Market Insider

Fear of Refining Issues Light Up Gasoline Futures


Concerns about shrinking refining industry capacity put a fire under gasoline futures Friday, after news reports that a major east coast refinery shut down for repairs.

An oil refinery in Elizabeth, N.J. is shown in this aerial photo of Wednesday, Aug. 29, 2007. Oil prices extended their rise above $78 a barrel Wednesday, Sept. 12, 2007 after finishing at a record close the previous session as a production increase from OPEC failed to calm market concerns about the availability of supplies for winter in the Northern Hemisphere. (AP Photo/Mark Lennihan)

February RBOB gasoline futures settled nearly 3 percent higher, closing at a 5-month high. ConocoPhillips, during the trading day, was reported to have shut down gasoline production output at its Bayway refinery in Linden, N.J. to repair a mechanical problem.

But after the market close, the Bayway refinery was reported to be ready to go back into service as early as Friday night. The news wire report said problems with mechanical valves at the Bayway gasoline making fluid catalytic cracking unit were not as serious as first believed.

Seperately, the first of hundreds of employees have been laid off from ConocoPhillips’ Trainer, Pa. refinery, which has failed to find a buyer after four months on the market.

About one million barrels per day of refining capacity has been taken off line on the east coast and St. Croix, as the industry responds to low margins and shrinking demand.St. Croix's Hovensa is expected to shut down all of its refining operations in the next month.

Some traders are concerned the industry will become increasingly vulnerable to gasoline supply pressures, as the summer driving season approaches.

“There’s pressure on the refining industry right now, but when demand does come back, expect a squeeze in the industry,” according to Nymex trader Anthony Grisanti.

Demand for physical gasoline may be waning, but demand for the futures contract is hitting a record. Open interest in the NYMEX RBOB contract hit an all-time high this week, surpassing 330,000 contracts, for the first time in history.

Earlier this week, Swiss-based Petroplus added to refining capacity losses, when it declared bankruptcy and shut down major refineries in the U.K. and Germany.

Two Sunoco refineries also face an uncertain future. The company has already idled a refinery in Marcus Hook and has previously announced it may have to close its Philadelphia refinery in July 2012 if a new owner isn't found.

Poor market conditions have accelerated the idling of the Marcus Hook refinery in December, but as for Philadelphia “it is still operating,” according to Tom Golembeski at Sunoco.

He notes that Sunoco is currently in the process of selling the refineries, and there are “interested parties.” He declined to comment further, due to confidentiality agreements.

As for Sunoco, analysts and traders alike will be will be listening closely to the conference call next Thursday when it reports earnings. Analyst Tom Kloza of OPIS, however, isn’t expecting Sunoco to announce a Philadelphia closure on the call.

“My hunch is that they will not announce anything on their earnings conference call next week. But it continues to be an albatross on the entire company,” Kloza says.