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(John Kemp is a Reuters market analyst. The views expressed are his own)
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By John Kemp
LONDON, May 25 (Reuters) - U.S. freight movements have started increasing again, which should help boost consumption of distillate fuel oil in 2017 and 2018.
The tonnage of freight moved by road, rail, barge, pipeline and air cargo has been increasing year on year since October, after stagnating for much of 2015/16 (tmsnrt.rs/2qSDLAJ).
Freight movements hit a new record in February, before slipping slightly in March, according to the U.S. Bureau of Transportation Statistics (tmsnrt.rs/2rTVx58).
Most freight is hauled by equipment that uses diesel engines, or jet turbines in the case of air cargo.
Freight is therefore the main driver for consumption of fuels refined from the middle of the crude oil barrel, including distillate fuel oil and jet fuel.
The U.S. Energy Information Administration forecasts that distillate consumption will increase by 80,000 barrels per day in 2017 and a further 90,000 in 2018.
By contrast, the agency forecasts gasoline demand will be flat in 2017 and grow just 30,000 barrels per day in 2018 (“Short-Term Energy Outlook”, EIA, May 2017).
Forecast growth in distillate consumption is largely due to stronger freight demand, where a cyclical recovery is being driven by a general normalisation of business inventories as well as specific improvements in the oil, gas and coal sectors.
Freight movements were sluggish during 2015 and 2016 as U.S. businesses tried to reverse an unplanned build up in inventories of raw materials, work-in-progress and finished goods all along the supply chain.
The ratio of business inventories to sales climbed from 1.28 in January 2013 to a peak of 1.41 in March 2016, according to the U.S. Census Bureau (tmsnrt.rs/2rTNyVO).
Manufacturers, distributors and retailers cut back on new orders in an effort to reduce stocks to a more normal level.
After struggling in 2015, destocking finally began to pay off with inventory ratios turning down from April 2016 and falling to 1.35 by December.
With better inventory control, manufacturers, wholesalers and retailers have shown more confidence to increase their orders and freight deliveries are picking up.
Freight movements have also been strengthened by the resurgence in the oil and gas sector, where the number of active rigs has more than doubled in the last 12 months (tmsnrt.rs/2rkF9NT).
The number of rigs drilling for oil and gas has increased from a low of just over 400 at the end of May 2016 to more than 900, according to oilfield services company Baker Hughes.
Drilling and well completion need large amounts of equipment and materials, including sand, water and steel drill pipe, to be delivered to remote sites, usually by rail and road.
Oil and gas drilling also supports distillate consumption directly because diesel-electric generators provide power for drilling rigs as well as auxiliary supplies for heating, lighting and other operations.
Finally, freight movements are increasing thanks to an increase in demand for coal deliveries from U.S. power producers after a slump in 2015/16.
Coal-fired electricity generators struggled with their own unplanned build up of coal stocks between 2014 and March 2016 as a result of competition from cheap natural gas and a very mild winter in 2015/16.
New coal deliveries from the mines were cut sharply as generators sought to manage down their stockpiles to more normal levels.
Roughly two-thirds of coal moves from mine to power plant by rail, while coal shipments account for about a third of all tonnage carried by the major railroads.
So the slump in coal deliveries had an immediate and significant impact on freight volumes across the rail network and a corresponding impact on diesel demand.
By September 2016, however, coal stocks had been reduced to more normal levels and coal consumption was increasing in response to higher natural gas prices (tmsnrt.rs/2rkrpmm).
Railroad coal deliveries have been rising swiftly according to carload data from the Association of American Railroads (AAR).
The number of coal cars hauled by the major railroads was up by more than 18 percent in the first 20 weeks of 2017 compared with the same period in 2016 (“Weekly rail traffic report”, AAR, May 20).
Just as the downturn in freight movements during 2015/16 hit diesel demand especially hard, it is now contributing to a sharp cyclical recovery.
Gasoline accounted for most growth in U.S. fuel demand during 2015/16 but diesel will probably account for most growth in 2017/18. (Editing by Susan Thomas)