Summer Gasoline Prices to Cause More Pain at the Pump

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Consumers in the US can expect high gasoline prices this summer as the ripple effects of both acute and structural developments look to keep the global market tight and put pressure on supply.

In its recent Summer Fuels Outlook, the US Energy Information Administration (EIA) painted a painful picture of what the average US consumer can expect during the peak demand season for gasoline.

The government agency projected average retail prices of some $3.84 per gallon, but noted that demand is still expected to increase year on year, although not quite to pre-pandemic levels.

Several confluent factors are helping to drive higher gasoline prices, while simultaneously preventing refiners from hiking supplies of the fuel. Russia’s invasion of Ukraine and the resulting sanctions have not only tightened the global petroleum market, they have also roiled refining economics and led to an atypical relationship between diesel and gasoline while pressuring the European downstream.

Meanwhile, outright refinery throughput capacity in the US and Canada has fallen sharply since mid-2019.

Gasoline vs. Diesel

Refiners usually start boosting gasoline yields in the run-up to summer, replenishing inventories with summer-grade product. But this year, Russian outages have put diesel rather than gasoline front and center, even with summer just weeks away.

“Refiners are making a lot of money producing diesel … As Europe moves away from Russian diesel purchases and the public takes to the skies this summer, increasing airline traffic, increasing jet fuel demand, diesel prices could easily set a record in the coming days and weeks,” noted Andy Lipow of Lipow Oil Associates.

Current US crack spreads reflect this dynamic: Energy Intelligence’s downstream modeling puts current cracks for diesel against an incremental barrel of medium, sour crude in a complex Gulf Coast facility at just over $60. New York Harbor cracks against Brent, meanwhile, are north of $80 and could go higher.

To be sure, gasoline cracks are also strengthening as summer approaches, keeping a hold above $30 against incremental medium, sour crude.

“Last week, the front-month RBOB–Brent crack spread climbed above $29 per barrel for the first time since 2007,” noted Stephen Brennock of oil brokerage PVM.

“What we expect to see … as we get into driving season and gasoline demand continues to pick up, you're going to have compression between gasoline cracks and diesel cracks,” said Gary Simmons, chief commercial officer for independent refiner Valero Energy.

EIA data show gasoline output from US refiners and blenders has climbed for three consecutive weeks and averaged over 9.8 million barrels per day in mid-April, the highest figure since late December last year.

“As production edges higher throughout the summer, this will gradually add downward pressure to wholesale gasoline margins and retail prices,” Brennock said.

Ceiling and Swing

There is a limit to how much refiners can swing supply from diesel to gasoline. For one thing, rising demand complicates adjusting yields.

“It was much easier to swing capacity during the early pandemic because shifting demand patterns were trending in the direction of less demand,” explained John Auers of consultancy Turner, Mason & Co. Now such a switch means cutting into supply of an in-demand fuel.

Auers pegged overall US swing capacity at some 10%-15% between gasoline and diesel, generally speaking. However, the US downstream has lost over 800,000 b/d in throughput capacity since mid-2019.

“Refiners do have flexibility, but they don’t have the capacity. The global system is tight,” Auers said. “The market for products in general is going to be tight spring through summer, and I don’t see any way around that.”

Refiners themselves also say that current utilization rates are likely unsustainable.

Gasoline, Oil Demand, Oil Products, Refining, Independent Refiners
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