US retail gasoline prices soared to another record on Monday as global refineries struggled with adding new capacity ahead of the driving season.
Before diving into Goldman Sachs' new commodity note explaining how global refining will be tight for the foreseeable future, last week, Saudi Energy Minister said, "the bottleneck is now to do with refining … many refineries in the world, especially in Europe and the US, have closed."
Goldman's commodity analyst Neil Mehta outlines a rash of refinery retirements, reduced Russian energy exports, recovering jet fuel demand, and tight global inventories for products, particularly diesel, have supported higher retail fuel prices.
Mehta points out US product inventories are below a 10% five-year average, refining utilization rates are below normal, global natural gas prices are high, and demand for diesel remains robust.
US product and total inventories are well below a five-year average.
US refining utilization struggles to increase as the driving season begins.
"We believe the oil market needs to price to demand destruction, which will drive the least elastic prices, such as those for distillate, higher," he said, adding tight inventories could last through this year and well into 2023.
While the demand destruction has not begun yet (from what we have seen in the data), the price adjustments for refined products is starting to reprice drastically (in barrel equivalents below for easy comparisons)…
A lack of refinery capacity is the culprit of rising fuel prices. The average cost of US gas prices at the pump on Monday morning is $4.483 and $5.56 for diesel.
Today's refinery bottlenecks may suggest that even higher prices are ahead this summer as the driving season begins.