(July 20): US gasoline prices at the pump climbed back above the US$4-a-gallon mark as the Middle East conflict intensified, threatening to exacerbate a global crunch for transportation fuels and stoke inflation.

Regular unleaded gasoline averaged US$4.003 a gallon, according to daily prices posted by the American Automobile Association, after hovering for a month below the painful threshold for drivers. Prices for road fuels are also soaring in Europe, with gasoline nearing seasonal levels last seen in the aftermath of the invasion of Ukraine in 2022.

Fuels have spiked faster than crude since the US-Iran war caused the oil market’s biggest-ever supply disruption, straining consumers and leaving central banks on edge. The “real bottleneck” is in refining, more so than in crude, Morgan Stanley said in a note.

“For now, there isn’t enough refining capacity running to turn the available crude into product,” Morgan Stanley analysts including Martijn Rats said. That “keeps a lid on crude and, at the same time, leaves product markets scrambling".

US gasoline remained stubbornly expensive even as crude prices slumped in June and American refineries ran hard. Prices eased to as low as US$3.79 a gallon before trending back up in early July.

Now, with the scope of both US and Iranian strikes expanding, the risk of sustained disruptions to energy flows through the vital Strait of Hormuz is rising and sending prices surging again.

Fuel prices are also supported by a sharp decline in Russian refining capacity due to Ukrainian attacks, low US imports and tight stockpiles at a time when demand remained relatively resilient during the peak summer driving season.

The rebound at the pump also places renewed focus on a political challenge for President Donald Trump’s Republican Party as it looks to hold the House and Senate this fall. Democrats have highlighted the cost of living on the campaign trail, zeroing in particularly on high gasoline prices.

For now, the strain on American households isn’t yet as bad as it was in May, when average pump prices were in excess of US$4.50 a gallon.

But prices may yet have room to run. Refineries are processing crude at remarkably high rates in an effort to capture profits and supply the market with fuel. That runs the risk of triggering outages, particularly in extreme weather like hurricanes. With capacity already strained and stockpiles tight, any disruption to fuel production could trigger a much larger reaction in prices than usual.

The price of diesel in the US moved above US$5 a gallon last week. In Europe, gasoline, diesel and jet fuel have also surged.

Global crude benchmark Brent jumped 16% last week, the most since April. Futures extended gains past US$91 a barrel early on Monday following a ninth straight day of US airstrikes on Iran, before erasing the day’s gain after Tehran said it received proposals from mediators. Futures remain 45% up this year.

Uploaded by Arion Yeow