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Why Gasoline Prices Are Rising Again

Pump prices could rise still higher in the months ahead as the summer driving season approaches. Filling up in Miami.

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Joe Raedle/Getty Images

Gasoline prices
are on the upswing again, rising 35 cents per gallon in just the past month to an average national price of $3.45. More gains could be in store in the weeks and months ahead, since prices tend to rise in the spring and summer when more people drive.

It’s not likely to be as bad as last year, when prices rose as high as $5, but the summer driving season could still be more expensive than motorists expected.

Gasoline prices are rising even as crude oil has held relatively steady in recent days, at around $80 per barrel. The biggest source of the increase–and the biggest beneficiaries of it—are the refineries that turn crude oil into gasoline.

“Three weeks into the new year, we see tailwinds building again for US refiners,” writes
Bank of America
analyst Doug Leggate.

Refining capacity has been falling in recent weeks as some refineries have been taken offline for maintenance or have had operational problems, including downtime due to winter storm damage. In addition, refineries have been exporting about twice as much gasoline as they did a year ago. And China’s reopening from Covid restrictions is causing global demand for fuel to rise. “Demand has bounced back enough that given all the capacity that’s shut down, you’ve got a very tight global system,” said Piper Sandler analyst Ryan Todd in an interview.

Refiners are making large margins once again, and not just on gasoline. Diesel is climbing back toward the record highs it hit last year, with the “crack spread”—an industry term that describes the margin between crude and diesel prices—rising above $60 this week, from around $50 in November and $25 a year ago. Diesel could go up even more as Europe prepares to ban Russian oil products on Feb. 5.

The big refining companies will start reporting fourth quarter earnings this week, and they’re likely to offer optimistic predictions for the year ahead.

Valero Energy
(VLO) is set to report fourth-quarter earnings on Thursday, with analysts projecting profits of $11 billion in 2022, the company’s largest haul ever and more than it made in the past five years combined. Its stock has jumped 20% just since the start of this year.

Other refiners that are expected to have strong fourth quarters include
Phillips 66
(PSX),
PBF Energy
(PBF),
Par Pacific
(PARR) and
Marathon Petroleum
(MPC). While refineries are expected to see their earnings dip slightly in 2023, they will remain well above historical levels, according to Leggate and other analysts. Leggate’s favorite stocks heading into earnings are Valero, PBF and
Marathon.
Todd’s favorites heading into the year were Valero and PBF. An ETF that tracks refiners,
VanEck Oil Refiners
ETF (CRAK), is up 9.3% so far this year.

In the coming months, refiners are likely to have more downtime than in the recent past, but continue to make strong profits. Late last year, refineries were operating at around 95% of their capacities, much higher than average for the season. But several have begun performing deferred maintenance to make up for an extended period when they didn’t do much maintenance. In the early part of Covid, it was difficult to get maintenance workers on site. And once fuel demand rose, the refineries were incentivized to run at full capacity so they could maximize profits. Now there’s a seasonal lull in demand, with the summer driving season months away and fuel storage levels getting closer to normal. So it’s a good time to ramp maintenance. In the latest week, refiners were running at 85% capacity, according to the Energy Information Administration. A year ago, they were operating at 89%. Fewer refineries means less fuel, and higher prices.

It’s not a sure thing that refiners will have good years, however. More new refineries are opening around the world this year than have opened in the past three, which could lead to more competition for existing refineries, though Todd still expects demand to rise more than supply. Broader economic weakness would have an even bigger negative impact. A deep recession would hurt demand for fuel, and send gasoline and diesel prices down.

Write to Avi Salzman at avi.salzman@barrons.com

Credit: marketwatch.com

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