U.S. demand for diesel fuel has dropped nationwide, but one lesser-known user of diesel is particularly affected: the oil industry itself.
Fuel demand has dropped worldwide by roughly 30% due to the coronavirus pandemic. This has prompted sharp cutbacks in U.S. drilling, which further diminishes demand for diesel to run the pumps, equipment and trucks that serve the sector.
U.S. distillate consumption, which is largely diesel fuel, is off by 20%, with the four-week average at a seasonal low not seen since 1995, data from U.S. Energy Information Administration (EIA) showed.
Oil producers use a significant amount of diesel to power equipment like rigs and trucks in shale oil fields. The oil industry was the fastest-growing customer of middle distillates like diesel during the first shale boom from 2009 to 2014, and then again for 2017 and 2018, according to the EIA.
"It's like the snake biting its own tail," said Alexandre Ramos-Peon, senior analyst at Rystad Energy. "The collapse of new drilling and completion could account for a demand loss of up to 1% of total U.S. diesel demand."
Oil companies account for a small percentage of U.S. distillate demand—just 2.4% as of 2018, according to the latest EIA data. Trucking represents a vast majority of U.S. diesel demand, but there is overlap, as trucks are used in the oil fields to transport crude from wellheads to pipelines when there aren't gathering lines.
U.S. energy firms are expected to have cut oil and gas rig counts to their lowest levels in history, dating back 80 years, as of this week. Production is expected to have fallen by more than 1.5 million bbl/d as oil prices crashed last month and traded in negative territory briefly.
Michael Mears, president of Magellan Midstream Partners LP, last week said on a call with investors that the slowdown in drilling will cut its diesel demand by 5%, and reduce cash flow by $20 million to $30 million in 2020.
That demand may take years to return.
William Thomas, CEO at EOG Resources Inc., said May 8 on an investor call that the "historic and prolific oil production growth by U.S. shale may have been forever altered."
Between the 2014 peak and 2016 trough in shale, distillate use by oil companies fell by 58%.
Through much of March and April, refiners turned to diesel as margins to refine crude into gasoline plummeted. While people stayed off the roads to comply with stay-at-home orders due to the coronavirus, diesel demand held up relatively well as trucks still delivered goods. Distillate margins have plunged to around $13/bbl, lowest since 2016, Refinitiv Eikon data showed.
Distillate stockpiles on the Gulf Coast, which includes the Permian Basin, the biggest shale basin in the country, rose to 51.6 million barrels last week, highest on record for this time of year, EIA data showed. U.S. distillate inventories were at 151 million barrels last week, highest seasonally since 2016.