Commodities Corner: Sky-high gas prices aren’t stopping Americans from hitting the road this summer

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Despite a rebound in COVID cases, Memorial Day Weekend is expected to mark the beginning of a busy US driving season as Americans hungry for some time away are undeterred by the rising cost of gasoline and pretty much everything else.

Data from GasBuddy showed that nearly 60% of Americans are planning on hitting the road for a vacation at some point this summer. That’s the highest reading since 2019.

This suggests that Americans are feeling the itch to travel after two years of pandemic-induced isolation.

But just how many people will be hitting the road during Memorial Day Weekend?

According to the American Automobile Association, nearly 40 million people are expected to travel 50 miles or more by car over the holiday period. That represents an increase of 8.3% from the same weekend a year ago, and it’s just shy of pre-pandemic levels. By comparison, prices at the pump have risen roughly 50% over the past year.

Across the US, gas prices are already sky-high – and most experts expect them to continue to climb. During the week before Memorial Day, the national average gas price was around $4.598 per gallon, according to data from AAA. That’s compared with just over $3 a gallon a year ago.

Although travel plans are pretty much uniform across the US, it’s worth noting that the burden on every family’s pocketbook will vary depending on where they live.

Nearly a dozen states along with Washington DC are paying more than $5 a gallon for regular gasoline at the pump. And thanks to their heavy state levies, Californians are paying more than $6 a gallon, on average, with at least one gas station in the northern part of the state charging more than $7.

Both Los Angeles and San Francisco have seen the price of gas in their respective areas top $6 a gallon, with other American cities expected to join them in the not-too-distant future.

And there’s no relief in sight – at least not according to analysts at the major investment banks, who expect gas prices will continue to climb as the summer drags on.

A team of commodity analysts at JP Morgan recently warned the bank’s clients that the average price of gas in the US could top $6 a gallon by the end of August, which would represent an increase of more than 35%.

“Typically, refiners produce more gasoline ahead of the summer road-trip season, building up inventories. But this year, since mid-April, US gasoline inventories have fallen counter seasonally and today sit at the lowest seasonal levels since 2019. Gasoline balances on the East Coast have been even tighter, drawing to their lowest levels since 2011,” the JP Morgan analysts said in their note.

Although American refineries have picked up the pace in recent weeks, the data show that the advance still isn’t enough to compensate for the drop in inventories.

Crude-oil stockpiles at Cushing, Oklahoma, the main hub for the US energy industry, have fallen for a third straight week, dipping below 25 million barrels.

Still, refiners in the US were running at full tilt in the weeks before the start of the summer driving season as they responded to the wide margin between prices of crude oil and prices of refined petroleum products, which represents a serious boon to the business of refining.

According to EIA inventory data released Wednesday, Gulf Coast refiners boosted their run rates to 97.4% last week, the highest level since January 2020, while refiners along the East Coast raised their run rates to 97%, the highest level since July 2018. Despite this pickup in production, there was a minor drawdown for gasoline inventories, while inventories for heavier products – including heating oil and jet fuel – showed a slight build. One factor driving this was exports, which also accelerated last week.

Refiners have plenty of incentive to keep working at or near capacity: in the US, the spread between the price of gasoline, heating oil and other distillates and that of crude oil remains at or near their widest levels ever. This is known as the “crack” spread, and it’s a measure of the pricing of a barrel of oil and the prices of the refined products that can be produced from it.

While refiners do have the ability to achieve run rates of more than 100%, capacity remains an issue, according to Patrick De Haan, head of petroleum analysis at Gas Buddy.

“From diesel to gasoline it has been a story of tight inventories and less refinery capacity than we had a couple of years ago,” De Haan said. “Whether we have enough capacity to weather the driving season is really the question.”

Looking ahead, few analysts can imagine a catalyst or catalysts that might cause oil and gasoline prices to revert – although a severe recession just might do the trick.

“Barring a major recession and barring Russia doing an about-face, we’re going to be stuck with elevated product prices for the majority of the summer, if not the year,” De Haan said.

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