Oil refineries shut down

Hurricane Sandy forcing wave of oil refinery shutdowns

Forbes,

29 October, 2012

Hurricane Sandy is beginning to have a noticeable economic impact on the U.S., forcing major oil producers to cease operations in their refineries in the North East. With Sandy expected to traverse a path that hosts 6.5% of the nation’s total refining capacity, and tight supplies due to regulation, prices for refined products could surge to new highs. Amid thin trading and illiquid markets, prices for gasoline and heating oil are already on the rise and are expected to move higher.

Due to low inventories, the East Coast is “totally unprepared for this disaster,” explained economist Phil Verleger. The reality is that Hurricane Sandy has already forced refiners to shut down their operations, and this is coming in a time of thin inventories in the East Coast.

East Coast inventory numbers (PADD 1) aren’t too encouraging. Gasoline inventories hit a recent low at approximately 45.1 million barrels in the first week of October, compared to an average of around 55.8 million barrels for the corresponding weeks over the last couple of years. “For distillates, the drop is even more stunning,” explained John Kingston of The Barrel:

Stocks in the most recent report for PADD I were 39.5 million barrels. In the prior three years in the corresponding week they were 58.3, 75 and 74 million barrels. Even in 2008, when companies were dumping stocks like crazy in the wake of the fiscal crisis, they were 48.4 million barrels.

Refiners have already moved to cease their operations, which will put further upward pressure on prices. Phillips 66 will take 238,000 barrels per day offline as they shut down their Bayway Refinery in Linden, New Jersey, while Hess will be taking another 70,000 daily barrels of capacity off the market as it shuts down their operations at Port Reading, New Jersey. According to Trade the News, Philadelphia Energy will be operating its 330,000 barrel-per-day plant in Philadelphia (recently acquired from Sunoco) at reduced rates.

“The problem is that the US is already terribly short of refinery capacity on the East Coast and the refiners have little if any inventory on hand of products even as crude is moving toward them,” noted commodity expert Dennis Gartman. “With the refineries shuttered in, products are going to become uncommonly short supplied, while crude inventories likely back up and increase,” he added.

And the problem could get worse. Beyond the safety of its employees, refiners will have to deal with possible power outages and damages to equipment and infrastructure. Sam Stovall of S&P Capital IQ notes that estimated damages could hit $3.2 billion, but if the storm truly materializes as a “Frankenstorm,” then he sees no reason why it couldn’t top $10 billion (comparative damages estimates from the prior top 12 hurricanes all topped $10 billion).

Major utility Con Edison is already “bracing for Hurricane Sandy.” By 10 AM on Monday, ConEd reported just over 3,600 customers without electrical power, and indicated it could shut down underground equipment in Manhattan, Brooklyn, Queens, and elsewhere.

With major refiners like Chevron and Exxon Mobil having moved out of the North East, it will be a challenge for companies operating in the region to bring production back up in the aftermath of Hurricane Sandy. With supplies already tight, experts agree prices for gasoline and other distilled products are set to rise rapidly. While there may be a boost from construction and employment in the aftermath of the storm, the dire state of the U.S. economy could be further aggravated by Sandy.