Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
I am incredibly happy to announce that my prediction that retail gasoline prices might peak during the Memorial Day Holiday weekend is coming true! AAA reports that the price of Regular Unleaded Gas broke its record-breaking stretch of gasoline price increases by reporting that retail price fell to $459.9 a gallon down a whopping 0.1 cent a gallon from yesterday’s record price of $460.0! Ok, I know that it’s not that big of a deal but after seeing record after record I’ll take what I can get. Besides, after the record-breaking run, there is even talk that the Biden administration may be looking for ways to help re-open shuttered refineries, the same refineries that the policies they back helped shut down.
In all seriousness, the surge in gasoline price could be moderating but there is no doubt that the fundamentals for gasoline are still solid. The likelihood of a substantial price break could be measured in pennies, not quarters. The Energy Information Administration (EIA) this week reported that gasoline supplies are about 8% below the five-year average for this time of year. The reason is in large part due to the push by the Environmental Social and Governance (ESG) movement and the Paris Climate accord to pressure investment and regulate refineries out of business. We have lost well over a million barrels a day of refining capacity and have closed 5 refineries or retooled them for biofuels to appease the climate lobby. Yet now it appears that the political reality of rising gas prices might be too much to take for the Biden administration.
Joe Biden has been blasted by everyone by saying that this pain at the pump that Americans are facing is all part of his planned “incredible transition”. Now after the backlash, it appears that the Biden Administration is thinking about reopening refineries to make more gas as part of the incredible transition. Bloomberg News reports that, “The Biden administration is reaching out to the oil industry to inquire about restarting shuttered refineries, as the White House scrambles to address record high-gasoline prices.” Bloomberg reported that, “Members of the National Economic Council and other officials have inquired within the industry about factors that led some refining operations to be curtailed and if plans are underway to restart capacity, a person familiar with the matter said. The person, who wasn’t authorized to speak on the record, added no direct asking to restart operations was made. The White House didn’t immediately respond to a request for comment.
Bloomberg also laid out the numbers that have led to the gasoline price rally pointing out that, “More than 1 million barrels a day of the country’s oil refining capacity — or about 5% overall — have shut since the beginning of the pandemic. Elsewhere in the world, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co. estimates. And with no plans to bring new US plants online, even though refiners are reaping record profits, the supply squeeze is only going to get worse.”
Oil Price reports that, “Some of the biggest refiners are expanding the crude oil processing capacity at large existing facilities, but those additions will not fully offset the U.S. refinery processing capacity, which closed during and right after COVID. They say that ExxonMobil, Valero, and Marathon Petroleum are currently working on the expansion at three large refineries, which will bring a combined 350,000 barrels per day (bpd) additional crude distillation capacity in the United States, Dylan Chase of Argus reports. The refineries that will see their capacity expanded are Exxon’s facility in Beaumont, Valero’s Port Arthur refinery, and Marathon Petroleum’s Galveston Bay refinery, all in Texas. However, some 1 million bpd of refinery capacity in America has been shut permanently since the start of the pandemic, as refiners have opted to either close losing facilities or convert some of them into biofuel production sites according to the oil price.
We need to point out that it was not just covid that shut these refineries down. ESG pressures as well as the Paris Climate accords made it very dangerous to invest in refineries because of the hostile regulatory environment.
Diesel fuel has also been impacted. John Kemp at Reuters wrote that, “Brents six-month calendar spread is moving into an increasingly steep backwardation again as traders anticipate a growing shortage of crude. High margins for diesel and gasoline are encouraging refineries to maximize crude processing which is intensifying the downward pressure on already-depleted crude inventories. He also looks to the wind and the solar-driven UK and showed that U.K. Diesel and gasoline inventories depleted further in March as late-cycle tightness was intensified by the impact of Russia’s invasion of Ukraine and some panic-buying by consumers and road haulage firms. Diesel/gas oil stocks were at the lowest seasonal level since 2014 and before 2006. So now that the UK is talking about putting a windfall profit tax on oil companies, you should expect that supplier to fall to maybe zero!
Natural gas also took a break yesterday after hitting the highest level since 2008. That could also be a short-term top but we still will see a lot of support near $800.
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