To say that the beginning of the U.S. driving season, which kicked off after the Memorial Day long weekend at the end of May, has been disappointing would be an overstatement; nonetheless, previously bullish expectations have not materialized. Consequently, the price differential between CME Group RBOB contract and its flagship crude oil marker, WTI, while not unambiguously depressed, remains below average by historical measures. The current value of $22-23/bbl compares with a spread of around $40/bbl in 2023, $50/bbl in 2022 (admittedly, influenced by the Ukrainian war) and around $20/bbl in 2021.

There are several reasons for the subdued performance. Firstly, domestic demand remains lukewarm. The weekly EIA statistics show that gasoline supplied by refiners, the proxy for demand, struggles to meaningfully exceed 9 mbpd. Secondly, U.S. refining capacity is set to increase for the second consecutive year and reach 18.38 mbpd in 2024, the statistical arm of the Department of Energy estimates. Thirdly, this tepid backdrop is mirrored in the international markets where refiners’ profit from selling gasoline is dwindling, inevitably affecting U.S. gasoline exports. Finally, there are genuine concerns that the U.S. administration will release oil from strategic stocks in case of stronger retail gasoline prices ahead of the November election.

There are, however, green shoots. The slower-than-expected ramp up of Mexico’s Olmeca refinery, which is set to alleviate the country’s product import needs could keep demand for U.S. gasoline elevated. The 650,000 bpd Dangote refinery in Nigeria just announced a delay in gasoline deliveries further supporting the motor fuel. Finally, the planned turnaround at the 435,000 bpd Whiting refinery should also provide a timely boost for gasoline. An active hurricane season could be another bullish factor and so could the slow adaptation of electric vehicles in the U.S.

There are lots of “ifs” and “buts,” yet the inverse relationship between U.S. gasoline stocks and crack spread values is conspicuous, as exhibited in the chart above. While the downside in the RBOB/WTI price differential appears limited, after all the holiday season has arrived, a revival in the crack spread value is only anticipated if or when U.S. gasoline stocks start depleting. That will be the time to build up length in the product against crude oil and/or heating oil, which has to navigate through its own headwinds in the U.S.