US gasoline prices show little sign of moderating leading into the summer driving season, with resurgent demand, tight supplies and stubbornly high crude prices feeding the recent run-up at the pump. But some forecasts predict markets could soon rebalance as consumers take steps to shield themselves from prices and refiners bring on incremental capacity.
High crude prices and shortages of key gasoline blendstocks have exacerbated the traditional run-up in US pump prices leading into the summer driving season this year. Average nationwide gasoline prices rose 40pc from the first week of January to the week ending 30 May, when they reached a new record-high of $4.73/USG, according to the US Energy Information Administration. That January-May rise marks the steepest increase over that period since 2009 and the second-highest increase over that stretch on record.
These rapidly increasing prices, combined with inflation elsewhere in the economy, have prodded politicians at the state and federal levels toward measures to tamp prices, including taps on strategic stocks, loosened rules around ethanol blending and holidays on state gasoline taxes. But most consumers are filling up their tanks as usual.
In a mid-May survey of 1000 US drivers, US consultancy KPMG found 51pc of respondents said gasoline prices have not yet impacted their daily transportation choices.
"While some consumers are changing their commuting choices and gasoline purchases due to higher prices, a sizable portion of consumers have not changed, which sets up an interesting demand dynamic as we head into the summer travel season," KPMG energy sector leader Angie Gildea said. "We anticipate continued record gasoline prices in June though hopefully we may see some decline in prices later this summer."
Some industry watchers expect prices to simply keep rising this summer. Analyst Paul Sankey last month forecast a "borderline crisis summer for US gasoline," citing tight refining capacity and forecasts from AAA that travel activity "will be on fire" this summer. US on-road vehicle miles traveled reached a new monthly record of 277bn miles in March, lending some credence to those forecasts.
The supply backdrop
Even a marginal rise in demand would stress an already pressured slate of US refineries. The closure of roughly 1.488mn b/d of refining capacity in the US and Canada across 2020-2021 has left North American refiners outgunned in the face of demand now outpacing pre-pandemic levels.
Impacts from the war in Ukraine offer another challenge. US sanctions on Russian energy passed in March cut off US refiners' access to feedstocks central to gasoline production, including vacuum-gasoil (VGO) typically used as in fluid catalytic crackers (FCCs). VGO is also a key feedstock for diesel production in hydrocrackers, forcing some refiners to choose between gasoline and diesel production.
"Is this going to be a time where if you don't have enough secondary feedstocks to fill all your cracking units you are going to wind up asking what the diesel crack is [versus] the gasoline crack?" PBF Energy chief executive Tom Nimbley said earlier this year. "We have knobs to turn but [the shortage] is clearly going to be a limiting factor."
Balancing act
Some sources believe that balancing could occur on the demand side. Retail fuel prices recently prompted Argus Consulting to downgrade its global oil demand growth forecast for this year, on expectations that record prices at the pump will offset the release of pent-up travel demand among US drivers.
Other industry watchers argue the global refining system has more spare capacity than headline data suggests. Sarah Emerson, president of consultancy Energy Securities Analysis, expects global refining capacity will "go up about 5mn b/d" this summer as refineries come back from maintenance, shutdown, or "warm idle" refineries came back online and long-delayed expansion projects are completed.
But while the idea that refiners will boost capacity carries a redemptive ring for the industry, there are practical considerations standing in the way of such scenarios.
PBF Energy does not expect to restart capacity it previously closed at its Paulsboro, New Jersey, refinery in early 2021 amid reduced demand, due mostly to feedstock tightness. The Limetree Bay refinery in the US Virgin Islands is often cited as one source of incremental supply, but US environmental regulators will likely stand in the way of efforts to revive the facility. And while Chevron expects to make a final decision this year on reconfiguring its 100,000 b/d Pasadena refinery in Texas toward more light oil processing, output gains would likely be mitigated by the parallel closure of the facility's FCC.
For now, high prices are likely to remain a leading political issue. One space to watch is the US Environmental Protection Agency's (EPA) issuance of renewable fuel blending standards, which compel US refiners to blend renewable fuels into domestic road fuels. While the blending program calls for those standards to increase annually, the EPA in December proposed a retroactive reduction in 2020 volumes to reflect reduced demand during the pandemic. Whether the agency might alter its approach to the volumes given current high prices for gasoline —which refiners argue are partly a result of the blending program — has been a topic of discussion among industry sources for the better part of 2022.
The EPA faces a deadline today to finalize blending mandates for 2020, 2021 and 2022.
