Diesel Tops $5, Echoing 2022 Russia-Ukraine Invasion Energy Shock
US Fuel Spike Summary:
AAA national average diesel prices have jumped 34%, the largest increase for any month on record.
AAA national average gasoline prices have jumped 24.5%, also the largest increase for any month on record.
The spike in refined products comes just ahead of driving season and, if it persists long enough, could dent consumer sentiment polls.
The Trump administration assures the conflict will be short-term.
Countdown to Memorial Day driving season: 69 days.
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Update (0840ET)
The partially paralyzed Hormuz chokepoint has unleashed a worldwide tightening in the refined products market, sending gasoline and diesel prices at the pump in the US skyrocketing.
AAA (American Automobile Association) reports that the national average price for a gallon of diesel has topped $5, surging 34% so far this month. The monthly jump is the highest on record and may spark an energy shock across the core of the US economy, from freight to construction to agriculture to even heating oil.
The national average price for diesel now exceeds $5; the last time this happened was during the Russian invasion of Ukraine.
Seasonally...
Earlier, UBS analyst Matthew Cowley commented on a colleague's note about global refined products markets tightening:
The refined products market is already sensing tightness in the crude market, according to UBS chief strategist Bhanu Baweja.
Producers are reducing the output of petrochemicals given the likely rationing of crude supply. Markets are also getting tight because of fears of export limitations being imposed by large refining countries such as China.
Increases in prices of jet fuel, diesel, naphtha and urea are already in excess of the surge seen ahead of and through the Russian invasion of Ukraine. This has not yet spread aggressively to the broader commodity universe, including food and metals, but that is possible.
The longer the energy shock persists in the refined market space, the greater the risk of broader inflationary pressures and a political headache for the Trump administration ahead of the midterms. The administration assures that the conflict in the Middle East will be short-term.
On Monday, we reported that AAA data showed the national average for regular gasoline prices jumped the most on record for any given month, inching closer to the politically sensitive $4-a-gallon level.
Memorial Day is about 69 days away, and it tends to be one of the biggest travel periods, alongside Thanksgiving and Independence Day. This only suggests the administration needs to find an off-ramp to the conflict before the driving travel season really begins ramping up in May, or higher prices at the pump could start denting sentiment polls - bad news ahead of midterms.
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AAA (American Automobile Association) reports that the national average price for a gallon of regular gasoline has surged nearly 25% so far this month, putting it on track for the largest monthly increase on record, even surpassing the May 2009 spike, unless the Middle East conflict is resolved quickly.
This consumer fuel-price shock is coming at about the worst possible moment: it is a midterm election year for MAGA, and as we have noted previously, an emergency SPR release would do little to contain the spike, leaving the administration with few viable options.
Brent crude is trading near $102 a barrel and WTI around $95 on Monday afternoon, levels that suggest the national average price for regular gasoline could soon push even closer to the politically sensitive $4-per-gallon threshold.
Consumers have already noticed, as Google Search trends for "Why are gas prices going up" have surged to levels seen when crude prices spiked during Russia's 2022 invasion of Ukraine.
The good news is that comments from the Trump administration show an urgency to reopen the critical maritime chokepoint, the Strait of Hormuz.
Treasury Secretary Scott Bessent told CNBC's Squawk Box this morning that the US is deliberately "allowing Iranian oil tankers to transit the Strait of Hormuz" and is "fine" with some Indian and Chinese ships moving through "for now… to supply the rest of the world."
He highlighted "more and more of the fuel ships start[ing] to go through" and a possible "natural opening" the Iranians are permitting - a tactical concession to stabilize global supply while full escorts remain "militarily" off the table for now.
Last week, we highlighted JPMorgan's head of commodity research, Natasha Kaneva, who warned that policy measures will have, at best, a limited impact on oil prices unless safe passage through the Strait of Hormuz is assured, given the potential for up to 12 mbd in losses over the next two weeks.
Some of those policy maneuvers included the 32-nation IEA's emergency release of 400 million barrels that will soon hit crude markets, along with the initial flows from the U.S. SPR release of 86 million barrels, which could begin as soon as this week. As we have noted, this is not a stockpile problem, but a flow problem.
Kaneva's other five options beyond SPR releases to contain soaring oil prices include export restrictions, lifting the Jones Act (which Trump is set to do), waiving federal fuel taxes (which could occur if gas hits $4 a gallon), relaxing E15 gasoline blending rules, and issuing a Reid Vapor Pressure waiver (read her full note here).
With the national average price of gas inching closer to the politically sensitive $4-per-gallon level, the key question is what tools the Trump administration is prepared to use to contain pump prices to mitigate any risk of political fallout.
The immediate focus at the start of the week is clearly on reopening the Strait of Hormuz, but domestically, the policy maneuvering is far narrower, likely centering on an SPR release by mid-week and potentially a temporary waiver on federal fuel taxes.
Soaring pump prices come as spring break begins. Will Trump's Iran conflict be over before the Memorial Day driving season?