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. With 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 US 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 over 50% of US refining capacity.  In 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 over 3,100 thousand barrels per day!  Almost 16000 flights canceled. Cities under water.  Cities without power!   Now divide that into the refining capacity!  The Northeast has only about 8% of US refining capacity it does not add up.  You are wiping much more demand as compared as compared 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 North-East 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 on line 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 storm 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.

Two refineries with more than their fair share of bad luck had issues that brought up gasoline futures off of their demand destruction lows. RBOB futures rallied when Bloomberg News reported that BP refinery in Whiting Indiana will start work “imminently” to replace the largest of three crude units. They say that the work will temporarily reduce the refinery’s crude capacity by more than 50 percent, the London-based company said in a statement today. The refinery can process 420,000 barrels of crude a day, according to data compiled by Bloomberg.  Also a fire at Texas City also helped increase the RBOB futures. BP Texas city reported a fire at either an hdro-treater or a hydro-cracker depending on who you believe. Gasoline production was likely impacted and now the fires are out.  Maybe it was a hydro-trick-or- treater.  I spoke to one industry insider who is getting the impression that BP wants to fix these refineries once and for all to avoid the problems that has caused gas prices in the Midwest to skyrocket all summer long.

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 US stock market that is getting ready to reopen is already focused on the rebuilding phase.  The ultimate rebuilding will give the economy a boost and a boost to GDP. Obviously the Fed will continue to be accommodative and perhaps even more so, if that is even possible in the aftermath of this crisis. We are seeing a boost in the industrial metals and we should continue to see the hope for demand growth on rebuilding. The funny part is that oil and gasoline may be the laggard. The API did release their figures and that could help support heating oil. The U.S. oil stockpiles rose 2.1 million barrels to 371.7 million last week, the American Petroleum Institute said yesterday. Crude supplies at Cushing, Oklahoma, the delivery point for Nymex futures, dropped 659,000 barrels to 43.4 million.

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Phil Flynn

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