TACO Strikes Again

The US-Russia diesel deal is unlikely to materially reduce diesel prices and could instead increase the risk of further Federal Reserve rate hikes.

• Two months after imposing tariffs on India for continuing to buy Russian oil, Donald Trump agreed with Vladimir Putin on a staged release of Russian diesel: 300,000 tonnes immediately, 500,000 tonnes in November, and 1 million tonnes afterward.
• The US Treasury is understood to have suspended the earlier sanctions until 7 April, while assets such as those held in American banks remain frozen; Trump also announced a possible additional 3 million tonnes, conditional on the state of Russian refineries damaged by Ukraine.
• The first tranche of 300,000 tonnes equals about 2.25 million barrels, versus nearly 3.6 million barrels of daily US diesel consumption, so it represents less than one day's consumption.
• Assuming roughly 5 million tonnes are released, the author's calculation converts this to 37.5 million barrels against 976 million barrels of annual US diesel consumption; transportation uses 41 billion gallons, or 69% of the US total, implying coverage of less than 4% of its annual needs, or 2.6% when all users are included.
• ARP also questions whether Russia, already short of diesel, can deliver the promised volumes and notes that diesel inflation affects core CPI more broadly than petrol inflation, which could prompt a stronger Fed response.

Takeaway: The agreement appears politically motivated ahead of the 3 November midterm elections and is too small and uncertain to resolve the US diesel problem; investors should therefore not assume meaningful diesel-price relief and should retain the possibility of further Fed hikes.