Fuel markets in the U.S. are sending out warning signals. Donald Trump has said that gas prices will drop "like a rock" once the Iran conflict is over. The sharp and persistent declines in U.S. crude, gasoline, and diesel stocks in recent months suggest otherwise.

The risk goes beyond sticker shock. The Strait of Hormuz was almost completely closed on February 28, resulting in a loss of more than 13 million barrels of crude oil per day and refined fuels. This is roughly 13% of global supplies. Oil shocks have roiled the global economy and forced refiners to reduce output, while airlines scrapped thousands of flights.

Brent crude futures have dominated the news, with prices over $100 per barrel today, more than 40% above the price at the beginning of the war. Prices on the physical market are even more grim. European diesel prices reached a record of $205 per barrel on 7 April and are still hovering around $160. This is 60% higher than their pre-war levels, underlining the acute shortage of refined fuels. This squeeze has the opposite effect of a powerful tailwind, especially for the U.S. Gulf Coast export hub. According to the Energy Information Administration, U.S. refiners responded to unusual price signals by increasing jet fuel production by 18%, and gasoline and diesel by over 2%. EIA data show that since the beginning of the war, crude and fuel exports have reached a record high of 14 million bpd for the week ending April 24. These flows provided much-needed relief to fuel-starved countries - but they came at a high price.

TIME OF RECKONING The export frenzy is causing a rapid and counter-cyclical drop in the domestic inventory, which is threatening to undermine the U.S. economic system.

Refiners typically build up gasoline stocks in advance of summer driving, and distillate inventories during the warm months, ahead of the harvest season and winter heating demand.

This year, nothing is normal. EIA data shows that U.S. distillate stock levels - primarily diesel and heating oils - have fallen to their lowest level in 2005, and are about 20% below the 10-year average at this time of year. With the current rate of drawdowns, both the U.S. and global economy risk entering this winter with extremely thin supply cushion. Jet fuel tells a similar story. According to Kpler, the output of aviation fuel has risen by 30% over its 10-year average, at around 2 million bpd. However, exports have soared to a new record of 320,000 bpd in March andApril, leaving no room for disruption. The most important issue is gasoline. The U.S. accounts for 8% of the global motor fuel demand.

Gasoline has been sacrificed in the shift to jet fuel and diesel, the two products that are most needed right now by Europe and Asia. The problem was compounded by the fact that gasoline imports to the U.S. East Coast almost halved from a year ago in April as global supplies tightened.

Due to this, U.S. gas inventories fell much faster in the last 11 weeks than they did in previous years. Morgan Stanley analysts predict that stocks will fall below 200 million barrels at the end of August, a level not seen before in the modern age.

A POLITICAL CONUNDRUM

According to EIA, the price of gasoline in the United States has already increased to $4.30 per gallon. This is more than 40% higher than it was a year earlier - and this will be a political headache for Trump in November's midterm election.

Prices are expected to continue rising, despite the fact that domestic consumption is slightly higher than last year, as record-low inventories and peak summer demand clash. Prices may continue to rise well past September, as refiners try to replenish severely depleted inventories.

The Trump administration may restrict some fuel exports to try and cap fuel prices before the election. This would likely send global prices soaring, and damage the U.S.'s reputation as a reliable provider at a time of great stress.

This would squeeze the margins of refiners, and force them to reduce their operating rates. The shortages in both countries and at home could worsen.

The Iran War has made America's energy dominance a?double-edged sword. The U.S. helped stabilize markets and allies by increasing exports to counter a global supply shortage. However, the cost was exposing its own economy and consumers to sharply increased prices. This could be a high price for November.

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(source: Reuters)