LIVE MARKETS-Diesel daze: Inflation pressures, export bans, and midterms
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DIESEL DAZE: INFLATION PRESSURES, EXPORT BANS, AND MIDTERMS
The Iran war has sent US crude prices skyrocketing since US-Israeli airstrikes marked the war's opening salvo on February 28. Those upward price pressures have provoked Warsh & Co to implement at least one rate hike so far, with more where that came from, most likely.
Fears that oil prices, which are currently about 40% north of prewar levels (down from 59.3% at their acme), could morph into broader inflation have been confirmed by recent inflation data, a fact that can be explained, in part, by soaring distillate prices, particularly diesel.
Diesel fuels the trucks that move goods, after all.
And trucking companies' margins don't leave much wiggle-room.
Trucking company J.B. Hunt JBHT.O reported net profit margin of just over 5% in its most recent quarterly report. Stack that next to higher-margin sectors such as semiconductors, software, pharmaceuticals, asset management which have net profit margins ranging from 18% to 30%.
They have no choice but to pass on the added expense.
"(Diesel) is a major cost input for a lot of transportation-related companies," Chuck Carlson, chief executive officer at Horizon Investment Services tells Reuters. "It's a cost that either the company's got to eat or pass it on or both.
"That's where the inflation is."
Through that lens, it's easy to see how higher diesel prices are helping to keep the Fed's feet to the fire.
"Surging diesel prices should keep the Federal Reserve hawkish," writes Bernard Yaros, lead US economist at Oxford Economics. "Diesel prices are emerging as the main upside risk to the inflation outlook, given that they’re embedded in the costs of producing and transporting everyday consumer goods."
"The surge in diesel prices is becoming a political issue, and the administration is considering a temporary diesel export ban, which might add upside risk to inflation," Yaros adds.
The political aspect is real. With critical midterm elections just weeks away, US President Donald Trump is weighing a 90-day diesel export ban.
“Washington has its hand on the most dangerous lever in the entire energy system," says Nigel Green, CEO of the deVere Group. "Choke it off and every price tag on the planet feels the shockwave.”
The chart below shows diesel prices against Dow Transports .DJT.
(Stephen Culp)
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