$4 Gas Forecast

East Coast refinery closures will affect fuel supply, EIA, analysts say

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

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% 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 (NYMEX) futures contracts, the basis for national prices at the pump.

Cargoes arriving from abroad accounted for 19% of demand in the East Coast in September, Energy Department data show. Shipments from the Gulf Coast and Midwest met another 51% 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 told the news agency. "Summer gasoline is harder to make than winter gasoline, and we could see $4 as a floor price rather than a ceiling limiting demand."

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

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

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.

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," George Los, an analyst at Charles R. Weber Co., a Greenwich, Connecticut- based shipbroker, told the news agency. "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 November 30.

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, N.C. The main lines from North Carolina deliver about 1.4 million barrels a day to Linden, N.J.

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

Colonial announced December 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 December 6 report cited by the news agency. The analysts suggested buying the gasoline contract for August delivery and selling heating oil for the same month, according to the note.

Gasoline's discount to heating oil narrowed to 25.03 cents from 45.37 cents November 30. The spread reached 62.69 cents a gallon on November 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 December 6 report cited by Bloomberg. "The outlook for gasoline is challenging, but summer values for the spread are already extremely cheap."

Click here to read the Energy Information Administration (EIA) report, "Reductions in Northeast Refining Activity: Potential Implications for Petroleum Product Markets."