In our September Short-Term Energy Outlook, we forecast U.S. total distillate inventories to end 2025 and 2026 at lower levels than previous years because of significant inventory draws in 2025, strong export demand, and domestic production declines stemming from refinery closures. In the weeks since the publication of this forecast, U.S. distillate inventories have increased substantially, but they remain relatively low. Distillate fuel oil includes both diesel fuel used in vehicles and home heating oil. Lower distillate inventories elevate the risk of higher prices and price volatility from supply disruptions, especially during periods of high demand like the autumn harvest and winter heating season.

We use total distillate to look at the combination of distillate fuel oil and biomass-based distillate fuel oil, which can be used in place of distillate fuel oil and includes both renewable diesel and biodiesel.

A significant factor in the forecast low inventories is the sharp inventory drawdown in the first half of 2025 (1H25). U.S. total distillate inventories decreased by 17% (about 22 million barrels) during this period, more than the average decrease of 10% (14 million barrels) over the same period in the previous four years.

One major reason for the large inventory draw in 1H25 was reduced supply of renewable diesel and biodiesel because of lower production and lower net imports of those fuels. Less renewable diesel and biodiesel supply resulted in more demand for petroleum-based distillate to fill the gap. As renewable diesel and biodiesel consumption decreased by 124,000 barrels per day (b/d), or 35%, in 1H25 compared with 1H24, petroleum distillate fuel oil consumption increased by about 170,000 b/d, or 5%.

We expect the 1H25 drop in biofuels consumption to be a short-term departure from the longer-term trend of biofuels increasing as a share of distillate consumption. We forecast renewable diesel and biodiesel consumption to partially recover in the second half of 2025 to meet existing and future production mandates under the Renewable Fuel Standard (RFS). We expect an increase in renewable diesel and biodiesel production will partially offset the increase in total distillate fuel oil consumption that we forecast in 2026, resulting in essentially flat distillate fuel oil inventories between December 2025 and December 2026.

Another reason for the large inventory draw in 1H25 was higher-than-average distillate exports, supported by strong international demand. Since 2023, major European hubs in the Netherlands and the United Kingdom have been importing significantly more distillate from the United States as a replacement for Russian products.

In 1H25, U.S. distillate exports averaged 1.2 million b/d, 7% more than the previous five-year average. We expect strong international distillate demand to continue to place downward pressure on U.S. inventories through 2026.

U.S. refinery closures also play a role in the forecast low distillate inventories through 2026. The LyondellBasell Houston refinery shut down in early 2025; another two refineries in California with a combined 284,000 b/d in refining capacity plan to close over the next two years. The loss of refining capacity will likely reduce U.S. production of petroleum products, including distillate fuel oil, reducing the output available to restock distillate inventories. We expect increased renewable diesel production in 2026 will partially offset some of the decline in distillate fuel oil production.

Principal contributors: Jimmy Troderman, Alex de Keyserling