Trading the Flood: Gas Futures Surge on Refinery Concerns

Floodwater engulfs a farm in Missouri
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Floodwater engulfs a farm in Missouri

Energy traders' fears are rising right along with the flood levels along the Mississippi River.

Oil is firmly back above $100 a barrel and gasoline futures surged over 6% Monday on concerns about the potential impact of flooding on the largest gasoline pipeline in the U.S. as well as nearly a dozen Gulf Coast refiners.

"The potential for flooding is just one more issue in a series of things that have befallen the gasoline market," says Houston-based energy analyst Andy Lipow of Lipow Oil Associates.

Rising river waters are fueling concerns about U.S. gasoline production after a series of refinery outages in Texas and the East Coast over the last several weeks.

Analysts say a fire at a 330,000 barrel per day Chevron refinery in Pascagoula, Miss., and unplanned repairs on a key crude oil pipeline in the Midwest today also contributed to a surge in gasoline prices.

Still, most traders' remain focused on the Mississippi. River flows are expected to crest in the Memphis area tonight or tomorrow, but have not had an impact on local refineries.

Valero's 180,000 barrel per day refinery in Memphis has seen "no material impact to production," says Bill Day, a company spokesman.

He adds that no interruptions are expected there or at its 250,000 barrel per day refinery in St Charles, La., either.

But traders aren't taking chances. Gasoline inventories are already 9% lower than they were a year ago and nearly 4% lower than they were at this point in 2008, while demand historically picks up before Memorial Day.

Traders are watching weather forecasts calling for river waters to crest in the Baton Rouge-New Orleans region in two weeks, an area that is home to 11 refineries.

Lipow estimates those refineries process about 900,000 barrels of gasoline a day, or about 10% of gasoline demand in the U.S. Also, near Baton Rouge is a key pump station for the Colonial Pipeline, the largest US pipeline carrying gasoline from Texas to New York.

"Flooding is the beginning and the end of gasoline story right now. It all about the flooding and supplies. It's not about demand," says trader Ray Carbone, president of Paramount Options. "If you want a great example of what flooding can do, go to Tokyo, go to the nuclear plants."

Fears that flooding could seriously impact operations or cause a complete shutdown of some refineries along the Gulf Coast has caused traders to bid up gasoline futures, particularly the most active front-month contract.

RBOB gasoline futures traded at the New York Mercantile Exchange for June delivery are trading at more than a 10 cent premium to the July contract.

For traders, this increasing "backwardation" is a key barometer of how fearful the market is that U.S. gasoline inventories will soon be in short supply. But some analysts caution that gasoline prices may start to come down if there's not a big impact.

"If the floods don't manifest themselves in refining operations," says Oil Price Information Service analyst Tom Kloza, "gasoline prices could drop another another 25 cents."