Bond yields closely track diesel prices now, and Trump’s deal with Putin may be too little too late

The national average for diesel is about $6.277 per gallon, according to AAA, down from its $6.528 high but still 71% above year-ago levels. By contrast, U.S. crude oil is up 56% from a year earlier as damage to refining capacity in the Middle East and Russia has produced a sharper crunch in fuel markets.

Because diesel is a critical input in manufacturing, agriculture and logistics, the recent price surge has been felt broadly. The latest consumer and producer price indexes showed jumps in transportation costs, while purchasing manager surveys signaled big spikes in prices businesses are paying.

“This is why products have been trading at double the price of crude during the past few months, something that has never happened before. Ultimately, diesel and gasoline drive inflation, not crude oil,” Amrita Sen, director of market intelligence and co-founder at Energy Aspects, wrote in the Financial Times on Wednesday.

And as higher fuel costs keep inflation forecasts elevated, markets are pricing in a more hawkish Federal Reserve that’s ready to hike rates further. Bond yields have risen in anticipation of tighter monetary policy, raising borrowing costs for consumers.

Crude prices had previously moved in tandem with prices for refined products and had long been a proxy for those costs, but that relationship has broken down, according to Sen.

“In fact, since May, 10-year US Treasury yields have correlated more closely with diesel prices than crude prices, for the first time ever,” she added.

That’s why the Trump administration has started paying more attention lately to bringing down diesel prices, Sen said.

Over the past week alone, President Donald Trump has taken steps to ease the cost burden. On Monday, he signed an executive order to defer the 24-cent federal tax per gallon on diesel until the end of the year, though most states have separate levies on diesel.

And on Friday, he said he reached a deal with Vladimir Putin to obtain diesel from Russia, a stunning reversal from years of U.S. pressure on Moscow over its invasion of Ukraine.

Russia will supply more than 300,000 tons of diesel now, followed by an additional 500,000 tons in November and 1 million tons “immediately thereafter,” according to Trump. Russia will deliver another 3 million tons “within a short period of time” after that.

The surprise announcement was more shocking considering that Trump signed a sweeping sanctions law last month that imposes steep tariffs on the top buyers of Russian energy.

But Trump’s efforts to lower diesels costs are unlikely to improve affordability significantly. 

Farmers and truckers have said his executive order on the diesel tax will offer little relief, especially given that per-gallon prices are $2.60 higher than a year ago while the federal tax is just 24 cents a gallon. Similarly, energy experts said the deal for Russian diesel is also unlikely to make much of a dent.

“It’s kind of shuffling deck chairs on the Titanic,” Michael Lynch, distinguished fellow at Energy Policy Research Foundation, told the Associated Press. “If we get diesel from Russia, basically it means that their existing customers are not going to get it and they’ll have to go somewhere else, and that will keep the price basically where it is now.” 

And even if Trump somehow managed to end his Iran war or bring fuel prices down sharply, Republicans may not see a lift with voters in November.

According to a new Politico Poll, just 10% of undecided voters said they would be more likely to vote for a Republican if gas prices went down by $1 a gallon versus 29% who said it would have no impact and 57% who didn’t know.

The results were similar when asked about how an end to the Iran war and a sharp drop in inflation might affect their midterm choices.

“There’s nothing that Trump can do, and frankly, even if he did something, no one would believe it anyway at this point,” one GOP operative working on battleground races told Politico.