The US diesel market has entered its traditional peak season, but this year's price gains have moved well beyond normal seasonal patterns. AAA data showed the national average reached $6.45 a gallon on September 18, while California's average climbed to $8.39. Prices were up about 74% and 62%, respectively, from a year earlier. The increase is moving beyond fuel stations into trucking, rail, agriculture, retail and food supply chains, putting pressure on corporate margins and share prices.
Russia and shipping disruptions tighten diesel supply
Tom Kloza, chief oil analyst at Golf Oil, said geopolitical conflict has affected Russian refineries, while shipping through the Strait of Hormuz and the Red Sea has also been disrupted. Together, those developments are adding pressure to global diesel supplies. Kloza has repeatedly warned that diesel inventories in the US and globally are low, while drone attacks in Russia, the Gulf region and around the Red Sea have left about 7 million barrels per day of refining capacity offline.
The US diesel average did not break above $6 a gallon for the first time until last week. Kloza also noted that inventories had never previously been this low in September. As supplies tighten, refiners must decide how to allocate capacity between diesel and gasoline, and some areas have already seen limits placed on the amount of oil customers can purchase.
Higher fuel bills spread through freight and food
The impact of rising diesel prices extends well beyond pickup-truck drivers. Diesel powers trucks, ships, trains, construction equipment and farm machinery, sectors that cannot reduce consumption as quickly as individual motorists. Clark Williams-Derry of the Institute for Energy Economics and Financial Analysis said commercial transportation has demand closer to a necessity than gasoline, making it less price-sensitive. When supplies fall short, diesel prices can therefore rise faster than gasoline.
Diesel is also a globally traded commodity, so a supply disruption in one region can affect other markets through trade flows and inventories. Gasoline formulations, by contrast, are more heavily shaped by local climate, weather and air-quality standards, meaning price shocks do not move across regions in exactly the same way.
Logistics companies are expected to pass some fuel costs on to customers. That could push up delivery costs for groceries, snacks and other everyday goods, while also increasing household heating bills. Farms, trucking companies, rail operators, retailers and food grocers all face higher operating expenses.
J.B. Hunt shares lose nearly 14% in a week
Markets have begun to reassess earnings expectations for transport companies. Brad Delco, chief financial officer of S&P 500 constituent and trucking company J.B. Hunt, said at a Morgan Stanley conference that the company expects earnings to fall 5% to 10% from the second quarter to the third quarter. J.B. Hunt shares then opened 11% lower on Wednesday and were down nearly 14% for the week ended September 18.
Shares of FedEx and United Parcel Service have also weakened since the end of August. Rail operators Union Pacific and CSX are facing higher diesel costs as well. However, rail freight demand has improved during the period of higher diesel prices, so the two companies have not tracked the performance of highway freight operators exactly.
Whether diesel prices move higher will depend on how quickly refineries return to service, conditions along key shipping routes and when US and global inventories begin to recover. Until those variables become clearer, elevated diesel costs will continue to show up gradually in freight contracts, product distribution expenses and corporate earnings.