The White house starts to worry about fuel price inflation

Crude prices remained volatile on Tuesday, as sources close to the White House mentioned that an SPR release of potentially 60 mb was considered, while also mentioning that reinstating the crude oil export ban was a possibility. The White House backed-tracked later in the day, which boosted crude prices, with ICE Brent Dec21 contract close to 83 $/b. Both measures would have been fairly inadequate to the current situation. Indeed, it is likely that an SPR release would have dented the prompt-month prices, but longer-dated futures would continue to be elevated, as US production remains markedly below expectations. Looking at the US crude export ban, it would likely collapse light sweet US crude prices. Yet, US refiners mainly process imported heavy crude from Canada, Russia and the Middle-east. The collapse in light sweet US crude oil would therefore have little effect on US refining, with fuel prices at the pump remaining elevated, because tied to international sour crude markets. Soaring refining margins are increasingly due to high natural gas prices in Europe and Asia. US margins are climbing higher due to arbitrage conditions, with the US Gulf coast being the most profitable and cheapest refiner across Europe, North America and Asia. Potential solutions for the White House to limit the upward pressure on prices could range from boosting US crude and natural gas production, expanding pipeline capacity from Canada or limiting US product exports.

Looking at product stocks, European stocks in the ARA region dipped by another 1.1 mb, mainly due to middle distillate and heavy fuel stock draws. Diesel stocks may continue to have a lumpy trajectory due to the arrival of the VLCC New Era at Rotterdam, carrying 0.22 Mt of diesel. In Asia, product stocks built by 1.7 mb, with fuel oil stocks gaining 2.1 mb, slowly coming back to normal levels, as the summer burning season eases. Fuel oil and diesel stocks are closely looked at globally as they may exhibit abnormal seasonal patterns ahead of an exceptionally high winter burn season in the power sector due to high natural gas prices. We still do not see this effect in Asian product stocks or European ones.

ARA product inventories