The surge in gasoline prices worldwide is causing concern among central banks and governments, as it serves as an inflationary omen. Gasoline futures recently reached a nine-month high in New York, causing shockwaves at the pump. This price increase has also been observed in Asia. The tightening of motor fuel markets can be attributed to a combination of unforeseen refinery outages and lower-than-usual stockpiles in key storage hubs such as the US Gulf Coast and Singapore.
While crude oil futures have remained relatively stable this year, US gasoline contracts have rallied by over 20%. This resurgence in gasoline prices presents a challenge for central banks, including the US Federal Reserve, as they grapple with the task of determining if further monetary tightening is necessary to combat inflation.
Gasoline prices are a contentious issue as they can significantly impact daily expenses for many people, alongside necessities like food and rent. Rising energy prices, including gasoline, have contributed to the global surge in inflation. In the United States, President Joe Biden will have to address the issue of reining in prices at the pump, especially with the next election approaching in just over a year. This becomes even more crucial after last summer's decision to sell a substantial portion of the nation's strategic petroleum reserve.
Andrew Hollenhorst, Chief US Economist at Citigroup Inc., warns that higher energy costs could lead to increased consumer prices, potentially reigniting goods inflation, which has experienced a slowdown. The rise in gasoline prices can significantly impact consumer spending power. Each one-cent increase in a gallon of gasoline in the US takes away approximately $1.15 billion in annualized spending power. Therefore, the $1.30 per gallon drop in the second quarter saved consumers $150 billion, which they could allocate to other goods and services. However, if prices continue to rise, this tailwind could become a headwind and dampen consumer spending.
Low inventories and high demand in key regions are driving the increase in gasoline prices globally. In Europe, gasoline prices are rising faster than crude oil prices, although this trend has yet to fully translate into higher costs at the pump. The Singapore market, an important Asian hub, has also experienced tightened conditions due to lower-than-expected Chinese exports. In many emerging markets, the burden weighs even heavier on governments as they provide fuel subsidies to mitigate costs for poorer citizens. Despite the addition of refining capacity in the Middle East and China, global gasoline supply has not significantly recovered from historically low levels. Unplanned outages, such as Exxon Mobil Corp.'s Baton Rouge unit in the US and Shell Plc's Pernis site in Rotterdam, have further tightened supplies, compounding the situation of already low inventories.
According to Callum Bruce, an analyst at Goldman Sachs Group Inc., refining systems worldwide have become more susceptible to outages after prolonged usage. Additionally, a wave of record-breaking heat in Europe and parts of Asia is making it more challenging to process lighter crudes.
In China, the world's largest crude importer, indicators point to robust demand. Congestion levels in major cities with high car registrations have increased by around 25% compared to January 2021. In addition, commercial gasoline inventories in China are estimated to be at their lowest levels since at least 2019.
Europe has also experienced a rebound in gasoline usage, with countries like France, Germany, Spain, and Italy all witnessing year-on-year increases in consumption. However, the region is still feeling the impact of sanctions on Russia, which have deprived local refiners of crude and other raw materials for gasoline production. The loss of heavy naphtha from Russia has resulted in a shortage of feedstock for gasoline-making units, known as reformers. This has led to a scarcity of gasoline suitable for European cars. Moreover, the switch from Russia's Urals grade to lighter American crude has created an excess of light naphtha, which requires additional components like reformate to be blended into gasoline, further driving up the cost of premium gasoline.
The supply of gasoline has also been constrained by the recent counter-seasonal strengthening in demand for diesel, prompting refiners to increase diesel production at the expense of gasoline, according to Mark Williams, Research Director at Wood Mackenzie Ltd. These factors contribute to the tightness in global gasoline supply and the subsequent price surge.