Feature: US drivers in for expensive summer as refiners grapple with high demand

With average US gasoline prices breaking the $5/gal level in early June, refiners are working hard to meet rising post-coronavirus demand from drivers seemingly undeterred by high pump prices.

"Pent-up travel demand in North America will support oil consumption despite mounting pressure from high retail prices and eroded consumer purchasing power from high inflation," according to Platts Analytics.

And GasBuddy, which tracks real-time gasoline prices at over 150,000 North American stations, noted that the national average for gasoline reached $5/gal June 9, with drivers in 17 states paying over that already.

With about 1 million b/d less of refinery capacity and indications of strong summer driving demand ahead following the US Memorial Day weekend, US retail gasoline pump prices are forecast to stay in record territory, with regular averaging $4.39/gal in Q2 and declining only slightly to $4.38/gal in Q3, according to Energy Information Administration data.

"Demand is winning the race," said Rick Joswick, head of global oil at Platts Analytics.

Rising demand meets low inventories

While US gasoline demand climbed to 9.2 million b/d in early June, June gasoline inventories were woefully low, 10% under the five-year average for this time of year.

And increased gasoline exports – headed mostly to Mexico and other Latin American nations – reduced domestic supply by just under 1 million b/d, EIA data showed.

But most impactful on gasoline supply was the disruption caused as refiners shied away from Russian diesel in February after its invasion of Ukraine, which took over 500,000 b/d of supply from Europe.

As US refiners moved quickly to replace these lost Russian barrels, US Gulf Coast diesel cracks skyrocketed, topping $70/b in April.

To capture the margin, refiners then switched into max distillate mode, at a time when they normally would be transitioning into building gasoline stocks. Cracks reflect the value of the refined product in relation to the price of crude and dictate refinery output.

So today -- despite running over 90% of capacity and the economic incentive of refining margins north of $30/b -- US refiners don't expect to be able to increase gasoline production enough to provide relief at the pump in the near future.

"We estimate U.S. refinery inputs will average 16.7 million b/d during the second and third quarters of 2022. This average is lower than the 2019 refinery inputs average of 17.3 million b/d despite high utilization rates because of reductions in refinery capacity since early 2020," according to the EIA.

So even as refiners move quickly to return plants to service after planned maintenance work, they are working from a smaller base. The EIA expects refineries to run flat out, with refinery utilization averaging 96% in June, 94% in July and 96% in August.

The 1 million b/d of shut refining capacity since the beginning of the coronavirus pandemic is expected to continue to impact supply.

"We're going to see tighter refining markets in the US going forward," Chevron CEO Mike Wirth told attendees at Bernstein 38th Annual Strategic Decisions Conference June 1. "Some of the capacity that's been taken out, it's been taken out in bigger chunks."

Gasoline vs. diesel price compression

As refinery utilization has been rising -- reaching 94.2% of capacity for the week ended June 3, EIA data shows -- gasoline production is up to 10 million b/d and distillate production down to 5 million b/d. However, both gasoline and distillate inventories remain 9% and 20% below 2021 levels, respectively.

Increased gasoline production is a function of higher gasoline cracks, which are closing in on ULSD levels. USGC gasoline cracks versus Dated Brent actually topped that of ULSD by about $3/b in the lead-up to Memorial Day.

And that has continued into June, with USGC gasoline cracks trailing ULSD by about $3/b, compared with April's $35/b spread, as USGC spot gasoline prices reached $4.27/gal June 8, the highest price since 2008, according to the Platts Market on Close assessment process.

Diesel cracks are likely past their peak but will stay robust while gasoline cracks stay strong, marginally higher than diesel for the summer," S&P Global said.

But that doesn't mean ULSD cracks are dropping anytime soon, as Russian diesel remains off-limits to many buyers.

"US refiners are exporting diesel to Europe," Chevron's Wirth said. "That tightens up the US market. It moves molecules that would go into gasoline or jet fuel into the diesel pool, which tightens up the gasoline and jet market."

And the weather remains an unknown. The National Hurricane Center is predicting a 65% chance of an above average hurricane season in 2022, which includes the possibility of six to 10 hurricanes, of which three to six could be Category 3 or higher.

"If we have a bad hurricane season in the US ... at a time when these markets are already seeing very low inventories ... even a normal storm season ... you can see shortages as a result," Wirth said.