Despite G7, fuel inflation will remain

Last week's decision of G7, that grouping of 7 of the world's most advanced industrial economies, to release 100 mn barrels of diesel and crude oil from emergency reserves is unlikely to put a lid on the fuel inflation they are grappling with. The draw down in reserves is a quarter of the 400 mn stock release coordinated by the International Energy Agency (IEA) in March. Around two-thirds of the initial commitment has been fulfilled. It's not clear how much of the extra G7 promise overlaps contributions that remain from the March agreement. The pledge was extracted through Donald Trump's threat of banning US diesel exports, which he says will not be needed after Europe gave in over its large diesel stockpile.

The G7 move is political with underwhelming economic consequences. Trump will be headed for midterm elections next month at a record low rating on account of high prices at US gas stations. He has unsuccessfully tried to pressure the Fed to go easy on interest rates. Europe is easier to convince because it's now buying a lot of diesel from the US and an export ban will hurt. But that doesn't translate into lowering fuel prices ahead of the midterms, or convince central bankers to go soft on interest rates amid a bond market selloff.

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Total global crude oil production capacity is just about covering consumption. But supply disruptions and export restrictions over refined petroleum are throwing the market off equilibrium. Diesel export bans by Russia and China, and fouled up tanker movement, will add to the pressure ahead of winter heating demand in the northern hemisphere. Freight will remain expensive, adding to the inflationary impact of extended high crude oil prices. Trump's unconventional moves over releasing diesel reserves will cause some dips. But underlying economic forces won't pull energy prices off their perch. Correction is not expected till well into 2027 as inventories are rebuilt and shipping lanes normalise. Till then, threats of fuel export bans will serve to score political points at home and abroad.