Pain at the Pump Could Become a Major Investor Headache

Diesel prices, perhaps the most important component of U.S. economic activity, have surged this summer. (AFP via Getty Images)

Key Points

• Global energy prices extended their run higher on Wednesday, stoking consumer fuel costs that could add to inflation pressures.
• U.S. diesel prices have jumped nearly 9% over the past two months and are up nearly 50% from last year, crossing $5.50 a gallon.
• Supply concerns have been fueled by Russian export restrictions following Ukrainian drone attacks and a standoff between the U.S. and Iran.

Global energy prices extended their run higher on Wednesday, stoking a key component of consumer fuel costs that could add to inflation pressures and broader market disruption over the coming months.

Prices for diesel fuel have jumped nearly 9% over the past two months, and are up nearly 50% from last year, having crossed the $5.50 a gallon mark for the first time since late May, according to data from the AAA.

Current U.S. diesel crack spreads, effectively the gross margin a refinery makes when it turns a barrel of crude into diesel fuel, hit a fresh record of more than $102 a barrel this week as well.

The U.S. Energy Information Administration says diesel powers around 70% of the movements of freight, rail, agriculture, and construction equipment, and is a key component of domestic inflation when prices rise.

“Diesel cracks have more than doubled since the start of the US-Iran conflict and are up more than 20% month-to-date,” says Ewa Manthey, commodities strategist at ING.

“Export restrictions from Russia, following repeated Ukrainian drone attacks on refineries, have reduced diesel availability, while disruptions affecting energy infrastructure elsewhere have added to concerns over supply and helped support prices,” she adds.

The moves in diesel, especially heading into the peak of the U.S. farming harvest this autumn, will provide additional upward pressure on consumer inflation at a time when Treasury bond yields are testing the highest levels in years.

Ole Hansen, head of commodity strategy at Saxo Bank, argues the surge in diesel, and the consumer risks it carries, could be the market’s next area of concern.

“After six months of disruption, the oil market has demonstrated remarkable flexibility,” he says. “Alternative routes, strategic inventories, U. S. exports and demand destruction have prevented a much more dramatic crude price spike.”

“But the calm in crude is disguising the more important message coming from product markets,” Hansen cautions. “The world has managed to find enough barrels of oil, but it is increasingly struggling to produce and deliver enough of the fuels consumers actually need.”

Crude prices are rising, but haven’t reached the $100 levels seen in late July. Still, President Donald Trump said Tuesday that there are “no talks or conversations going on, or scheduled” following the collapse of a 60-day memorandum of understanding between Washington and Tehran.

Iran, meanwhile, has said it won’t open the Strait until the U.S. follows through on agreements in the MOU to remove sanctions, release frozen assets, and lift its naval blockade.

The standoff, alongside renewed attacks on Russian oil refineries by Ukrainian forces amid a worrying escalation of their four year conflict, has added notable to upward pressure on global crude prices.

Brent crude futures for October delivery were pennies away from $92 a barrel in overnight trading, having risen nearly 20% over the past three weeks.

U.S.-focused WTI crude , meanwhile, topped the $85 a barrel mark for the first time since July 24, and is some 22% higher since the end of June.

Those moves have added steady upward pressure to U.S. gas prices, which topped $4.09 a gallon on Tuesday, according to AAA data, a 2.5% gain from last month and 30% higher on the year.

“While the seasonal transition to cheaper winter-blend gasoline in the coming month could bring some relief, the two dominant challenges facing motorists—the closed Strait and the ongoing refinery strikes—show no signs of resolving anytime soon,” says Patrick De Haan, head of petroleum analysis at the consumer advocacy group GasBuddy. “Until they do, the path for gas and diesel prices remains tilted to the upside.”

So does the path for inflation—and the worries about the U.S. consumer that could result.

Write to Martin Baccardax at martin.baccardax@barrons.com

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