Gas Prices Poised to Rise Again as Sanctions on Russia Take Effect

Gasoline prices in the U.S. are down significantly from last June, when they were above $5 a gallon. They are still up some 40% from two years ago, and analysts are betting that they could soon jump higher.

About half the rise in prices over the past two years stemmed from an increase in the cost of crude oil used to make gasoline. Most of the rest stems from a growing gap between the wholesale prices of crude and gasoline. That gap, or premium of gasoline to crude, goes to the bottom line of refining companies and is up about 80% since Ms. Morgewicz started her side job.

Gasoline’s premium to crude has lagged behind that of its sister products, diesel and jet fuel, whose premiums have more than doubled and quadrupled respectively over the past two years. Some analysts said gasoline’s premium is poised to surge further because of a looming shortage of a petroleum product called vacuum gas oil, or VGO.

VGO is essentially the sludge that remains after lighter and more valuable products are distilled by refiners out of crude oil. Complex refineries, like many in the U.S. and Europe, have the equipment to process VGO and turn it into gasoline. Simpler ones, like many in Russia, lack this capability. Until recently, Russia was the world’s largest exporter of VGO, and most of it went to the U.S. and Europe.

Now Western sanctions on Russia’s exports of refined products, which took effect earlier this month and which halted most European imports of VGO, could reduce the capacity of the U.S. and its allies to make gasoline. The sanctions’ potential impact on diesel supplies and prices is widely recognized, but it pales in comparison with the possible consequences on those of gasoline, some analysts have said.

Fuel prices are already generally high with respect to crude, in large part because many refineries all over the world were permanently closed after the pandemic sharply reduced demand for fossil fuels. As the pandemic has eased, demand has surged and outpaced the world’s capacity to create more supply.

The world’s refining capacity is about 900,000 barrels a day less than it was in 2019, according to Rick Joswick, head of global oil analytics at S&P Global Commodity Insights. Meanwhile, the International Energy Agency expects this year’s global demand for refined products to surpass 2019’s record level by a million barrels a day.

The premiums of fuels to crude have climbed as a result, pulling the profit margins and share prices of such refiners as

Valero Energy Corp.

,

Marathon Petroleum Corp.

and

Phillips 66

up with them. Diesel led the way, in part because demand for it remained robust during the pandemic. Jet fuel prices have surged more recently, on the back of a boom in Asian air travel prompted by China’s relaxation of its Covid-era restrictions.

Gasoline has held up the rear, with a premium to crude oil of $24 a barrel versus $30 for jet fuel and $35 for diesel. But some analysts said its days of dawdling might be over.

“Gasoline is going to be crazy tight this summer” should Russian VGO disappear from the market, said Amrita Sen, director of research at the consulting firm Energy Aspects.

Millions of barrels of VGO are produced by refineries each day, but most of it is consumed on site rather than sold into the marketplace. Francesco Martoccia, an energy strategist at Citigroup, estimates that before the sanctions, Russia accounted for nearly 80% of the VGO market, and that the loss of its supply could dent gasoline production by as much as 450,000 barrels a day.

That is a small share of U.S. gasoline consumption, which has been about 8 million barrels a day recently. What makes gasoline made from VGO essential to prices, said Mukesh Sahdev, an analyst at the consulting firm Rystad Energy, is that it constitutes a significant fraction of the month-to-month swings in demand. Therefore, Russian VGO, along with imports from Europe, have in the past cushioned the blow of gasoline demand increases by providing a ready source of marginal supply.

If Russian VGO disappears, he said, the U.S. will have to turn to other, more expensive sources in Asia and the Middle East for such marginal supplies. That means that increases in gasoline prices could be more severe than they have been in the past.

It is unlikely that a VGO shortage would cause gasoline prices to surge to the record levels that they reached last June. Rising prices might be kept in check by drivers reducing mileage in response, which analysts said is a major reason why U.S. gasoline consumption last year was significantly below that in 2019.

Ms. Morgewicz already sees some Instacart orders going begging.

“The ones that are over 15 or 20 miles, they sit,” she said. “Only people that are really kind of desperate will take them, because it’s really not worth it.”

Write to Bob Henderson at bob.henderson@wsj.com