As growth slows in the US economy, warning signs in the energy markets are adding to investor fears that a recession is looming over the world’s biggest fuel guzzler.
Demand for diesel, the lifeblood of the industrial economy, has fallen sharply in recent months as freight markets cool. And there are indications that petrol demand may be beginning to wane as motorists look to dial back spending.
Taken together, analysts said, these suggest a deceleration in the world’s leading economy could soon give way to contraction.
“If you were looking at it in the closet, and not knowing what the wider economy was doing, you would say we’re seeing some sort of an industrial recession,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service.
US economic growth slowed considerably in the first quarter of the year, according to official figures released last week, adding 1.1 per cent on an annualised basis. That was down from 2.6 per cent in the last three months of 2022 and marked a greater drop-off than economists had anticipated.
While US consumers continue to spend despite the broader economic cooldown, there are signs that they may be beginning to tighten their belts.
Demand for distillates including diesel, which is used to power the trucks and trains that transport goods around the country, was about 6 per cent lower in the first quarter of 2023 compared with the same period last year as a trade slowdown bites, according to government data crunched by S&P Global Commodity Insights.
“Simply stated, we’re in a freight recession,” said Shelley Simpson, chief executive of trucking group JB Hunt on a recent earnings call. UPS boss Carol Tome suggested the trend would continue, pointing to a retail slowdown and saying she expected “volume to remain under pressure”.
Meanwhile, petrol demand, which is more closely linked to consumer travel, has held up so far, with consumption in the first quarter off by 2 per cent versus last year. But there are indications that it is beginning to slip.
“What we’re seeing is this ongoing narrative of persistently . . . resilient consumers, and this flagging industrial and business investment sector — which is where you see diesel demand falling off, you see gasoline demand remaining firm,” said Rory Johnston, who runs Commodity Context, a market research service.
“[But] if the business sector continues to retrench, that will inevitably, eventually feed into the consumer side.”
Data at the pump suggests that may be beginning to happen, as America’s motorists become more conscious of their spending.
According to Opis, which tracks activity across 40,000 stations nationwide, petrol volumes sold in the week to April 22 were down about 3 per cent versus the same week last year, 6 per cent versus the same week two years ago and 20 per cent versus the same week in 2019, before the pandemic hit.
That is despite a drop-off in prices, which sit at $3.62 a gallon on average, according to automotive group the AAA, down from $4.16 a gallon a year ago, when the breakout of the war in Ukraine sent them surging to record levels of more than $5 by the summer.
“We’re just not seeing the consumer really driving,” said Kloza. “I think the consumer isn’t necessarily motivated to drive more just because prices are cheaper than they were last year”.
The summer driving season from May to August will push up demand, but there are signs this year’s uplift might be softer than usual.
“It’s really noisy. I think investors are having a really difficult time handicapping what gasoline demand looks like and what travel season looks like,” said Michael Tran, managing director, global energy strategy at RBC Capital Markets. “[But] leading indicators of future mobility are suggesting to us that travel is going to be softer than people think because consumers are pitching their wallet harder than people realise.”
RBC’s “Get Out and Travel” tracker suggests that measures of future travel — including hotel bookings, car rentals and train transport — slipped into negative territory in February and March, suggesting Americans are planning to curtail travel spending this summer — and burn less petrol.
Still, despite some of the signs of a slowdown, refiners have remained upbeat. Valero, the world’s biggest independent refiner, dismissed concerns about market weakness during a recent earnings call.
And many analysts remain confident that motorists will continue to guzzle enough petrol to offset diesel weakness.
“There’s enough positive in the balance that it doesn’t create an overall problem,” said Alan Struth, manager for macroeconomics and oil demand at S&P Global Commodity Insights. “There is nothing immediately clear to say we should be ratcheting back our outlook — or prepare for a recession. Of course, that could change.”
Still, further upheaval in the banking sector could be the catalyst that sparks a wider rout in energy markets, analysts said, driving a retrenchment in consumer spending. International crude prices last week wiped out the gains seen since Opec surprised the market by announcing a supply cut in early April as concerns over the future of California’s First Republic bank roiled markets.
“I think we’ve got at least a couple more months of this kind of industrial, investment weakness,” said Commodity Context’s Johnston. “Unless we do get the consumer falling off, in which case, I think we spiral further downward — I think it’s the only thing really holding this together right now.”