UPDATE 1-U.S. economic slowdown hits diesel demand

NEW YORK, Jan 14 (Reuters) - U.S. demand for diesel struck a five-year low last week as the effects of an economic downturn deepened in the trucking and industrial production sectors, energy analysts said on Wednesday.

Falling diesel consumption comes amid similar declines in American gasoline use and adds to the mountain of evidence a financial crisis stemming from the soured U.S. housing sector is making its mark on consumers and businesses.

Demand for distillate fuels fell by 15 percent in the week ended Jan. 9 to 3.65 million barrels per day, the lowest since the same week in 2004, led by a decline in ultra-low sulfur diesel -- a product widely used in trucking and manufacturing, according to the U.S. Energy Information Administration.

"This appears to be a reflection of the underlying weakness in the U.S. economy," said EIA analyst John Duff. "We were very surprised by this number and we rigorously checked it out."

"The biggest part of the decline was for ultra-low sulfur diesel, which tends to be used for shipping and hauling and is affected by things like industrial production," he said.

The drop in implied demand contributed to a 6.4 million barrel increase in U.S. commercial stockpiles of distillates, according to the EIA data -- an increase that exceeded analyst expectations by nearly six-fold.

Oil prices dropped more than $1 a barrel on the New York Mercantile Exchange after the report, quelling concerns that distillate supplies could be tested by a cold blast approaching the U.S. Northeast heating oil market.

"If you're bullish, this report gives you nothing to hang your hat on," said Stephen Schork, editor of The Schork Report in Philadelphia. "A six million barrel build in distillate when it is cold out there underscores the total lack of economic demand."

(Reporting by Richard Valdmanis; additional reporting by Haitham Haddadin, Janet McGurty, Rebekah Kebede in New York; Editing by Marguerita Choy) Keywords: ENERGY EIA/DISTILLATES

(richard.valdmanis@thomsonreuters.com; +1 646 223 6056; Reuters Messaging: richard.valdmanis.reuters.com@reuters.net)


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