LONDON - U.S. gasoline prices and refining margins have come under pressure as inventories deplete more slowly than normal for this time of year, indicating supplies are plentiful, and undermining the bullish case for the fuel.

Just over a month ago, investors had amassed one of the largest bullish positions in U.S. gasoline futures and options since before the pandemic, anticipating that prices would continue climbing.

Gasoline had become the most attractive part of the petroleum complex for investors to bet prices would rise further in the run-up to U.S. presidential and congressional elections in November.

Their bullishness was underpinned by relatively low inventories, employment growth, strong increases in household incomes and the prospect of an active hurricane season.

Ukraine’s drone attacks on refineries in Russia threatened to tighten international supplies even further, prompting the Biden administration to warn Ukraine’s government to change its targeting.

But the expected inventory depletion and rise in prices has failed to materialise, causing investors to liquidate most of their bullish holdings.

U.S. gasoline inventories were less than 3 million barrels or 1% below the prior 10-year seasonal average on May 10, according to data from the U.S. Energy Information Administration (EIA).

Rather than swelling, the deficit had narrowed progressively from 6 million barrels or 3% below the prior 10-year average eight weeks earlier on March 15.

Nearby futures prices for gasoline have fallen much faster than for crude as traders have reassessed the outlook and concluded supplies will remain ample during the peak summer driving season.

Second-month U.S. gasoline futures prices have recently traded $21 per barrel above front-month Brent, with the premium down from more than $28 in the middle of March.

The gasoline futures calendar spread between June and September, spanning the driving season, has narrowed to a backwardation of less than $3 per barrel from more than $7 on March 18.

If gasoline supplies are going to become tight this summer, leading to downward pressure on inventories and upward pressure on prices and spreads, there has been no sign yet.

Investors have noticed and liquidated many of the bullish long positions in gasoline futures and options they had amassed by early April.

Hedge funds and other money managers sold the equivalent of 36 million barrels of gasoline futures and options between April 9 and May 7.

As a result, fund managers’ net position was cut to 49 million barrels (41st percentile for all weeks since 2013) on May 7 from 85 million barrels (88th percentile) four weeks earlier.

The hedge fund community had a neutral or even slightly bearish outlook on gasoline prices having been strongly bullish just a month before.

Inflation-adjusted pump prices including taxes rose to a national average of $3.73 per gallon (59th percentile for all months since 2000) in April up from a low of just $3.23 (38th percentile) in January, according to the EIA.

But in the first two weeks of May, pump prices have retreated slightly as the effect of lower wholesale prices has filtered through.

REFINERY HEAD-FAKE

Most of the apparent tightening of gasoline supplies in the first quarter stemmed from the prolonged disruption of BP’s refinery at Whiting, Indiana following a site-wide electricity failure at the start of February.

Gasoline inventories depleted by around 13 million barrels more than the seasonal average between late January and the middle of March.

Since then, however, the refining system has stabilised and even rebuilt inventories in response to strong refining margins.

U.S. refineries operated at 91.9% of their maximum capacity over the seven-day period ending on May 10, the highest seasonal utilisation rate since 2017.

Refineries processed an average of 16.7 million barrels per day (b/d) of crude and other feedstocks, the highest for the time of year since 2019.

At the same time, fuel consumption has not accelerated as much as anticipated, making it easier to rebuild stocks.

Refiners, blenders and importers supplied an average of 8.6 million b/d of gasoline to the domestic market in February, the latest data available.

The volume supplied, a proxy for consumption, was the lowest for the time of year since February 2021 (when the pandemic was still raging) and before that February 2014.

HURRICANE SEASON

Gasoline supplies are now expected to be comfortable throughout the summer, which has taken the heat and speculative froth out of the market.

The main risk comes from hurricane season, which runs from June through November, with storm activity peaking in late August and early September.

This year’s season is likely to be more active than usual, and poses a small but non-zero threat of disrupting major refineries clustered along the Gulf of Mexico in Texas and Louisiana.

In 2023, the number of hurricanes and tropical storms making landfall on the U.S. Atlantic and Gulf Coasts was below average.

El Niño conditions tend to suppress hurricane formation in the Atlantic and last summer was characterised by the formation a very strong El Niño episode.

But the El Niño episode is now over and there is an above-average probability that it will be replaced by La Niña conditions that tend to boost the number of tropical storms.

In addition, sea-surface temperatures in the tropical area of the North Atlantic are exceptionally warm for the time of year, which will also contribute to the formation of more tropical storms with greater intensity.

Tropical storm formation requires a sea surface temperature of at least 26°Celsius (78.8 Fahrenheit), among other complex conditions.

Surface temperatures in the tropical North Atlantic were already 27.4°C on average in April, a record for the time of year, and 1.54°C above the 30-year seasonal norm.

The number of hurricanes, among them storms in the most severe categories, is likely to be higher this summer than in 2023 and probably above the long-term average.

But not all of them will make landfall and the probability of a direct strike on Texas and Louisiana coastal refineries remains relatively low.

Major refinery disruption remains a tail risk, concentrated in the months of August and September. The more probable central scenario is that gasoline supplies remain comfortable through the summer driving season.

John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X https://twitter.com/JKempEnergy

(Edited by Rod Nickel)