Poor Demand Weigh on US Diesel Prices Despite a String of OPEC Production Cuts

Diesel prices in the US have continued the bearish trend in November, pressurized downward by weak demand in the global oil market. Factory orders in October had fallen beyond expectations and registered the largest monthly drop since April 2020, as the US Census Bureau reported. This has raised concerns on the demand side of Diesel despite the OPEC+ crude production cut.

US oil supply has exceeded market expectations. Oil production in the US has reached a record 13.2 million barrels per day, recently released EIA’s September month data have shown. At the same time, it has been projected that US oil production will reach 13.3 million barrels per day at the end of the year 2023. It was noted that US September’s field production of crude oil had been 12.98 million barrels per day. Thus, Diesel prices in the US have been closed at USD 4.2 per gallon, DEL-Washington, with a decline of 6 percent.

OPEC+ has announced a reduction of 2.2 million barrels of crude supply daily over the first quarter of next year, which represents an extension of 1.3 million barrels on individual production cuts announced by Saudi Arabia and Russia this summer. The group has been trying to support petrol and Diesel prices by continuous crude production cuts, and that is expected to continue next year, as per market participants. However, one of OPEC+’s biggest concerns has been the lack of Universal agreement amongst individuals within the group about the production cut.

A series of production cuts by OPEC+ might lead to supply shortages of Diesel in the second half of the fiscal year 2024, which is expected to support Diesel prices in the future. Moreover, Diesel prices might get some support after the news revealed a ship attack on the Red Sea because of the escalation of the Israel-Hamas conflict.

In its November STEO, the EIA has projected that Diesel prices will be averaged at USD 4.27 per gallon in 2023 and USD 4.25 per gallon next year. EIA analysis of Diesel’s retail price breakdown has shown that crude oil costs have contributed 46 percent, refining costs have contributed 26 percent, 15 percent has gone towards distribution and marketing costs, and taxes have occupied 13 percent.

Crude oil output in the US’s lower 48 states has been expected to hit 10.68 million barrels per day within 2023 year-end and 10.84 million barrels per day next year. Crude oil production in the Federal Gulf of Mexico has been estimated to hit an average of 1.87 million barrels per day in 2023 and 1.91 million barrels per day next year, as per EIA STEO.