Refineries in path of ‘Frankenstorm’

Hurricane Sandy, which may become the worst storm to hit the U.S. East Coast in 100 years, may slow a decline in gasoline prices just weeks before the presidential election.

The National Hurricane Center track calls for Sandy to go ashore just south of the Delaware Bay on Oct. 30 and move northwest between Baltimore and Wilmington, Delaware. Five refineries in Delaware, New Jersey and Pennsylvania that produce about 600,000 barrels a day of gasoline may be shut down, according to Andy Lipow, president of energy consultant Lipow Oil Associates LLC in Houston.

Extended outages may deplete East Coast supplies, which Energy Department data show are 9.1 percent below a year ago. Gasoline at the pump has fallen 6.4 percent nationwide since Oct. 8, blunting one weapon of Republican presidential candidate Mitt Romney, who has blamed the Obama administration for almost doubling fuel prices since 2009.

“It would have a major impact,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “The first thing you’re going to think of is demand destruction if people can’t drive. But product levels are well below normal. You could see a rush to the pumps to buy ahead of the storm and that could cause an uptick in demand.”

Gasoline for November delivery rose 2.27 cents to settle at $2.6991 a gallon on the New York Mercantile Exchange. Prices have jumped 3.7 percent in the past two days, after sinking 22 percent since the end of September.

Hurricane Sandy

As of 2 p.m. New York time, Sandy’s top winds fell to 75 miles per hour, down from 100 mph earlier, according to the hurricane center in Miami. It was 430 miles south-southeast of Charleston, South Carolina, moving northwest at 7 mph. As much as 10 inches of rain may fall on parts of the Northeast, with the heaviest rain to the north of the storm’s track.

The five main East Coast refineries are Philadelphia Energy Solutions’ Philadelphia; PBF Energy Inc.’s Paulsboro, New Jersey, and Delaware City, Delaware; Monroe Energy LLC’s Trainer, Pennsylvania, and Phillips 66’s Linden, New Jersey, plants. Together, they process about 1.15 million barrels a day of crude.

Sandy may shutter the plants for five to seven days due to pre-storm closures and power outages, forcing Gulf Coast refiners including Valero Energy Corp., Marathon Petroleum Corp. and Phillips 66 to make up the difference, Roger Read, an energy analyst with Wells Fargo & Co. in Houston, said today in a note to investors.

Low Inventories

The loss of capacity would be “meaningful given relatively low refined product inventories nationally combined with the fact that the U.S. East Coast is already an import-dependent market,” Read said.

Gasoline imports to the East Coast were 471,000 barrels a day last week, down from 942,000 barrels at the end of August, government data show.

Lower demand may reduce any price impact from the outages. U.S. gasoline demand sank 2.7 percent last week to 8.49 million barrels a day, and in the past four weeks was 1.8 percent below a year earlier, department data show.

“Hurricane Sandy’s impact on fuel prices will be short- lived as the loss of supply from the northeast refineries will be in large part offset by a reduction in demand as business in the area is virtually shutdown for several days,” said Lipow in an electronic message. The storm likely “just tempers the ongoing decline in gasoline prices that has occurred over the last few weeks.”

Pipeline Deliveries

The East Coast received 1.42 million barrels a day of gasoline in July by pipeline from refineries along the Gulf Coast, Energy Department data show. Colonial Pipeline Co. operates the largest system connecting the two regions, running from Houston to Linden, New Jersey.

The need to ship more gasoline east would boost prices in both regions and potentially boost refining margins by 10 percent or more on the Gulf Coast, Sam Margolin, a refining analyst with Dahlman Rose & Co. in New York, said in a telephone interview today. Margolin rates Valero and Marathon a buy and doesn’t own shares.

Heating oil prices may also be boosted by the storm. In addition to the gasoline output, the plants produce about 75,000 barrels a day of jet fuel and 350,000 barrels of diesel and heating oil. November-delivery heating oil gained 3.57 cents to $3.0978 a gallon on Nymex.

Heating Oil

“Heating oil is where you could have a big problem,” Flynn said. “If you have to shut down New York Harbor or the refineries, you could see a big spike in heating oil prices. It’s supposed to get cold after the storm. Heating oil supplies are already below normal in the Northeast so heating oil is the most vulnerable.”

The risk of shortages or a spike in the price akin to what occurred earlier this month in California is unlikely due to seasonal outages due to maintenance activity and reduced capacity on the East Coast, he said.

“There are marginal refineries up here,” he said. “The market, especially given the time of year, will probably be able to function with some disruption.”