Tags: US | Refineries | European | Gasoline

Closed U.S. Refineries Open Door for European Gasoline

Wednesday, 29 Feb 2012 12:50 PM

Europe's gasoline traders are betting on richer pickings from this year's U.S. summer driving season, despite a grim demand outlook, because U.S. refinery closures have tightened supply in the major East Coast market.

For the last two summers, high unemployment in the United States and soaring prices at the pump have meant less driving, spelling disappointment for European gasoline traders and refiners hoping for a return to the bumper U.S. driving seasons of the mid-2000s.

This year threatens to be worse, with U.S. President Barack Obama watching U.S. gasoline prices push towards $4 a gallon in an election year.

However, the closure of refineries on the populous U.S. East Coast and limited refined products pipeline capacity have raised hopes that the summer season will deliver.

"Without those refineries on the East Coast — and if there is a problem with the pipeline — then you would need to import barrels from Europe," said Olivier Jakob, an oil analyst at Petromatrix in Switzerland. "That's what people right now are betting on, that there will be some logistical problems."

Gasoline imports into the U.S. north-east averaged 560,000 barrels per day in 2011, with some 261,000 bpd coming from Western Europe, U.S. Energy Information Administration (EIA) data showed.

That was three-quarters of the imports in 2007, when some 350,000 bpd came from Western Europe.

But this year, a series of refinery closures has taken over half of the U.S. East Coast refining capacity offline meaning the market might be short of 160,000 bpd of gasoline in 2012 and 240,000 bpd in 2013, the EIA says.

Speculative positions in Nymex gasoline futures indicate investors and traders expect prices to rise further. "Summer is looking pretty strong," said one gasoline trader.

"Everyone I speak to is very hot on gasoline this season," another trader said. "It will be volatile and traders like that. The only possible change I can see to that (scenario) is demand destruction. People are choosing more efficient cars and driving less."

DEMAND DILEMMA

At more than $3.70 a gallon, the average price of regular gasoline in the United States is at the highest level on record for February, Department of Energy data shows.

Pump prices are up about 11 percent from last year and the worry is that if prices continue to climb at such a clip, they will undermine demand over the summer driving season and pose a threat to Obama's presidential re-election bid.

The U.S. East Coast has tended to back Democratic candidates in recent elections, but the closure of local refineries may play a role in Pennsylvania, one of the few large swing states in the region with 20 electoral college votes.

Pressure from high gasoline prices is reflected in discouraging U.S. demand data, with the weekly Mastercard SpendingPulse survey showing retail gasoline demand down 6.9 percent year on year..

"We're seeing the potential for demand destruction accelerating. The only question is whether it is going to be deeper than what we are already forecasting," said Mark Routt, an analyst with energy consultancy KBC Advanced Technologies.

Despite this, European traders are bullish, citing logistical problems and refinery closures by Sunoco and ConocoPhillips in Pennsylvania, Hovensa in the Virgin Islands and a potential shutdown of Sunoco's Philadelphia refinery.

"In the short term, increasing imports is the most readily available option for replacing lost gasoline production," the EIA said in its report.

TRICKY LOGISTICS

Although new refining capacity is coming on stream this year in the U.S. Gulf Coast, U.S. legislation restricts the number of vessels that can carry gasoline to the eastern seaboard.

The Jones Act, passed in the 1920s, requires all commercial vessels transporting merchandise between the country's ports to be built, owned, operated and staffed by U.S. citizens and to be registered under the U.S. flag.

Such vessels are in short supply, so Gulf Coast refiners are more likely to look for new export markets. U.S. gasoline exports jumped by 61 percent in 2011, even as imports rose by 22.8 percent, U.S. Customs data showed.

Gasoline can also go from the Gulf to the East Coast in pipelines operated by Colonial Pipeline, the main conduit for refined products, but shipping orders are far surpassing capacity.

For now, imports from Europe and Asia are the most plausible substitutes for lost gasoline output, and some analysts believe demand will turn around, boosting refining margins.

"Ultimately, we see oil demand data catching up with the economic data and not the other way round," Harry Tchilinguirian and Gareth Lewis-Davies at BNP Paribas said in a note.

"And when supply constraints, associated with refinery shutdowns, are introduced into the picture, the seasonal uptick in demand during the summer becomes conducive to higher cracks."

© 2017 Thomson/Reuters. All rights reserved.

   
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2012-50-29
Wednesday, 29 Feb 2012 12:50 PM
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