Excerpted from This Week in Petroleum, September 5, 2019

U.S. total distillate consumption, as measured by product supplied, has been approximately 1.2% lower during the first eight months of 2019 than it was during the same period in 2018. Distillate fuel is linked with economic growth because of its many uses in multiple sectors. Distillate is used by multiple transportation modes as a fuel to move freight and people, by commercial and industrial heavy machinery to build and produce goods, in agriculture for farming, and in residential and commercial sectors as a heating fuel. Trends in several of these end-use sectors explain some of the reasons behind slowing demand growth for distillate fuel in the United States.

Recent monthly and weekly total distillate product supplied data indicate declining U.S. consumption. Examining changes in product supplied over time reveals that the 3-month moving average of year-over-year growth in U.S. distillate product supplied has been negative since May 2019, and the 12-month moving average shows flat year-over-year growth according to the latest monthly-from-weekly data in August (Figure 1). In comparison, the 12-month moving average year-over-year growth of U.S. distillate consumption was stronger in August 2018 at 175,000 barrels per day (b/d).

Distillate use varies widely by geography and U.S. Petroleum Administration for Defense District (PADD) because of region-specific industries and weather patterns. The Midwest (PADD 2) has the largest regional consumption of distillate, with average product supplied of 1.28 million b/d in 2018, closely followed by the East Coast (PADD 1), with a product supplied of 1.26 million b/d. In all regions, on-highway transportation consumes the largest amount of distillate. Both light- and heavy-duty vehicles accounted for 69% of total U.S. distillate end use in 2017, the latest data available. After on-highway transportation, farming and railroad transportation are the second- and third-largest end uses for distillate in the United States (Figure 2).

Long-distance trucking is the main driver of on-highway consumption of distillate fuel in the United States, which in turn closely correlates with economic growth and industrial activity. In 2018, trucking freight, as measured by the truck tonnage index (adjusted for seasonal factors), indicated strong year-over-year growth, which contributed to higher U.S. distillate consumption. However, 2019 year-to-date truck tonnage index data indicate slower growth than in 2018 (Figure 3).

In 2019, U.S. distillate fuel use in agriculture is also likely to be lower than in 2018. According to data from the U.S. Department of Agriculture, heavy rainfall and flooding prevented farmers from planting cash crops on a record 19 million acres of farmland in August, a significantly larger area than in recent years (Figure 4). Nearly 77% of the prevented planted acres are located in the Midwest where regional distillate sales for farming are highest, representing nearly 60% of U.S. distillate sales for farm use, at an average of 121,000 b/d in 2017. The implications for a large area of prevented planting will vary by region and crop, but a large area of prevented planting acres generally suggests less intensive use of distillate this crop season because acres without a cash crop are less likely to be sprayed, fertilized, or to require other activities that use distillate fueled heavy equipment.

U.S. consumption of distillate fuel for space heating demand, particularly in the northeastern states of the East Coast (PADD 1), is the largest contributor to residential consumption of distillate fuel. However, because there is little to no U.S. demand for heating fuels during the summer, residential demand for distillate heating fuel is unlikely to have been a large contributing factor in the slowing demand growth for distillate in 2019. In addition, East Coast residential consumption of distillate fuel has decreased from 360,000 b/d (a 35% share) of regional sales/deliveries in 1985 to 180,000 b/d (15%) of sales/deliveries in 2017, leading to reduced seasonality in U.S. distillate consumption.

Although making up only 1.9% of distillate sales in 2017, distillate consumption by oil companies—including drilling companies, pipelines, and other related oil companies not engaged in the selling of petroleum products—will also be lower in 2019 than in 2018. Oil company distillate consumption is closely correlated with oil and gas drilling because active oil and gas rigs use distillate for onsite power generation and other activities. Drilling activity in 2019 is lower than at the same time in 2018, with 144 fewer active rigs in the United States as of August 30, according to Baker Hughes.