The gasoline market is starting to run out of control — just like diesel before it.

U.S. buyers are already sucking in more supplies from Europe as the summer driving season — which increases demand — gets underway. Add to that a loss of so-called secondary feedstocks from Russia that are critical in the production of the road fuel. All that is being compounded by oil refinery closures in recent years as consumption shriveled because of the COVID-19 pandemic.

Diesel prices spiked after the invasion of Ukraine amid concern about disruption to Russia's huge exports. Gasoline, meanwhile, has just rallied to records in the U.S. and both fuels now fetch big premiums to crude. The surging costs are a blow to governments the world over who are struggling to contain inflation.

“The market is realizing that besides a jet and diesel supply crunch, we may also face a gasoline supply squeeze, as spare capacity is thin, product stocks low and secondary feedstock supply limited,” said Hedi Grati, executive director, refining & marketing at IHS Markit.

Gasoline was a less obvious concern early on in the war because Russia is only a small exporter. Diesel was a much clearer risk — the country is a major supplier — and any trade disruptions, either through sanctions or war-related logistical issues, risked depriving the world of much-needed fuel. 

Before the war, Russia supplied fuel oil and vacuum gas oil — or VGO — to refiners in the U.S. and Europe. These secondary feedstocks can be processed into higher value oil products, like gasoline and diesel.

But the U.S. has now banned imports of Russian petroleum and many European companies — such as Portugal’s Galp Energia SGPS SA — are also shunning Russian oil. Millions of barrels a day of refining capacity, particularly in the U.S. and Europe, has also closed since the start of 2020 amid a significant drop in fuel demand because of lockdowns.

That’s helping the gasoline market to heat up. U.S. futures and retail prices have hit unprecedented levels and high costs have also been seen in Europe and Asia. Supplies are under pressure with American drivers expected to guzzle more this summer driving season, even with higher prices. The country's stockpiles are also seasonally low.

Driving Outlook

The Energy Information Administration expects U.S. gasoline consumption from April to September to rise almost 1% this year. Globally, total demand is projected to climb by 1.3% this year, according to the International Energy Agency.

Diesel’s woes are also far from over. Its premium to crude oil in Europe is still extremely high by historical standards, indicating very strong demand relative to supply. It’s a similar story for jet fuel — airlines in Nigeria recently threatened to stop flying because of surging prices.

Gasoline’s price rally is a clear reminder that it’s not just the fuels that Russia supplies directly in large volumes, like diesel, that are under pressure.