Bloomberg News

Gasoline May Rise Above $4 a Gallon as Plants Shut

December 28, 2011

(Adds Energy Department analysis in ninth paragraph.)

Dec. 23 (Bloomberg) -- Gasoline prices may rise above $4 a gallon next summer as refineries along the U.S. East Coast close, reducing fuel supply, said Edward Morse, New York-based head of commodities research at Citigroup Global Markets Inc.

Sunoco Inc. and ConocoPhillips have idled two plants and plan to shut a third that together can process more than 700,000 barrels a day of oil, or about 46 percent of the region’s refining capacity. That will increase the dependence on imports to meet fuel demand in the region that includes the delivery point for New York Mercantile Exchange futures contracts, the basis for national prices at the pump.

Cargoes arriving from abroad accounted for 19 percent of demand in the East Coast, or Padd 1 region, in September, Energy Department data show. Shipments from the Gulf Coast and Midwest met another 51 percent of consumption, with local refineries supplying the rest.

“We have a real supply problem ahead this summer because these refineries have not made money and they are shutting down,” Morse said yesterday in a Bloomberg TV interview with Tom Keene. “Summer gasoline is harder to make than winter gasoline, and we could see $4 as a floor price rather than a ceiling limiting demand.”

Gasoline for January delivery on the Nymex rose 0.8 percent to $2.66 a gallon at 10:50 a.m. in New York today. Pump prices in the U.S. averaged $3.224 a gallon yesterday, 7 percent higher than a year earlier, according to AAA data.

Summer Gasoline

Analysts at Citigroup and Barclays Capital recommended buying gasoline contracts for delivery in summer months after Sunoco announced Dec. 1 the immediate idling of its 194,000- barrel-a-day Marcus Hook refinery in Pennsylvania. ConocoPhillips stopped processing crude oil at the 190,000- barrel-a-day Trainer plant Sept. 30.

“The area could be left vulnerable to price spikes if there are ever any unplanned outages or supply disruptions,” said Tom Bentz, director with BNP Paribas Prime Brokerage Inc. in New York.

Sunoco idled Marcus Hook, moving up an earlier July deadline to find a buyer, because of “deteriorating market conditions,” the company said in a Dec. 1 statement. The July deadline remains to sell or shut the 355,000-barrel-a-day Philadelphia plant, the company said.

The three plants combined produced 315,000 barrels a day of gasoline, the Energy Department said in a report today. The shutdowns may increase regional petroleum product price volatility and may be “problematic” as supply sources shift, the report showed.

Higher Prices

The shuttered refineries, which processed mostly imported crude from Europe and West Africa, faced higher prices than their counterparts in the U.S. Midwest and Gulf Coast able to use less-expensive domestic oil. North Sea Brent increased to a record premium of $27.88 a barrel over West Texas Intermediate oil on Oct. 14.

The East Coast imported 596,000 barrels a day of gasoline in September out of 3.1 million barrels supplied daily, Energy Department data show. That’s poised to rise as suppliers seek to replace local production.

“The tanker market had already anticipated the prospect of an increase of gasoline to New York harbor,” said George Los, an analyst at Charles R. Weber Co., a Greenwich, Connecticut- based shipbroker. “With the acceleration of Sunoco’s plans for the Marcus Hook idling by some eight months this is likely to boost demand, mostly for medium-range tankers.”

Prices may also rise in New York versus the Gulf Coast in order to attract more shipments from the Gulf, where about half of U.S. refining capacity is located. Reformulated 87-octane gasoline in New York was 8.38 cents a gallon above the Gulf yesterday, according to data compiled by Bloomberg, up from 4.53 cents Nov. 30.

Colonial Pipeline

Colonial Pipeline Co., the largest pipeline linking the U.S. Gulf Coast with Northeast markets, delivers 2.35 million barrels a day of oil products from Houston to Greensboro, North Carolina. The main lines from North Carolina deliver about 1.4 million barrels a day to Linden, New Jersey.

“I would assume the Colonial line space just got a lot more valuable,” said Andy Milton, vice president of supply at Gainesville, Georgia-based Mansfield Oil Co., which supplies more than 2 billion gallons of fuel per year.

Colonial announced Dec. 21 that it plans to increase capacity on its main gasoline pipeline by 100,000 barrels a day by the first quarter of 2013.

“We foresee some significant tightness” ahead for Nymex gasoline, analysts at Barclays including Miswin Mahesh in London said in a Dec. 6 report. The analysts suggested buying the gasoline contract for August delivery and selling heating oil for the same month, according to the note.

Narrower Spread

Gasoline’s discount to heating oil narrowed to 25.03 cents from 45.37 cents Nov. 30. The spread reached 62.69 cents a gallon on Nov. 14, after diesel and heating oil inventories in the U.S. dropped to the lowest level since December 2008.

“Now is the time to look at selling heating oil and buying gasoline for the summer,” Citigroup analysts led by Seth Kleinman said in a Dec. 6 report. “The outlook for gasoline is challenging, but summer values for the spread are already extremely cheap.”

The gap between contracts for delivery in August was 16.94 cents a gallon yesterday, from 28.71 cents Nov. 30.

--With assistance from Romy Varghese in Philadelphia and Moming Zhou in New York. Editors: David Marino, Richard Stubbe

To contact the reporter on this story: Paul Burkhardt in New York at pburkhardt@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.


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