GreenShoots! They Literally Can't Shut Refineries Fast Enough Due to Massive Gas Glut

Discussion in 'Economics' started by ByLoSellHi, Oct 11, 2009.

  1. With the economy so robust and so strong, and green shoots sprouting everywhere, you'd think people would be buying a lot of gasoline.

    Maybe something in the propaganda campaign doesn't jive.

    Sunoco, Valero Shut Refineries as Winter No Match for Fuel Glut
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    By Barbara Powell

    Oct. 12 (Bloomberg) --
    Oil refiners from Valero Energy Corp. to Sunoco Inc. are cutting the most capacity since the early 1980s, anticipating the coldest U.S. winter in a decade won’t be enough to soak up a glut of fuel.

    The returns from processing crude into heating oil for delivery in February are the lowest in six years after the recession cut demand by the greatest amount since Jimmy Carter was president. The margins for making heating oil and diesel may decline 33 percent by January because of the increasing supply, according to Energy Security Analysis Inc.

    San Antonio-based Valero shut its Aruba plant and Philadelphia-based Sunoco will idle its Eagle Point refinery in New Jersey. Across the U.S., the Energy Department forecasts heating costs this winter will fall 8 percent, even as the U.S. Northeast, where most heating oil is used, faces prospects for frigid weather, according to Commodity Weather Group, a private forecaster in Bethesda, Maryland.

    “Some refiners are not going to survive” unless profit margins recover, said Andy Lipow, president of Houston consultant Lipow Oil Associates LLC, and a 30-year veteran of the U.S. refining and oil-trading business. The most vulnerable “are inefficient refineries with high operating costs, high fuel costs. The East Coast refineries probably carry the biggest risk because they compete with the rest of the world.”

    February futures contracts show the premium of heating oil to crude oil, called the “crack spread” in industry jargon, will average $5 to $5.50 a barrel in January, down from $7.83 Oct. 9, said Andrew Reed, a market analyst for Wakefield, Massachusetts-based Energy Security Analysis. That’s down 73 percent from $19.60 a barrel last year, the biggest one-year drop in more than two decades.

    Shares Drop

    Valero, the largest U.S. refiner, has fallen 10 percent this year, and Sunoco, the largest refiner in the U.S. Northeast, has dropped 33 percent. Analysts forecast that of the nine publicly traded independent refiners, Valero, Sunoco, Tesoro Corp., Frontier Oil Corp., Western Refining Inc. and Alon USA Energy Inc. will lose money in the third quarter, according to data compiled by Bloomberg.

    While the companies suffer, U.S. households will benefit. Heating-oil users will see their bills drop 2.2 percent to $1,821, the Energy Department said Oct. 6. The Northeast accounts for 80 percent of U.S. heating oil consumption. Retail prices are expected to average $2.62 a gallon this winter, down 21 percent from the winter of 2007-2008.

    Only a colder-than-expected winter can help the refiners, according to the Energy Department. If temperatures are 10 percent below projections, home heating bills would drop only 2 percent, the department said.

    El Nino

    An El Nino system in the Pacific Ocean may push down temperatures in the Northeast U.S. during the first quarter of 2010, Matt Rogers, a forecaster at Commodity Weather Group, said Sept. 28.

    The forecast for cold weather and signs of economic recovery caused Francisco Blanch, head of global commodities research at Bank of America-Merrill Lynch in London, to estimate refining margins may rise.

    “I will be very surprised if we don’t see $10-a-barrel- plus in January and February, particularly in light of what appears to be a recovery in manufacturing activity and industrial production,” said Blanch. “In a very cold winter you could have some more upside, and cracks could spike well above $10 a barrel.”

    Economic Recovery

    The U.S. economy is recovering from the worst recession since the Great Depression. Industrial production rose 0.8 percent in August, the Federal Reserve said Sept. 16. Service industries expanded in September for the first time in a year, according to the Institute of Supply Management.

    The recovery is uneven, as job losses mount. Non-farm payrolls fell more than expected in September, the Bureau of Labor Statistics said Oct. 2, as the unemployment rate rose to 9.8 percent, a 26-year high.

    The Energy Department projected Oct. 6 that U.S. demand for so-called distillate fuels such as heating oil and diesel will plunge 8.2 percent to 3.62 million barrels a day in 2009, the biggest decline since 1980.

    “The demand data measured in barrels per day is not responding yet,” said Harry Tchilinguirian, head of commodity derivatives research at BNP Paribas in London. “Part of the answer lies in that it is hard to distinguish what constitutes a rebound in activity connected to the inventory cycle and the reinstatement of previously canceled orders, and a genuine return to growth.”

    Ample Supplies

    There was enough heating oil and diesel in the U.S. as of Oct. 2 to last 50.5 days, according to the Energy Department, the most since at least March 1991. Stocks have risen by 33.9 million barrels, or 25 percent, this year.

