The U.S. manufacturing sector, while gradually emerging from a long-lasting yet shallow downturn over the past two years, is experiencing a slow recovery. Diesel consumption remains weak, which is significantly affecting oil prices and overall energy consumption.

The Institute for Supply Management's manufacturing index slipped to 48.7 in May, indicating continued contraction. This index fell from 49.2 in April and a recent peak of 50.3 in March, the first time it had risen above the 50-point expansion threshold since October 2022. However, it has again dipped into contraction territory over the past two months.

The survey's production sub-index also dropped, from 54.6 in March to 50.2 in May, as manufacturing activity rates fell. This downturn might persist for a few more months, as suggested by the new orders component, which decreased from 51.4 in March to 45.4 in May.

While the ISM non-manufacturing index showed improvement, rising to 53.8 in May from 51.4 in March, manufacturing, being more energy-intensive, has managed fewer gains. This sector's sluggish performance has dampened overall energy consumption despite the growth in services boosting the economy and employment.

The expectations at the year's start, predicting an upturn in manufacturing that would enhance diesel consumption and lift prices, have not been realized. More than three-quarters of diesel and other distillate fuels are used in freight transport, manufacturing, and construction, making their consumption closely tied to the manufacturing cycle. However, diesel consumption has lagged behind the modest recovery in manufacturing activity over the last six months.

In March 2024, the volume of distillate fuel oil supplied to the domestic market was below 3.7 million barrels per day, the lowest for this time of year since 1998, marking a 10% decline compared to the same month last year and the prior 10-year seasonal average.

Some petroleum-derived distillate fuel oils are being replaced by biodiesel and renewable fuels, particularly in California. Even with these renewable alternatives, the volume of distillates supplied was down by 4-8% in March compared to last year and the 10-year average.

Reflecting tepid consumption amid strong refinery crude processing to produce gasoline, distillate stocks have been trending higher in the past three months. Inventories were still 10 million barrels below the prior 10-year average at the end of May, narrowing from an 18-million-barrel deficit in March. Stocks have increased at a time when they typically deplete.

As a result, prices for diesel and other distillates have fallen faster than for crude, narrowing the refinery margin or crack spread. The average spread for producing diesel from Brent crude in June 2024 has narrowed to just $19 per barrel, a significant drop from $46 in August 2023 and a record $63 in June 2022 following Russia's invasion of Ukraine.

Traders expect diesel supplies to remain ample for the next few months, helping to contain inflationary pressures within the supply chain. This should give major central banks a greater scope to cut interest rates.

The U.S. manufacturing sector, while gradually emerging from a long-lasting yet shallow downturn over the past two years, is experiencing a slow recovery. Diesel consumption remains weak, which is significantly affecting oil prices and overall energy consumption.

The Institute for Supply Management's manufacturing index slipped to 48.7 in May, indicating continued contraction. This index fell from 49.2 in April and a recent peak of 50.3 in March, the first time it had risen above the 50-point expansion threshold since October 2022. However, it has again dipped into contraction territory over the past two months.

The survey's production sub-index also dropped, from 54.6 in March to 50.2 in May, as manufacturing activity rates fell. This downturn might persist for a few more months, as suggested by the new orders component, which decreased from 51.4 in March to 45.4 in May.

While the ISM non-manufacturing index showed improvement, rising to 53.8 in May from 51.4 in March, manufacturing, being more energy-intensive, has managed fewer gains. This sector's sluggish performance has dampened overall energy consumption despite the growth in services boosting the economy and employment.

The expectations at the year's start, predicting an upturn in manufacturing that would enhance diesel consumption and lift prices, have not been realized. More than three-quarters of diesel and other distillate fuels are used in freight transport, manufacturing, and construction, making their consumption closely tied to the manufacturing cycle. However, diesel consumption has lagged behind the modest recovery in manufacturing activity over the last six months.

In March 2024, the volume of distillate fuel oil supplied to the domestic market was below 3.7 million barrels per day, the lowest for this time of year since 1998, marking a 10% decline compared to the same month last year and the prior 10-year seasonal average.

Some petroleum-derived distillate fuel oils are being replaced by biodiesel and renewable fuels, particularly in California. Even with these renewable alternatives, the volume of distillates supplied was down by 4-8% in March compared to last year and the 10-year average.

Reflecting tepid consumption amid strong refinery crude processing to produce gasoline, distillate stocks have been trending higher in the past three months. Inventories were still 10 million barrels below the prior 10-year average at the end of May, narrowing from an 18-million-barrel deficit in March. Stocks have increased at a time when they typically deplete.

As a result, prices for diesel and other distillates have fallen faster than for crude, narrowing the refinery margin or crack spread. The average spread for producing diesel from Brent crude in June 2024 has narrowed to just $19 per barrel, a significant drop from $46 in August 2023 and a record $63 in June 2022 following Russia's invasion of Ukraine.

Traders expect diesel supplies to remain ample for the next few months, helping to contain inflationary pressures within the supply chain. This should give major central banks a greater scope to cut interest rates.

The slow recovery in the U.S. manufacturing sector is part of a larger global trend. The World Bank recently downgraded its global economic growth forecast for 2024, citing ongoing disruptions in global supply chains, fluctuating commodity prices, and geopolitical tensions as key factors. This has led to increased uncertainty in international markets, which, in turn, affects domestic manufacturing performance.

Inventory management has become a critical aspect for companies aiming to navigate this tumultuous period. Many firms have adopted just-in-time strategies to minimize excess stock and avoid the costs associated with holding large inventories. However, this approach carries risks, particularly when sudden surges in demand or supply chain disruptions occur, as seen during the COVID-19 pandemic.

While the renewable energy sector shows promise, its growth has not yet reached the levels necessary to offset declines in traditional fuel consumption. Investments in green technologies continue to be a focal point for both private enterprises and government initiatives, aimed at reducing reliance on fossil fuels and addressing climate change concerns. Nevertheless, the transition is gradual and requires substantial infrastructure development and policy support.

Employment trends within the manufacturing sector also reflect the slow recovery. While there have been gains in job numbers, they are not sufficient to compensate for the losses incurred during the downturn. Many manufacturing jobs have shifted towards automation and advanced technologies, demanding new skill sets from the workforce. Training programs and educational initiatives are critical to equip workers with the necessary skills to thrive in this evolving landscape.

Overall, the U.S. manufacturing sector is navigating a complex landscape of slow recovery, weak diesel consumption, and broader economic uncertainties. While there are pockets of growth and optimism, the path to a robust and sustained recovery remains fraught with challenges.