Prices for gasoline, diesel, and jet fuel are rebounding even as crude oil eases, a rare divergence that is swelling costs for peak-season travellers and threatening to undermine President Donald Trump's pledge to quash inflation ahead of midterm elections.
Record Gap Between Refined Products and Crude
The gap between the cost of some refined products and raw crude is at a record in the U.S. and other regions, even as global oil benchmarks have all but erased the spike driven by the Iran war. Some analysts warn that consumers need to brace for more pain as a Russian export ban stemming from the conflict with Ukraine and renewed tensions in the Middle East squeeze supplies.
“Refineries are already running at very high utilization rates,” said Jamie Torrance, who runs diesel and jet fuel trading at Trafigura Group, one of the largest global oil merchants. “Yet inventories are still drawing.”
Inflationary Fallout from Geopolitical Conflicts
For governments and central banks, fuel markets are a painful reminder of the inflationary fallout from Trump's decision to go to war with Iran and failure to negotiate an end to Russia's conflict with Ukraine. The president has pledged an investigation, but in the meantime companies including PepsiCo Inc. are blaming gasoline for slumping consumer demand, and money managers at Vanguard Asset Management are buying insurance against stickier-than-expected U.S. inflation because of costlier fuel.
“President Trump and his energy team anticipated short-term market disruptions, communicated them openly to the American people, and implemented an aggressive plan to mitigate any impacts,” White House spokeswoman Taylor Rogers said in a statement. “Oil prices have dropped dramatically, and prices at the pump should follow.”
Hedge Fund Bets on Rising Diesel Prices
Hedge funds were positioning for the run-up to continue before the U.S. renewed attacks on Iran this week, with the most bullish bets on European gasoil since late March, data from ICE Futures Europe show. Expectations for soaring diesel prices emerged even while funds were the least bullish on Brent crude oil, the international benchmark, since December.
Russian Export Ban and Strait of Hormuz Tensions
The most significant recent shift has been in Russia, which banned diesel exports after months of Ukrainian attacks on its refineries caused domestic shortages. Russia is the world's second-largest diesel exporter after the U.S., accounting for 11 per cent of global shipments. Traders say that countries that have relied on Russian supplies, such as Brazil and Turkey, have been in a bidding war for non-Russian supplies in recent days.
Fuels are “the much more concerning part of the picture at the moment,” said Isabelle Gilks, director of oils research at energy consulting firm Wood Mackenzie. “Russia is sort of the straw that could break the camel's back.”
At the same time, a recent flare-up in fighting around the Strait of Hormuz as Trump declares a ceasefire is threatening to exacerbate the problem. Flows of refined products through the strait, about five million barrels a day before Trump attacked Iran, have hovered near 1 million barrels a day recently, Citigroup Inc. analysts including Max Layton wrote in a note.
