Oil should focus on demand destruction, not refineries

Enough with Refineries

Enough with the refineries already! At least on the East Coast! Let’s talk about the refineries that will really impact gasoline prices and that is in Texas City and in Indiana. All the talk about the storm is about East Coast refineries when it should be about the destruction of demand. As I have written before there are three phases in trading a disaster. The first is demand destruction, the second assessment, the third rebuilding. The U.S. stock market that is getting ready to reopen is already focused on the rebuilding phase.

I know when a storm barrels down into the Gulf of Mexico the focus so often is on refining capacity and that is correct because the Gulf is home to more than 50% of U.S. refining capacity. The East coast is home to only about 8%. The East Coast is not about refining but more about imports and gasoline blending and distribution. If you just focus on when the refineries come back online you may miss the bigger picture. This may prove to be the biggest demand destruction event in US history. Just think the entire Eastern seaboard under water as well as the most populated city in America. The East Coast consumes by far the most gasoline — more than 3,100 thousand barrels per day! Almost 16,000 flights canceled. Cities under water. Cities without power! Now divide that into the refining capacity! The Northeast has only about 8% of U.S. refining capacity and it does not add up. You are wiping much more demand as compared to refining capacity because the East Coast is not a major refining hub.

Now consider the fact that the average 747 burns about 1 gallon of jet fuel every second and then consider that almost 16,000 flights were canceled. Think of all of the fuel that is not being used.

Now I know that the Energy Information Agency is warning that gasoline supply in the Northeast may hit a 1990 low, but remember demand has also taken a huge hit. Even before the storm demand was weak. As reported by Bloomberg News “U.S. gasoline demand fell 0.1 percent last week, according to data from MasterCard Inc. Drivers bought 8.66 million barrels a day of gasoline in the week ended Oct. 26, down from 8.67 million the prior week, MasterCard’s SpendingPulse report showed today. Fuel consumption was 1.3 percent below a year earlier. Fuel use over the past four weeks fell 2.4 percent below the same period in 2011. Demand by that measure has been lower every week but one since March 18, 2011.  Consumption in the week ended Oct. 19 rose 0.5 percent from the seven days ended Oct. 12 and was 1.9 percent below a year earlier. MasterCard releases weekly data every two weeks. Year-to-date, gasoline demand is 3.8 percent below 2011. The lowest demand this year through Oct. 26 was 8.01 million barrels on Feb. 10. The highest consumption level reached was 9.36 million barrels on May 25. The average pump price fell 14 cents in the past week to $3.62 a gallon. Drivers are paying 4.9 percent more than a year earlier. Prices reached a year-to-date peak of $3.94 on April 6. The highest prices last week were on the West Coast, where the average fell 14 cents to $4.19 a gallon. The lowest average was in the Midwest, where a gallon declined 19 cents to $3.42.”

Yet we did see oil get a boost on the fact that some refineries in the East coast are coming back online, yet what gave gasoline a pop was not that news but more worries about Midwest gasoline. Bloomberg news reported that on the East Coast ,Phillips 66 and Hess Corp.’s New Jersey refineries remained shut after Sandy cut power to both plants late yesterday. Restart is contingent upon post- storm assessments, the companies said. Phillips’s 238,000-barrel-a-day Baywy refinery in Linden was shut before the storm and lost power late yesterday. The company reported flooding in low-lying areas. Hess’s Port Reading plant, which can process 70,000 barrels a day, also was shut before the storm and lost power late yesterday. Philadelphia Energy Solutions’ 355,000-barrel-a-day Pennsylvania refinery is restoring operations and “came through the storm without issues. Parsippany, New Jersey-based spokesman for PBF Energy Inc. said the company’s refineries in Delaware City, Delaware, and Paulsboro, New Jersey, “ran well” overnight at reduced rates. The combined capacity of the plants is 367,200 barrels a day. Trebor Banstetter, an Atlanta-based spokesman for Delta Air Lines Inc.’s Monroe Energy LLC, didn’t immediately respond to an e-mail asking the status of the 185,000-barrel-a-day Trainer, Pennsylvania, refinery. The Energy Department said the plant was operating at reduced rates as of 8 a.m. local time. NuStar Energy LP said its 74,000-barrel-a-day Paulsboro refinery in New Jersey was shut and secured, according to a statement on the company’s website.

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