Anemic fuel demand signals plodding US recovery

By Rebekah Kebede - Analysis

NEW YORK (Reuters) - U.S. stockpiles of key industrial fuels like diesel have swelled to the highest levels in nearly 25 years, suggesting the full intensity of the recession may only now be coming to light.

The buildup in inventories of distillates, which include diesel and jet fuel -- the lifeblood of cargo movement -- along with other recent bearish economic indicators show that recovery could be farther off than expected.

"It is the very simple fact that the fat belly of the recession is finally coming through the economy," said Jan Stuart, global oil economist at Macquarie Securities. "(The build in distillates) is a reflection of the lagged effects of the contracting economy."

Distillate inventories in the United States ballooned to 158.7 million barrels in the week ended July 3, about 55 million barrels above normal, according to U.S. government data.

Demand for all oil-based fuels has been sluggish due to the recession, but distillate use has suffered in particular.

The latest numbers fly in the face of recent optimism about recovery, which pushed oil prices up 68 percent from the start of the year to a 2009 high of $73 a barrel last week. Crude has since retreated and traded as low as $58.72 on Friday.

"Distillate is the stuff that the productive part of the U.S. economy runs on: industrial fuels, transportation for industry, agriculture and jet fuel," Stuart said. "The fact of the matter is that the economy is still contracting -- unemployment is still rising, industrial production is still sliding."

Freight traffic, which accounts for much of U.S. distillate use, has fallen by double digit percentages in 2009, and the export market for the fuels has dried up due to the global downturn.

A preliminary consumer sentiment survey for July, released on Friday, showed consumer confidence dropping. Numbers showing the U.S. trade gap narrowed unexpectedly in May to the lowest since 1999, reaffirmed U.S. demand continues to wilt.

OIL-PRICE PRESSURE

Some analysts said the distillate glut is a key indicator that economic recovery is farther off than previously thought, leading the oil market steadily lower.

"The retreat in energy prices is a pretty good sign that people are now expecting (an economic recovery) not to occur until 2010," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

He cautioned that even that estimate is based on assumptions about the impact of the Obama administration's economic stimulus package.

"This is all based on a lot of 'ifs' that some of the measures taken are actually going to stimulate the economy, and I think the verdict is still kind of out on that," he said.

Still, some analysts warned weak distillate demand, while a symptom of current economic woes, cannot by itself be used to predict when an economic recovery will occur.