Mike Rogers, the Republican Senate candidate in Michigan, went on CNN on Sunday, Oct. 18. He said he'd have voted for the Russia sanctions bill his party's president just paused. On the diesel deal, he said, "I'm just a little skeptical that this will work." Two weeks before the Nov. 3 vote, the Journal's Michael R. Gordon, Meridith McGraw and Erin Mulvaney report, he isn't alone.
On Oct. 9 the president announced a deal he had struck with Vladimir Putin by phone. The U.S. would buy Russian diesel and help sell it on the world market. Late Friday, Oct. 16, the president signed an order halting most of the sanctions in the Graham bill. That bill passed the Senate 86-11 in September and allowed heavy tariffs on countries that buy Russian oil. The president says he doesn't want to drive Russia "away from the bargaining table." Secretary of State Marco Rubio says he'll take 60 days to review the effect.
Sen. Dan Sullivan of Alaska says he'd tell the president not to waive the sanctions to buy diesel. Iowa Senate candidate Ashley Hinson says lower diesel prices shouldn't need a deal with Russia. Sen. James Lankford calls the president's approach a balance between pressure on Russia and relief at home. The Journal's editorial board calls the dropped diesel sanctions a $4.5 billion windfall for Russian energy companies. Energy experts in the paper think the Russian barrels are too few to matter much. In their view the Iran war is what sets the diesel price. Tuesday's paper says diesel futures sit 6.5% below their recent record after the waiver.
What this does to Valero, and what it doesn't
Valero (VLO) sits at 3% in ten of the 12 model books that hold it, unchanged since Oct. 11. We wrote down one trim trigger, a published White House limit on U.S. diesel exports. Buying Russian diesel is the other side of that coin. It adds supply and stops no barrel leaving a Gulf Coast refinery. So the trigger hasn't fired. Held at weight, nothing added. Valero reports Thursday, Oct. 22, with $20.90 a share expected against $3.66 a year earlier. The stock closed at $433.31 on Monday, Oct. 19, down $11.40. By our own pull Tuesday morning, the Polymarket crowd prices a U.S. diesel export ban by Oct. 31 at about 2%, and by Dec. 31 at 11%. Crowd prices aren't forecasts.
One more diesel story, from the Weekend paper. Yaoyao Liu, a star trader at Vitol, is leaving by year-end. At the start of the Iran war his team bet diesel would rise against jet fuel. Then Iran shut the Strait of Hormuz and the trade went the wrong way, a hit of several hundred million dollars, Rebecca Feng and Peter Rudegeair report. His team had made billions for Vitol over several years betting the pandemic's blow to oil would pass. Tuesday's paper corrected that detail. The best in the business lose on one headline. That's why we hold energy as a hedge instead of trading the news.
Our read
Investments/Risk (IN04). Our rule for Valero is written down, and it names a thing anyone can check in print. Three papers full of diesel headlines, and none of them touched it. A refiner earns the gap between crude and the fuel it sells, and an export limit is what would squeeze that gap. We'll read Thursday's report the same way. Big numbers don't change the rule.
Here's your check this week. If you own an energy fund, pull up its top ten holdings and count the refiners. Then write one sentence next to each big holding, the single headline that would make you sell it. Do it before Valero reports on Thursday, while the news is loud and nothing in your rule has changed. That's what a review is for, and we're glad to do it with you. We'd rather find the umbrella while the sky is only gray.