Oil
prices are rising again. Expect higher
gas prices again
Demise
of small Hess refinery threatens U.S. East Coast pump pain
Hess
Corp's decision to close its U.S. East Coast refinery, the latest
plant to fall victim to weak profits in the Atlantic Basin, could
threaten painful gasoline price spikes for regional drivers as local
fuel supplies dwindle further.
28
January, 2013
Hess
will shut the 70,000-barrels-per-day Port Reading, New Jersey plant
in late February, as part of a larger restructuring, the company said
in a statement on Monday.
U.S.
RBOB gasoline futures, already near a record high for this time of
year, jumped more than 2 percent after the announcement, as the
supply outlook for the Mid-Atlantic and New England markets suddenly
looked tighter for the summer driving season.
A
tighter East Coast gasoline market could mean national gasoline
prices hit $4 a gallon by the spring if international oil prices
remain above $110 a barrel, threatening to create additional drag on
the struggling economy.
While
the plant is relatively small, the timing of the shutdown comes at a
tough time for the gasoline market. February is toward the end of the
heating oil season, and refiners begin to build inventories of
gasoline over the spring to meet peak summer demand. Refiners shut
units for planned maintenance in the spring, which cuts into
inventories.
Stocks
of gasoline on the East Coast are already trailing last year's levels
by 10 percent, due to a spate of refinery closures that cut capacity
in the region as well as the Caribbean and Europe - major exporters
to New York Harbor - as well as supply problems caused by Hurricane
Sandy.
"The
market is pricing in concern about the supply of gasoline this summer
and the news about Hess is supporting this," said Stephen
Schork, founder and editor of The Schork Report in Philadelphia.
Analysts
say the Northeast will have to bring in more crude from other regions
to make up for the loss of Port Reading, especially if the remaining
refineries are hit by unexpected outages that are common throughout
the industry.
In
recent years, the East Coast has imported more than a third of its
supplies, forcing regional prices to remain high enough to attract
shipments from as far away as Europe.
U.S.
Gulf Coast refineries have surplus gasoline, but a lack of space on
the Colonial Pipeline and a shortage of domestic tankers that comply
with U.S. shipping legislation mean they cannot cheaply ship it to
customers in the Northeast.
A
40,000-barrels-per-day expansion of the Colonial system into New
Jersey is due to be completed this summer, but the closure of Port
Reading will likely offset much of the increase in Gulf Coast supply.
Built
in 1958, Port Reading refines residual fuel oil and vacuum gas oil
into higher-value products such as gasoline and heating oil for the
giant East Coast market.
Hess
said it was also selling 28 million barrels of East Coast oil storage
terminals, part of the logistics network built up to store fuel from
the company's giant St. Croix Hovensa joint-venture refinery, which
was shuttered in 2012 due to poor margins.
ENVIRONMENTAL,
MARGIN PRESSURE
Many
refineries along the Atlantic Coast have seen margins erode due to
the rising cost of importing high-quality crude from the North Sea
and West Africa, which had served as the plants' main source of
feedstock for years.
Some
plants threatened with closure last year survived by looking to niche
markets. Delta Air Lines bought the Trainer, Pennsylvania refinery
last year in order to ramp up production of jet fuel to help lower
the carrier's fuel costs.
Other
East Coast refiners have sought to ship more crude from Texas and
North Dakota, where booming production has brought down prices.
Hess
said the Port Reading refinery came under pressure due to costs
associated with complying with environmental regulations for
low-sulfur heating oil as well as weak refining margins.
The
plant, shut for three weeks late last year after power was cut by
Hurricane Sandy, incurred losses in two of the last three years, Hess
said.
"By
closing the Port Reading refinery and selling our terminal network,
Hess will complete its transformation from an integrated oil and gas
company to one that is predominantly an exploration and production
company," Hess Chairman and Chief Executive John Hess said in a
statement.
Hess
said it would continue to supply its retail arm, being able to supply
its marketing businesses through third-party sellers. A company
spokesman said HETCO, the independent trading arm of Hess, would not
be affected.
Goldman
Sachs is advising on the sale of the company's terminal network.
PRICE
SPIKE
Front-month
RBOB gasoline futures traded up more than 2 percent to $2.94 a barrel
on Monday after news of Port Reading's impending closure, the highest
level for this time of year since the contract began trading in 2005.
Prices
of fuel on the East Coast have a large impact on the wider U.S.
market, as it is home to New York Harbor, location of the delivery
point for the New York Mercantile Exchange's RBOB gasoline and
heating oil complex.
"This
is a plant that is located near the harbor, and people can be
wrong-footed by removing it," said Jan Stuart, Credit Suisse oil
analyst.
Stuart
and other analysts noted gasoline demand growth could prove a
surprise this year as the economy improves and provide the backbone
of a tighter market.
While
the refinery supplies only a fraction of the East Coast's roughly 3
million bpd of gasoline demand, the market is heading into the summer
looking tight.
Nationally, stockpiles are above year-ago levels, but
inventories of the fuel in the East Coast are now just under 54
million barrels, compared with about 60 million barrels this time
last year.
Gasoline
futures hit a 2012 high over $3.44 a gallon in late March, before
average U.S. pump prices climbed to near $4 a gallon. Prices broke
even higher in some regions, nearing $5 a gallon, spurring talk the
U.S. government could tap its Strategic Petroleum Reserve or waive
domestic shipping requirements to help drive down prices for
motorists.
Nationally,
pump prices are averaging $3.349 a gallon, down from $3.419 a year
ago, according to motorist group AAA.
Additional
supplies from the major U.S. Gulf Coast refining center as well as
the Midwest - where margins have been strong - could also be limited
by a heavy load of maintenance in the coming months as plants take
down units.
That
means the East Coast will likely have to turn to foreign shipments to
make up for any shortfalls, so prices in the region will have to rise
enough to draw sufficient imports from other areas with supply.
"We're
losing capacity in a deficit market by shutting that refinery. We're
going to have to attract the barrels out from another source since I
don't see any more coming from the Gulf Coast," said one
products trader in New York Harbor, who declined to be identified.
Other
US news:
"Hess
Corp's decision to close its U.S. East Coast refinery,
the latest plant to fall victim to weak profits in the Atlantic
Basin, could threaten painful gasoline price spikes for regional
drivers as local fuel supplies dwindle further."
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