According to analysts, the latest geopolitical efforts by U.S. President Donald Trump to alleviate diesel supply tensions before the mid-term elections in November may not have a significant impact on prices.
On Sunday, Trump announced a "cease-fire on energy" between Russia and Ukraine, which came as a surprise to policymakers around the world, especially in Kiev, and led to a decline in oil prices on Monday. However, not long after the announcement, Russia attacked a power plant, and oil prices subsequently rebounded.
Trump's statement came after he announced an agreement: Russia would immediately release 300,000 tons of diesel to the United States and global markets, another 500,000 tons in November, and then another 1 million tons thereafter. Trump said that Moscow would also deliver an additional 3 million tons of diesel later on, depending on the situation at Russian refineries.
Trump has been trying to curb inflation before the mid-term elections in November; by then, his Republican Party may lose control of both the Senate and the House of Representatives.
According to data from the Pew Research Center, 84% of registered voters stated that the economy is “very important” to their voting decisions.
Data from the American Automobile Association ( AAA ) shows that due to the impact of the wars in Ukraine and the Middle East on supply, diesel prices reached a historic high of $6.5276 per gallon in late September.
Mohit Kumar, Chief European Economist at JPMorgan Chase ( Mohit Kumar ), stated in a report on Monday: "Trump is exploring every avenue to keep diesel prices low before the mid-term elections."
He added, "The agreement with Russia has sparked opposition both within the United States and among European leaders, as it would circumvent the current sanctions against Russia."
"Although more diesel supply will... alleviate some of the pressure on diesel prices, the quantity that has been agreed upon is unlikely to have a substantial impact."
Mysterious Diesel Supply from Russia
The U.S. Treasury Department has issued a temporary license to relax sanctions on Russian diesel in order to facilitate the agreement announced by Trump last Friday.
Analyst Lombard Odier stated in a report on Monday that this agreement, combined with China's plan to resume the export of refined fuels, "is potentially significant, as the diesel shortage has magnified the inflationary consequences of energy supply disruptions, especially through transportation, agriculture, and industrial production channels."
However, they warned that "the announced shipments do not equate to actual deliveries," and "neither of these two agreements will immediately repair the damaged infrastructure, nor will it restore maritime transport to normal."
Neil Atkinson, the former head of the Oil Department at the International Energy Agency (IEA), is not so optimistic. In a statement to CNBC, he said: "Where the supply required by the Trump agreement will come from remains a mystery, unless it comes from domestic supplies, but that would cripple the Russian economy."
Atkinson pointed out that the G7 recently authorized the release of 50 million barrels of oil products, mainly diesel, but since it is unclear how much will be released, when it will be released, and from where it will be released, "this has almost no impact on the tension in the diesel market."
"The same will be true for the new agreement that allows Russia to export, between the United States and Russia," he said. "Even if the initial 300,000 tons (which is roughly equivalent to 70,000 barrels per day for a month) become available tomorrow, it will hardly have any impact."
"The reason for the limited impact is that the United States consumes 3.7 million barrels of diesel per day, while globally, 29 million barrels of diesel are used daily. The United States currently has a commercial diesel inventory of 105 million barrels," Atkinson added.
"Before the war, the Middle East Gulf region exported nearly 1 million barrels of diesel per day. Due to damaged refineries and difficulties in exporting products by ship, this supply is still largely lacking."
This agreement will be “a financial failure” – and may embolden Putin
Analysts from Singapore Quantum Strategy presented a more pessimistic outlook in their report sent to clients on Monday.
"We expect this agreement to fail economically. We will continue to go long on distillate oil and crude oil. We will also continue to go short on U.S. assets," they wrote.
"We expect Putin to interpret this agreement as a public invitation to escalate the wars in his grey zones in Europe to a higher level. This will be detrimental to the euro and the sovereign debt of the EU, as European countries will compete to ensure their own defense."
