Sliding Diesel Prices Signal Warning for U.S. Economy

‘Freight recession’ means fewer trucks carrying goods across the country

· Benchmark diesel futures down nearly 25% this year, to $2.53 a gallon.

A nationwide freight slowdown has helped cut U.S. diesel prices by half from last year’s record, raising concerns that parts of the world’s largest economy have begun to slow.

Wholesale diesel recently fell to $2.65 a gallon in New York Harbor, down from $5.34 last May, after Russia’s invasion of Ukraine sent commodity markets haywire and turned prices advertised at gas stations into street-level reminders of inflation’s 40-year highs. Record diesel costs made it more expensive to operate excavators at construction sites, run machinery on farms, and haul goods from ports, rail yards or factory floors.

Prices began falling months ago, when a warm winter cut demand for heating fuel and a reshuffling of global oil trade alongside Russia’s war left a glut of diesel supplies on the market. Now—with the Federal Reserve trying to cool business activity by raising interest rates—waning manufacturing output and trade have also dented U.S. appetite for the fuel.

The darkening industrial outlook, which contrasts with low unemployment and a robust service sector, has pulled benchmark diesel futures down nearly 25% this year, to $2.53 a gallon. Federal record-keepers peg the year-over-year hit to domestic demand at 8.4%.

The declines are weighing on crude oil—even as China hoovers up more petroleum—and pushing down margins for refiners such as Valero Energy Corp., Marathon Petroleum Corp. and Phillips 66 Co. The S&P 500 energy sector has slid 1.3% in 2023, after being one of the stock market’s few winners last year.

“Diesel demand is being pressured from every side,” said Eric Lee, a commodities strategist at Citi.

Debbie Desiderato survived as an independent trucker when diesel prices hit records in 2008, so she wasn’t fazed when they reached record highs last year. But plunging costs in recent months haven’t provided much relief.

Instead, the Virginia-based driver said the rates she can charge for hauling cargo from dog food to pillows have in some cases fallen faster than fuel. Low demand for freight has meant fewer diesel-hungry semitrailers on the road, Ms. Desiderato said, pushing some fellow truckers to sell their vehicles.

“They have had enough,” the 58-year-old said. “Right now I’m taking every single load I can get, trying to tread water.”

Signs of slowing industrial activity have been flashing warnings around the world for months. Global trade and manufacturing production dropped 5.4% between September and January, according to the Netherlands Bureau for Economic Policy Analysis.

In the U.S., where stores and warehouses remain overstocked after a pandemic-era boom in consumer goods, container imports in the first three months of 2023 slid about 23% from the same period last year, according to logistics technology firm Descartes Systems Group Inc.

For such a steep drop-off to occur any other year, “the economy would have blown up,” said Chris Jones, Descartes’ executive vice president of industry and services. He added that U.S. container imports have fallen close to 2019 levels.

The diminished activity means fewer trips by fuel-guzzling semitrailers hauling goods across the country, a pullback that has punished trucking firms and pushed the Dow Jones Transportation Average down 7.8% from its 52-week high in February.

Knight-Swift Transportation Holdings Inc. and J.B. Hunt Transport Services Inc. last week reported year-over-year quarterly revenue declines and earnings that missed Wall Street’s expectations. Shares in both companies have since held steady.

J.B. Hunt executives pointed to consumers’ waning hunger this year for big and bulky products such as appliances, furniture and exercise equipment. They added that the company’s customers have been less accurate recently in predicting their freight needs than ever before.

“Simply stated, we’re in a freight recession,” J.B. Hunt President Shelley Simpson told analysts in an earnings call.

Bob Costello, the American Trucking Associations’ chief economist, said he has seen trucking companies with fleets in the range of 200 to 300 vehicles failing at a rate of about one a week.

That doesn’t bode well for even smaller operators. “I think a lot of these little ones are going out of business,” he said.

Refining economics look markedly different from last fall, when the cost of the diesel hit a record premium over gasoline and crude oil, turning fuel producers into profit machines that showered shareholders with cash. Goldman Sachs Group Inc. told clients last week that it believes refining margins will continue declining toward historical norms in the coming months.

As diesel prices have fallen in April, shares in Valero slipped by 14% this month. Marathon Petroleum dropped 6.2%, and Phillips 66 fell 0.7%.

Even as price drops provide breathing room for companies that use diesel to power machinery or haul supplies, truckers such as Ms. Desiderato in Virginia are struggling to stay afloat.

The 21-year veteran of the industry owns her truck outright, unlike many others. Still, lower freight rates have eaten into margins and forced Ms. Desiderato to try avoiding expensive diesel markets such as California or the Northeast.

As jobs hauling wood from a nearby logging company have slowed, however, Ms. Desiderato has felt pressure to maintain customer relationships by hauling cargo on costlier routes.

A recent job carrying textiles to Minnesota took Ms. Desiderato through the Appalachian Mountains—difficult terrain that hits her truck’s already lackluster diesel mileage.

“I’ve got to take it while I can get it,” she said.