Gasoline Costs Pointed Up on EU Action, Geopolitical Risk

For the week through Dec. 5 U.S. wholesale gasoline costs mostly increased, while activity in the European Union coupled with heightened rhetoric from Iran are seen pushing gasoline prices even higher. Additionally, Sunoco Inc. announced Dec. 1 that it was beginning to idle the main process units at it Marcus Hook refinery near Philadelphia, Pa., with that announcement pushing up gasoline prices in the minutes immediately following the news.

Sunoco had previously announced that it was seeking a buyer for the Marcus Hook refinery, and that it would permanently shut the plant in July 2012 should one not be found, citing dismal refining economics for the Northeast.

“Market conditions have deteriorated significantly and the outlook for both motor fuel demand and refining margins remains weak,” said Lynn L. Elsenhans, Sunoco’s chairman and CEO, in announcing the shut down.

East Coast Volatility
Earlier this year, ConocoPhillips announced the permanent closure of its Trainer refinery also in Pa., while on Dec. 1 Western Refining, Inc. said it reached a deal to sell its refinery in Yorktown, Virginia to a subsidiary of Plains All American Pipeline, L.P. The Yorktown refinery is currently idled.

“Continued extreme volatility of refining economics on the East Coast has significantly reduced the probability of restarting refining operations at Yorktown,” said Jeff Stevens, Western’s president and CEO. “This transaction precludes such a restart but allows us to maximize the value of the terminal assets.”

East Coast refineries are less sophisticated than many other U.S. refineries, lacking the capacity to process heavy crude oils that cost less than the lighter grades. East Coast refiners also use imported oil, which has been priced higher than the U.S. benchmark, West Texas Intermediate, throughout 2011. Moreover, East Coast refiners compete directly with gasoline imports, with the majority of those imports to the U.S. received at the New York Harbor.

When using Brent crude oil, the European crude price benchmark, refining margins for gasoline turned negative in early November, meaning it was costing refiners revenue to convert crude oil into gasoline. The last time that happened was in the fourth quarter 2008 in the midst of the Great Recession.

View Telvent DTN’s Weekly and Historical Gasoline Price Index.

The Marcus Hook refinery is situated within the greater New York Harbor market, with that market also the underlying delivery location for the NYMEX gasoline futures contract known as the Reformulated Blendstock for Oxygenate Blending contract. As a result, the Marcus Hook announcement pushed up the futures contract that reverberated throughout the country since gasoline prices are indexed to that contract.

NYMEX RBOB futures with nearest delivery shot up to a one-month high early Dec. 5 and could add to those gains, finding support from what is viewed as positive developments in the EU in addressing their two-year old sovereign debt crisis. Steps to resolve the contentious issue would ease the threat of another financial meltdown as seen in the fall of 2008 amid the Lehman Brothers’ collapse.

Meanwhile, a recent report from the International Atomic Energy Agency that said Iran was looking to build nuclear weapons has triggered increased sanctions from the United States, United Kingdom and Canada in late November, while the EU currently considers sanctions on Iranian oil. Countries in southern Europe are the greatest importers of oil from Iran, the second largest producer within the Organization of the Petroleum Exporting Countries. On Dec. 4, Iranian President Mahmoud Ahmadinejad was reported saying that enacting such a sanction would push world oil prices to $250 bbl. Early Dec. 5, Brent crude was valued near $110 bbl and U.S. WTI was pegged just above $100 bbl.

About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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