LONDON, May 15 (Reuters) - U.S. gasoline prices and

refining margins have come under pressure as inventories deplete

more slowly than normal for this time of year, indicating

supplies are plentiful, and undermining the bullish case for the

fuel.

Just over a month ago, investors had amassed one of the

largest bullish positions in U.S. gasoline futures and options

since before the pandemic, anticipating that prices would

continue climbing.

Gasoline had become the most attractive part of the

petroleum complex for investors to bet prices would rise further

in the run-up to U.S. presidential and congressional elections

in November.

Their bullishness was underpinned by relatively low

inventories, employment growth, strong increases in household

incomes and the prospect of an active hurricane season.

Ukraine's drone attacks on refineries in Russia threatened

to tighten international supplies even further, prompting the

Biden administration to warn Ukraine's government to change its

targeting.

But the expected inventory depletion and rise in prices has

failed to materialise, causing investors to liquidate most of

their bullish holdings.

U.S. gasoline inventories were less than 3 million barrels

or 1% below the prior 10-year seasonal average on May 10,

according to data from the U.S. Energy Information

Administration (EIA).

Rather than swelling, the deficit had narrowed progressively

from 6 million barrels or 3% below the prior 10-year average

eight weeks earlier on March 15.

Chartbook: https://tmsnrt.rs/3wEjQu1

Nearby futures prices for gasoline have fallen much faster

than for crude as traders have reassessed the outlook and

concluded supplies will remain ample during the peak summer

driving season.

Second-month U.S. gasoline futures prices have recently

traded $21 per barrel above front-month Brent, with the premium

down from more than $28 in the middle of March.

The gasoline futures calendar spread between June and

September, spanning the driving season, has narrowed to a

backwardation of less than $3 per barrel from more than $7 on

March 18.

If gasoline supplies are going to become tight this summer,

leading to downward pressure on inventories and upward pressure

on prices and spreads, there has been no sign yet.

Investors have noticed and liquidated many of the bullish

long positions in gasoline futures and options they had amassed

by early April.

Hedge funds and other money managers sold the equivalent of

36 million barrels of gasoline futures and options between April

9 and May 7.

As a result, fund managers' net position was cut to 49

million barrels (41st percentile for all weeks since 2013) on

May 7 from 85 million barrels (88th percentile) four weeks

earlier.

The hedge fund community had a neutral or even slightly

bearish outlook on gasoline prices having been strongly bullish

just a month before.

Inflation-adjusted pump prices including taxes rose to a

national average of $3.73 per gallon (59th percentile for all

months since 2000) in April up from a low of just $3.23 (38th

percentile) in January, according to the EIA.

But in the first two weeks of May, pump prices have

retreated slightly as the effect of lower wholesale prices has

filtered through.

REFINERY HEAD-FAKE

Most of the apparent tightening of gasoline supplies in the

first quarter stemmed from the prolonged disruption of BP's

refinery at Whiting, Indiana following a site-wide

electricity failure at the start of February.

Gasoline inventories depleted by around 13 million barrels

more than the seasonal average between late January and the

middle of March.

Since then, however, the refining system has stabilised and

even rebuilt inventories in response to strong refining margins.

U.S. refineries operated at 91.9% of their maximum capacity

over the seven-day period ending on May 10, the highest seasonal

utilisation rate since 2017.

Refineries processed an average of 16.7 million barrels per

day (b/d) of crude and other feedstocks, the highest for the

time of year since 2019.

At the same time, fuel consumption has not accelerated as

much as anticipated, making it easier to rebuild stocks.

Refiners, blenders and importers supplied an average of 8.6

million b/d of gasoline to the domestic market in February, the

latest data available.

The volume supplied, a proxy for consumption, was the lowest

for the time of year since February 2021 (when the pandemic was

still raging) and before that February 2014.

HURRICANE SEASON

Gasoline supplies are now expected to be comfortable

throughout the summer, which has taken the heat and speculative

froth out of the market.

The main risk comes from hurricane season, which runs from

June through November, with storm activity peaking in late

August and early September.

This year's season is likely to be more active than usual,

and poses a small but non-zero threat of disrupting major

refineries clustered along the Gulf of Mexico in Texas and

Louisiana.

In 2023, the number of hurricanes and tropical storms making

landfall on the U.S. Atlantic and Gulf Coasts was below average.

El Niño conditions tend to suppress hurricane formation in

the Atlantic and last summer was characterised by the formation

a very strong El Niño episode.

But the El Niño episode is now over and there is an

above-average probability that it will be replaced by La Niña

conditions that tend to boost the number of tropical storms.

In addition, sea-surface temperatures in the tropical area

of the North Atlantic are exceptionally warm for the time of

year, which will also contribute to the formation of more

tropical storms with greater intensity.

Tropical storm formation requires a sea surface temperature

of at least 26°Celsius (78.8 Fahrenheit), among other complex

conditions.

Surface temperatures in the tropical North Atlantic were

already 27.4°C on average in April, a record for the time of

year, and 1.54°C above the 30-year seasonal norm.

The number of hurricanes, among them storms in the most

severe categories, is likely to be higher this summer than in

2023 and probably above the long-term average.

But not all of them will make landfall and the probability

of a direct strike on Texas and Louisiana coastal refineries

remains relatively low.

Major refinery disruption remains a tail risk, concentrated

in the months of August and September. The more probable central

scenario is that gasoline supplies remain comfortable through

the summer driving season.

Related column:

- Investors bet on further rise in US gasoline prices (April

11, 2024)

John Kemp is a Reuters market analyst. The views expressed

are his own. Follow his commentary on X https://twitter.com/JKempEnergy

(Edited by Rod Nickel)