Prices at the pump have gotten even more painful of late—and things could get much worse.
In the U.S., the national average petrol price topped $4.55 a gallon on May 18, a fresh record high. Diesel is more than $5.50 a gallon at the pump, another record, according to the Automobile Association of America. Prices in the UK and across Europe are at all-time highs too, fuelling a surge in inflation and weighing heavily on the global economy.
Enter JPMorgan with more bad news. The bank’s analysts say U.S. petrol prices could surge well past $6 a gallon as the American summer driving season—which unofficially starts around the Memorial Day holiday at the end of May—shifts into gear.
The problem is refiners have been turning out as much diesel as possible in recent months given historically low stockpiles and record-high profit margins for the fuel. That has left gasoline inventories running low just as demand is expected to pick up when Americans hit the road for summer holidays.
On the east coast, petrol stockpiles are the lowest they’ve been at this time of year in a decade and JPMorgan is warning that by the end of summer national fuel inventories could be run down to the lowest levels since 2008, when previous price records were hit.
“With expectations of strong driving demand . . . US retail prices could surge another 37 per cent by August to a $6.20 a gallon national average,” Natasha Kaneva, an analyst at the bank, wrote in a note to clients yesterday.
Refiners are already running their facilities at near maximum capacity, leaving little left to catch up with demand and rebuild stockpiles.
The sector has been hobbled by a spate of refinery closures as demand crashed during the coronavirus pandemic. More than 1 million barrels a day of capacity was closed as steep financial losses and a shaky long-term fuel demand outlook forced weaker facilities out of business.
Even amid this year’s fuel crunch, chemical company LyondellBasell said late last month it would close one of its Houston-area refineries by the end of next year in a sign of the long-term challenges facing the sector. The company made the move as part of a strategy to decarbonize its business, it said.
Unusually high petrol exports, mostly to Mexico and other countries across Latin America with struggling refining systems, are also pulling fuel stockpiles in the US lower, JPMorgan says.
“Unless refiners shift yields toward gasoline and cut exports immediately to rebuild stocks before the driving season picks up, US consumers should not expect much in the way of relief in prices at the pump until the end of the year,” the bank said.
A summertime surge in pump prices would be politically explosive ahead of November’s midterm elections. Republicans have already put high pump prices and inflation at the centre of their campaign to take back majorities in the US House and Senate. A renewed rise in fuel prices would provide a tailwind for a red wave at the polls.
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