Treasury yields follow diesel more closely than crude for the first time, Energy Aspects says

Diesel enters the economy at more points than crude does. Fortune notes it is a critical input in manufacturing, agriculture and logistics ^[4]. The latest consumer and producer price indexes showed jumps in transportation costs, and purchasing manager surveys signaled big spikes in prices businesses pay ^[4]. Crude was long the proxy for those costs because refined products moved with it, a relationship Amrita Sen of Energy Aspects says has broken down ^[8]. "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," Sen, the firm's director of market intelligence and co-founder, wrote in the Financial Times ^[5].

Her rates claim is the bolder one, or rather the one with less published support. "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 wrote ^[6]. Fortune does not publish the correlation figures, so the article gives no way to check how much better diesel fits. Markets are pricing a Federal Reserve ready to raise rates further as fuel keeps inflation forecasts elevated, and yields have risen on that expectation ^[7]. Yields would also fit diesel more closely if both were responding to the same inflation forecasts. On that reading diesel is the better gauge of the Fed path, and a rates model fed only crude has been using the weaker input since May ^[6].

Input costs can be checked from the article's own figures. Diesel's 71% rise against crude's 56% is a 15-point gap ^[19]. A fuel surcharge that escalates with crude has therefore recovered about 79% of the diesel increase, 56 of every 71 points, and the shipper or farm carries the rest ^[14]. The year-ago pump price works out to about $3.67 a gallon, $6.277 divided by 1.71 ^[15]. That squares with Fortune's figure of a $2.60 rise ^[9].

Against $2.60, the 24-cent federal tax deferral is about 9% ^[16]. It roughly matches the 25 cents diesel has already given back from its peak ^[17]. The Russian schedule adds up to at least 4.8 million tons over four tranches ^[18]. A sanctions law Trump signed last month imposes steep tariffs on the top buyers of Russian energy ^[12]. Neither step repairs the damaged refining capacity behind the crunch ^[3]. "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," Michael Lynch, distinguished fellow at the Energy Policy Research Foundation, told the Associated Press ^[13].

The spread could close three ways. Repaired refineries in the Middle East and Russia would compress the product premium and pull diesel's annual gain toward crude's, and the distinction would stop mattering for rates ^[3]. Rerouted Russian cargoes, on Lynch's account, would leave diesel near $6.28 a gallon and the hawkish pricing in place ^{[1] [13]}. Rate hikes of the kind markets now price would cut fuel demand and soften both measures together ^[7]. We think the diesel-crude spread is the better gauge of input-cost pressure for as long as refining stays damaged. The view is wrong if diesel's annual gain falls back toward 56% and 10-year yields keep climbing anyway.