Diesel Hits New Record Above $6.50 As Export Ban Fears Mount, Gasoline Squeeze Looms
UBS analysts warned that the global diesel squeeze could get worse as two major suppliers potentially pull barrels from an already strained petroleum products market. Russia may extend diesel export restrictions through October, while chatter in Washington about a US fuel export ban continues to grow.
As of Monday morning, AAA data show the national average for diesel has reached $6.51 per gallon, with prices gaining a staggering 88 cents so far this month. Prices are rising nearly every day and surging beyond the peak set in 2022 during the early days of the Russia-Ukraine war.
UBS energy expert Anna Kishmariya says a Russian extension would derail her team's assumption that exports would begin recovering in October as a domestic diesel surplus emerged. She said keeping restrictions in place could suggest more extensive damage to refinery units and a longer repair cycle than previously expected.
The bigger risk is a policy decision coming from Washington, as the US has accounted for roughly 30% of global diesel and gasoil exports this year. Any US export ban would leave major overseas importers highly exposed.
Iowa Sen. Chuck Grassley wrote on X this weekend that diesel prices at the pump in his state were hitting $6.57 a gallon and proposed the idea: "Why doesn't Pres. Trump put an embargo on diesel exports like presidents in the 70s put embargoes on ag products bc food prices were inflated."
On Monday morning, Trump said Russia had "lost control" of its diesel industry due to the war with Ukraine, calling for an end to the "ridiculous and never-ending" war.
Trump was quoted by the Financial Times earlier today as saying he had been on a call with Ukraine's Zelensky, pressing him to stop drone attacks on Russian refineries.
The fuel shock is coming at an uncomfortable time for the Federal Reserve as it confronts broader inflation pressure. Policymakers raised interest rates by 25 bps last week, and Minneapolis Fed President Neel Kashkari warned that excessive inflation extends beyond energy.
Goldman Sachs commodity experts Yulia Zhestkova Grigsby and Daan Struyven warned last week that the diesel crisis could soon push gasoline prices higher, setting the stage for the next major squeeze.
"The key reason for this new recommendation is that refiners' switching output from gasoline to diesel is rapidly tightening gasoline markets, where less elevated price levels leave room for sharp price upside if the Mideast and Russia-Ukraine conflicts continued to constrain refining output for longer or if more energy infrastructure were damaged," Grigsby and Struyven wrote in the note.
On the inflation front, Citi US economist Veronica Clark asked clients: "Will rising diesel costs push up goods prices?"
Clark's take:
We were surprised to see the median core PCE forecast in the September SEP rise to 3.4% from 3.3% in June. We think it is likely that most Fed forecasts do not include upcoming revisions and that core PCE will ultimately be lower than many officials are expecting this year.
We continue to track core PCE around 3.0-3.1%Q4/Q4. A renewed substantial increase in energy prices has caused fresh concerns about pass-through to core inflation, particularly as elevated diesel prices mean higher transportation costs for various goods. But recent historical evidence is limited about the correlation between higher diesel prices and core goods in CPI.
We are still hesitant to conclude there will be substantial pass-through as long as real income growth remains soft. Market rents have picked up slightly in recent months but remain softer than pre-pandemic, suggesting shelter inflation should continue to slow.
As for the proposed US export ban, Height Capital Markets research director Benjamin Salisbury noted, "While it may be politically tempting, we still expect Republicans to resist the urge to ban diesel or other petroleum exports."