High gasoline and diesel prices will persist

With crude prices holding above $110 a barrel, and Russia’s invasion of Ukraine disrupting global crude and refined product trade flows, global refinery capacity is now lower than previously at some refineries, including those in the U.S., after COVID dented fuel demand in early 2020. plant) is permanently closed. Analysts say there is no quick fix for persistently high fuel prices in the U.S. or elsewhere. The quickest solution isn’t actually what American consumers want — a recession that would lead to job losses.

Despite months-long efforts by the Biden administration to lower gasoline prices — including a massive release of crude from the Strategic Petroleum Reserve (SPR) and accusations of price gouging by oil companies — U.S. refiners have been unable to keep up with demand.

Demand hasn’t soared that much. This is global and U.S. supply capacity, which is now several million barrels per day lower than it was before the pandemic.

U.S. refinery capacity at lowest since 2015

About 1 million barrels per day (bpd) of U.S. refinery capacity has been permanently shut since the start of the pandemic as Refinery Selection Either shut down the draining facilities or convert some of them into biofuel production sites. Refinery capacity is also stretched globally, especially after Western buyers, including the U.S., stopped importing Russian vacuum gas oil (VGO) and other intermediate products needed to refine crude into gasoline, diesel and jet fuel .

Fuel markets in Europe are also extremely tight given that many refiners refuse to stockpile Russian crude and suppliers shun Russian diesel, even as the EU struggles to reach a common position on an embargo on Russian oil imports.

In the U.S., the operational capacity of refineries in 2021 is just over 18 million bpd, Lowest since 2015according to EIA data.

“As we all know, 1 million barrels of distillation capacity have been pulled out of the system since pre-pandemic,” said Mike Jennings, CEO of refiners HF Sinclair and Holly Energy Partners. said on the first-quarter earnings call last week.

Distillate refining margins are very high due to the shortage of refined products, he added.

“How long is this going to last? I don’t see any indication that it’s going to end anytime soon,” Jennings said.

Rising demand since the reopening of the economy and people returning to travel, combined with lower refining capacity and a very tight distillate market, has resulted in U.S. product inventories falling below seasonal averages and multi-year lows, with record inventories reported on the East Coast. new low.

Distillate stocks fell by 900,000 barrels in the week ended May 6, about 23% below the five-year average for this time of year, the EIA said in its latest weekly inventory. Report. Distillate stocks, including diesel, stood at 104 million barrels, the lowest since 2008.On the East Coast, inventories are at record lows due to refining capacity in the region halved Over the past decade, it is now just 818,000 b/d.

‘We are ready for a potential supply crisis’

According to from Wood Mackenzie.

“For companies with aging refineries that require significant investment to stay afloat, in the face of a weak demand outlook, it can be difficult to justify spending, especially on gasoline due to improved fuel efficiency and the rise of electric vehicles,” Ed said. Crooks, WoodMac’s vice president for the Americas, wrote last week.

Meanwhile, Crooks noted that new refining capacity in the Middle East and Asia is only just entering the market after being delayed, in part because of the pandemic and weak refining margins.

“We are ripe for a potential supply crisis,” said John Auers, executive vice president of energy consultancy Turner, Mason & Co. Bloomberg last week.

U.S. gasoline prices at all-time highs as summer driving season approaches, but no weakening of demand However.

In addition, the paper market points to high gasoline prices throughout the summer, as Gasoline Futures New York hit $4.00 a gallon for the first time on Monday.

RELATED: Russian oil output drops nearly 9% in April amid Ukraine war

“Continued inventory drawdowns over the past few weeks have pushed U.S. gasoline inventories to levels well below the five-year average at this point in the season, reflecting severe supply constraints,” said ING strategists Warren Patterson and Wenyu Yao. said On Monday, commented on record gasoline futures prices.

The diesel market is even worse. Distillate inventories were 23% below their seasonal average and prices also hit record highs.

“I wouldn’t be surprised to see diesel rationing on the East Coast this summer,” said John Catsimatidis, chief executive of United Refinery. Bloomberg in an interview last week.

no short-term fixes

Prices are not expected to fall sharply from their all-time highs anytime soon, analysts and industry professionals said, noting that there is no quick fix for the strained fundamentals in the global fuel product market.

“I think, assuming the economy remains fairly strong, we can expect commodity prices, especially for our products, to be relatively high,” HF Sinclair CEO Jennings said on a first-quarter conference call last week.

Diesel and gasoline prices hit record highs Threats to economic growth, further increasing the upward pressure on US inflation data. With diesel prices affecting every part of the economy, the Fed’s fight against inflation is compounded by a bigger rate hike that could lead to worsening economic activity and household spending, and ultimately a recession.

Commenting on the diesel market imbalance, Mark Williams, director of short-term refining and petroleum products market research at Wood Mackenzie, said: “When we see a tight market, the natural conclusion is that a recession will fix that.”

A recession may be the only short-term “fix” for a very tight fuel market right now, but it’s certainly the least popular solution to high gasoline and diesel prices.

By: Tsvetana Paraskova of Oilprice.com

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