January 12, 2016 / 3:08 PM / 4 years ago

COLUMN-Drilling slump saps U.S. diesel demand: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

* Diesel sales to U.S. oil industry: tmsnrt.rs/1l2UAT6

By John Kemp

LONDON, Jan 12 (Reuters) - El Nino and the warm winter weather are being blamed for the weak demand for distillate fuel oil in the United States, but the slump in oil production is probably having a bigger impact.

The oil industry was the fastest-growing customer for middle distillates like diesel between 2009 and 2014, according to the U.S. Energy Information Administration (EIA).

The oil industry itself accounted for 20 percent of all the increase in diesel consumption during the five-year drilling boom.

Businesses engaged in oil drilling, pipelines and refining consumed 2.1 billion gallons of diesel in 2014, the most recent data available, up from just 760 million gallons in 2009.

By 2014, oil producers accounted for 3.5 percent of all distillate fuel oil sales in the United States, up from 1.4 percent in 2009.

Drilling rigs and the massive pumps employed for hydraulic fracturing all use high-horsepower engines which run 24 hours per day and consume prodigious quantities of fuel.

The heavy trucks used to haul drill pipe, frac sand and water to well sites, and carry away crude before the well is hooked up to gathering pipelines, are all diesel powered.

And since many oil fields are in remote rural areas with little or no electricity supply from the main power grid, most of the electricity used for heating and lighting also comes from diesel generators.

So as the number of active drilling rigs and crews rose five-fold from around 300 in 2009 to more than 1500 in 2014, diesel consumption surged as well.

Direct diesel sales to customers in the oil industry rose from 50,000 barrels per day to almost 140,000 barrels per day (bpd).

For comparison, in 2014, around 2.5 million bpd of distillate was were sold as road fuel, while 250,000 bpd were sold to residential customers, 240,000 bpd to the railroads and 200,000 bpd to farms.

But as drilling activity has plummeted in 2015, the big increase in diesel consumption in the oil fields has unwound.

Nationwide distillate consumption was flat in the first ten months of 2015, after growing by more than 5 percent in 2014. The slowdown started long before unusually warm weather arrived in the autumn and winter.

The slump in oil and gas drilling, as well as a general slowdown in freight shipments, some of which is linked to the drilling slowdown, likely explains much of the weakness in diesel consumption in 2015.

With no end in sight to the drilling slump, weak diesel demand looks set to continue through at least the first half of 2016, which will continue to depress refining margins in the middle of the barrel. (Editing by William Hardy)

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