Analysis: U.S. Diesel Inventories Set To Remain Tight


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- This year, distillate fuel oil demand has continuously 
outperformed 2024 levels. According to U.S. Energy Information Administration 
data, distillate fuel oil supplied ran some 110,000 bpd ahead of year-ago 
levels in the first nine months of 2025. Last year, however, also saw the 
lowest distillate fuel oil demand in 16 years, as an unusually warm start to 
the year dented heating oil demand in the Northeast and a prolonged lull in 
freight and industrial activity weighed on diesel consumption. Contrasted to 
longer-term averages, diesel and heating oil demand shined less brightly than a 
year-on-year comparison would suggest.

   In the first half of 2025, distillate fuel oil supplied averaged 3.931 
million bpd, up 4.1% from last year, but lower than in the comparable time 
periods since and including 2021, when fuel demand was still reeling from a 
global pandemic. Demand in the first half of this year trailed 2023 levels by 
1.1% and 2022 levels by 4% and was 0.4% below the three-year average.

   Rise and Fall of Renewables

   Petroleum diesel demand has been fighting an uphill battle against a rapidly 
growing renewables market. According to EIA data, renewable diesel production 
grew by 22.6% year-on-year in 2024, and the production of other biofuels, a 
category which includes renewable heating oil, expanded by 10.7%. This trend, 
however, saw a reversal this year. Renewable diesel consumption peaked in July 
2024 at an all-time high 291,000 bpd and has since plummeted, averaging just 
shy of 163,000 bpd in July 2025, down more than 44% on the year. Biodiesel 
consumption and production have similarly plummeted this year. In August, 
consumption averaged 58,000 bpd, less than half of the pace in August 2024.

   Winter Weather and Freight

   Amid the downturn in petroleum diesel alternatives, the U.S. experienced 
normal temperatures after two back-to-back years of unusually warm winter 
seasons, lifting distillate fuel oil demand up 4.5% year-on-year in the first 
quarter of 2025. Importers stocking up ahead of the implementation of tariffs 
provided further tailwind to demand in the second quarter, when demand 
outperformed the three-year average. Distillate demand has since softened, 
slipping below even 2024 levels in August, but up 2.2% year-on-year in 
September, the last month with available monthly EIA data.

   What's ahead

   DTN's Weather forecast predicts a slightly colder-than-average 2025-2026 
winter, which would boost heating oil demand in the Northeast. The EIA in its 
Winter Fuels Outlook, in contrast, expects national average heating oil 
consumption to decrease 4% from last winter, citing the trend of homes 
transitioning to other heating sources.

   U.S. GDP growth, meanwhile, which in the second quarter has outperformed 
estimates as retail spending surprised to the upside, is predicted to have 
slowed in the second half of the year. While industrial activity is likely to 
remain stagnant, growth in real disposable personal income may still boost 
overall freight activity.

   Given these factors, petroleum diesel and heating oil demand next quarter is 
likely to come in close to the average rate observed in the first three months 
of this year, and may, depending on the weather, even run slightly ahead.

   Distillate fuel oil inventories were well below historical averages this 
year. Globally tight supply, which is pulling diesel barrels to the export 
market, solid domestic demand and waning refinery capacity in the U.S. are 
likely to keep inventories depressed next year, and are set to bolster prices 
despite softening crude oil prices. The middle of the barrel is likely to 
continue to be the most profitable part for refiners.

    




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