Fuel markets in the U.S. are flashing warning signals. Donald Trump has said repeatedly that gasoline prices would "drop like rocks" when the Iran conflict ended. The sharp and persistent declines in U.S. crude, gasoline and diesel stocks in recent months suggests otherwise.

The risk goes beyond the sticker shock you get at the gas pump. After the Strait of Hormuz almost completely closed on February 28, a total of 13 million barrels of crude oil and refined fuels was taken off the market. 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, and none is more so than the U.S. Gulf Coast Export Hub. U.S. refiners responded to unusual price signals by increasing jet fuel production by 18%, and gasoline and diesel by over 2% since the start of the war, according to Energy Information Administration. EIA data show that since the beginning of the war, crude and fuel exports soared to a new record of 14 million bpd during the week ending April 24. These flows have brought much-needed relief to fuel-starved countries - but at a high price.

TIME FOR 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 replenish distillate stocks during the summer months, before the harvest and winter heating season.

This year, nothing is normal. EIA data showed that U.S. distillate stock levels - mainly heating oil and diesel - were at their lowest since 2005, and around 20% below the 10-year average. With the current rate of drawdowns 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 approximately 8% of the global demand of motor fuel.

Gasoline has been sacrificed in the shift to jet fuel and diesel, the two products that are most needed right now in 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 reached $4.30 per gallon. This is more than 40% higher than it was a year earlier - and will likely be a major political headache for Trump in the run up to November's midterm election.

Prices are expected to continue rising, despite the fact that domestic gasoline 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 struggle to replenish severely depleted inventories.

The Trump administration may restrict some fuel exports to try and cap fuel prices before the election. This would send global prices skyrocketing 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 blade. The U.S. helped stabilize markets and allies by increasing exports to counter a global crisis of supply. However, the cost was that it exposed its own economy and consumers to sharply increased prices. This could be a high price for November.

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(source: Reuters)