the shale revolution. Diesel demand surged 13.5 percent from 2013 to 2014 as drilling boomed.

Because most shale formations are in rural areas, diesel generators are used to provide power to equipment at the sites. Additionally, there is a significant consumption of diesel for trucks to move equipment and water to the site, and, if it is an oil well, moving the crude to a nearby rail terminal or pipeline injection point for distribution.

Beyond the reduction in drilling, which has removed about 1,000 rigs from the nation’s oil patches, infrastructure improvements are also paring demand. Midstream companies, for instance, are building out a massive network of pipe to move water to well sites for fracking, reducing the need for trucks.

Related: Unwanted diesel, jet ships could sink oil prices

TRUCKS AND TRAINS

Energy industry woes are also affecting demand for diesel from railroads, which account for about 6 percent of all diesel fuel consumed in the United States.

In the first 41 weeks of the year, total U.S. railway traffic fell 1.2 percent from a year ago, with carloads of coal and petroleum down more than 13 percent in the latest week, according to American Association of Railroads’ data.

Tonnage carried by trucks, meanwhile, was up 3.3 percent through August compared with the same period last year, according to the American Trucking Associations.

While improved fuel efficiency and the growing conversion of some fleets to natural gas-powered engines may explain part of the disconnect, “there is a wild card somewhere,” said Noel Perry, an expert at FTR Transportation Intelligence.

There is unlikely to be a quick fix to lackluster U.S. diesel demand anytime soon, analysts said.

With oil prices languishing below $50 a barrel, oil companies are not drilling more wells. And Volkswagen – the leading U.S. seller of diesel-fueled cars – has suspended sales after revelations it cheated on emissions tests.

Diesel bulls’ best hope may be for a cold Northeast winter. That’s not likely, according to the EIA’s winter outlook earlier this month, which forecast reduced demand based on expectations that this winter will be 13 percent less cold.

(Reporting by Robert Gibbons and Jarrett Renshaw in New York; Editing by Jonathan Leff and Tom Brown)

This article was from Reuters and was legally licensed through the NewsCred publisher network.