    The increase in distillate stocks to 171.8 million barrels, the highest since January 1983, has been encouraged by the so- called contango in the heating oil market, where contracts for later delivery are more expensive than near-term supply.

    “Storage costs for distillate range from 50 cents to 85 cents per barrel per month for tank storage,” said Lipow. That’s about 1.2 to 2 cents a gallon per month.

    The premium of the February contract on the New York Mercantile Exchange over November was 8.2 cents on Oct. 9, or approximately 2.73 cents per month, leaving room for traders to profit by purchasing the oil, storing it and selling contracts for future delivery.

    Refinery Rates

    Refinery rates at 85 percent are already at a seasonal seven-year bottom, after excluding last year and 2005, when hurricanes disrupted production.

    “If refiners keep utilization rates on the low 80 percent range, it might prevent the crack spread from falling to $1,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas.

    The heating oil futures contract has become a proxy for diesel fuel because households have turned to natural gas. Natural gas is used in around 52 percent of homes, compared with a 7 percent share for heating oil.

    Heating oil represented 18 percent of all distillate demand in January 2009, according to Energy Department data, compared with 55% in January 1994. As a result, the U.S. market has become more tightly linked to Europe, which uses more diesel fuel than it makes.

    European Inventories

    Gasoil stockpiles in the Amsterdam-Rotterdam-Antwerp area, Europe’s oil trading hub, were 2.89 million metric tons as of Oct. 8, according to Netherlands-based consultant PJK International BV. Inventories have fallen 4.6 percent over the past four weeks from a record 3.03 million tons.

    “There are stocks onshore, then floating storage, then German domestic stocks,” said Christophe Barret, an analyst at investment bank Calyon in London. “On top of everything we have diesel and gasoil arriving from Asia” where refinery capacity has been increased.

    Domestic tanks in Germany were 66 percent full at the end of August, above the 60 percent average for the same point between 2004 and 2008, according to Calyon.

    The amount of products in floating storage, which was mostly middle distillates, off Northwest Europe and the Mediterranean grew to about 50 million barrels as of the end of September, up from around 40 million barrels the previous month, the International Energy Agency said in its monthly Oil Market Report on Oct. 9.

    Refiners can adjust processes to yield more or less of a certain product, such as diesel or gasoline. The gasoline crack spread, based on February contracts, at $3.72 a barrel is lower than heating oil, so producing more motor fuel may not be a viable option. That leaves capacity cuts as the only solution.

    Closing Units

    “The only piece the refiners can do themselves is keep the supply low,” said Jacques Rousseau, an analyst at Soleil Securities Corp. in New York. “You are starting to see more pressure on that with Sunoco closing Eagle Point and Valero shutting Aruba. You may see more of that. The easier thing to do is close particular units at a refinery rather than a whole refinery.”

    More cuts are on the way. Valero must reduce more costs at plants in Paulsboro, New Jersey, and Delaware City, Delaware, and pursue “strategic alternatives” for them and the shuttered Aruba plant, Chief Executive Officer Bill Klesse said in a memo to employees Oct. 8.

    The Oct. 6 announcement by Sunoco to shut the Eagle Point plant in Westville, New Jersey, “highlights the difficult financial environment our industry is facing, particularly in the Northeast,” Klesse said. “Unfortunately, we do not see improvement on the horizon, and we must continue to take actions to improve our financial performance.”

    Low Demand

    The economic slowdown has resulted in low fuel demand, which, coupled with increasing competition from foreign refiners, produced losses for Sunoco, Chief Executive Officer Lynn Elsenhans said on a conference call Oct. 6.

    It will require a drop of 52.3 million barrels, or 30 percent, by the end of March to bring supplies down to the five- year average of 119.5 million.

    “It’s going take something extraordinary. More likely, it will be March and April and we will still be sitting on these inventories,” said Reed. “Unless something extraordinary happens, the risk is all to the downside.”

    To contact the reporter on this story: Barbara J. Powell in Dallas at
    Last Updated: October 11, 2009 19:39 EDT
  2. AyeYo


    I know this is straying from the topic of endless bearishness, but I found this very interesting...

    Why? Is it cold no where else in the country? We've a small area, granted the population density is high, but 80%? Are we the only ones in the country heating with oil?
  3. This seems to happen quite often when were in the midst of a robust economy. Nice find.
  4. Yawn, You sure didn't read weekly oil report. Nothing new and surprise.
  5. new$


    Natural Gas
  6. older houses with older heating systems. oil used to be popular before nat gas pipelines were built. almost no buildings are built with oil heat anymore.
  7. AyeYo


    Ah, that explains it.
  8. MattF


    get Joe Kennedy on the case.

    After all, a nice portion of that 80% are people who can't even AFFORD the oil to heat their homes in the first place!
  9. As stated already I use Nat Gas in CO. In fact everybody in the West uses Nat Gas as far as I know. Some on remote land use propane.