* Tesoro got caught on short side - traders
* Fundamentals can't explain surge in CARBOB gasoline prices
* Few pipeline connections leave Calif open to shortages
By Erwin Seba
HOUSTON, Oct 5 (Reuters) - The unprecedented surge inCalifornia's wholesale gasoline market this week has manyhallmarks of a classic short squeeze, traders said on Friday,evoking a once common ploy in unregulated oil markets.
With the isolated West Coast gasoline market already reducedby refinery outages and a pipeline closure that had diminishedstockpiles to near their lowest in over two decades, the pumpwas already primed for a rise in prices, especially as refinersprepare to switch to winter fuel production.
But industry sources who operate in the close-knit, fiercelycompetitive market say fundamental factors alone cannot explainthe 97-cent surge in the premium for prompt-delivery CARBOBgasoline this week. Even in the notoriouslyvolatile California market the spike was unprecedented, pushingretail prices to near a record high of nearly $5 a gallon.
Multiple trade sources say West Coast refiner Tesorowas caught short, forcing it to scramble to buy additional fuelfrom other companies in order to meet its commitments.
Traders said no single party appeared to be withholdingsupply intentionally, a move that could provoke accusations ofprice gouging and draw the scrutiny of regulators. And there wasno suggestion that traders had conspired in order to drive upprices, which would fall foul of competition authorities.
Instead, many participants may have seen an opportunity toprofit from one company's apparent shortfall.
Tesoro has declined to say if it went into spot markets tomeet supply, but on Monday it posted notices at southernCalifornia pipeline terminals and at its Los Angeles refinery,saying "unbranded open rack gas out till further notice,"referring to fuel supplies that are sold in bulk on the openmarket at truck "racks," according to trade sources.
The company said on Friday their refineries in Los Angelesand San Francisco have operated as planned throughout the week,and they have met all contractual obligations.
Tesoro declined to discuss what steps it may have taken topurchase gasoline in the West Coast spot markets this week,saying such information was confidential. It also declined todiscuss whether it saw rapid increases in prices for gasolinepurchased in spot markets this week.
"Through our integrated West Coast system, Tesoro is workingto bring additional gasoline supply that meets Californiastandards to the Southern California area," spokeswoman MeganArredondo said in a statement.
By Friday the worst seemed to have passed. The CARBOBpremium fell to 90 cents over the futures contract, still a highlevel but down 55 cents from Thursday. Exxon had restarted arefinery that had been hit by a power outage, and CostcoWholesale Corp was preparing to reopen several servicestations that had been shut after they ran out of fuel.
"The squeeze is over, I guess," a trader said. MALICIOUS TRADING?
This week's activity may be particularly sensitive inCalifornia, which already lays claim to the most costly gasolinein the United States and still smarts from the trading scandalsthat emerged from its deregulated power markets a decade ago.
The Federal Trade Commission, which has some authority toprevent manipulation in physical oil markets, had no comment.The agency has investigated allegations of efforts to push upprices in oil and gas markets. It has nearly always found thatprice jumps were caused by market factors such as closedpipelines, refinery outages or other production problems.
In August, Senator Dianne Feinstein of California urged theFTC to "investigate whether the use of market power is inflatinggasoline prices" in the state, arguing that the run-up in pumprates following a major fire at Chevron's large San Franciscoarea refinery was excessive based on fundamentals.
The CFTC is reviewing the situation as part of its normalsurveillance, according to a source familiar with the matter. Anagency spokesman declined to comment.
California is particularly susceptible to short-term supplydisruptions because of the ultra-clean specifications for itsgasoline, a blend few other refiners can make. It is alsolargely isolated from major refining centers in the Midwest andGulf Coast, with no major pipelines to speed supplies.
The problems were specially acute this week, with thestate's second-largest refinery shut since August, smallerplants struck by short-term glitches and a key pipeline alsoidle. Regional gasoline inventories were the third-lowest onrecord for this time of year, U.S. data show.
Even so, gasoline production in the state last week wasalmost as high as a year ago, and stockpiles of gasoline andblending components combined were equal to this time last year,state data show.
Independent U.S. refiner Valero Energy Corp said onThursday that it was exiting the California spot refinedproducts markets temporarily to assure supply to branded andunbranded retailers with which it has contracts.
Valero is a major player in the Los Angeles and SanFrancisco spot markets, whose actions can be a major factor inmoving prices up or down.
WHEN REGULATORS CAN REACH
Intentional squeezes were once common in world markets andeven in the United States, but they have become much rarer inrecent years as high prices have stoked political pressure forregulators to crack down on malicious trading activity.
Still, the physical oil markets - where trades are generallyconducted over the counter between big companies or merchants -remain largely beyond the reach of most regulators, w h oseauthority extends only over derivatives markets.
It is entirely legal for traders individually to seek higherprices but not lawful for them to coordinate on the price theywill sell to a customer, said one antitrust expert, who askednot to be named to protect business relationships.
"If the word on the street is that a buyer is short onproduct, then individual traders might make the unilateraldecision to hold back to get a higher price," said the expert.
"That might make the buyer feel squeezed between itspurchase price and its resale price, but it would not beunlawful."
But if the impact of the California activity were seen tohave affected the New York Mercantile Exchange (NYMEX) futuresmarket, for instance, regulators could step in. Benchmark RBOBgasoline futures surged this week, far outpacing crude,but the gains were seen mostly tied to a fire at ExxonMobil'sBaytown refinery in Texas, the nation's second largest.
In 2007 the CFTC won a record $303 million settlement withBP over charges it tried to corner the propane marketalong a key pipeline network.
(Editing by Jonathan Leff and Prudence Crowther)
Keywords: GASOLINE SQUEEZE/