Suppliers Move to Ease Glutted U.S. East Coast Gasoline Market

  • Refiners cut output as cargoes diverted from New York Harbor
  • Gasoline crack spread rises to highest level in a month

An overloaded gasoline market on the U.S. East Coast is getting some relief as suppliers scale back production and cargoes in a bid to boost prices.

Facing the region’s worst-ever glut of gasoline, suppliers are beginning to turn off the taps in response to low margins. Profits are gradually starting to rebound, though they remain at a five-year seasonal low.

“With the glut of gasoline and the margins down, you’re going to have to get some people who are making gasoline out of the business,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago.

The profit margin to process a barrel of crude oil into gasoline reached $15.58 Tuesday, the strongest level in more than a month, based on futures prices. That’s up from a five-month low of $11.92 on July 20 that began to trigger a slow ripple of East Coast refinery-run cuts.

While this may help producers, consumers are likely to be unhappy if prices rise as the oversupply eases. The average U.S. price at the pump has fallen more than 25 cents since June and averaged $2.13 a gallon Monday, the lowest level for this time of year since 2004, according to AAA, the nation’s biggest motoring group.

Refinery Output

In the biggest reduction to date, Delta Air Lines Inc.’s Trainer, Pennsylvania, refinery was said Tuesday to cut total production by about 23 percent, or 43,000 barrels a day. Trainer plans to focus on making jet fuel rather than gasoline while margins of the motor fuel are weak, according to a person familiar with the refinery’s operations who couldn’t be named since the matter is private.

PBF Energy, which has more than 340,000 barrels a day of refining capacity on the East Coast, is also “taking steps” to reduce production into the third quarter, Chief Executive Officer Tom Nimbley said Friday on the company’s second-quarter earnings call. “The bottom line is we know we’ve got too much product, and that’s having pressure points on the margins.”

Philadelphia Energy Solutions Inc. also reduced output by 10 percent in early July at its two-refinery Philadelphia complex which supplies the New York Harbor market, according to a person familiar with operations who declined to be named.

Cargoes

Gasoline has also shifted south amid cargo diversions and deviations. A 330,000-barrel tanker usually on the Houston-to-Jacksonville, Florida, run last month moved two products cargoes to Florida from New York Harbor, according to vessel tracking data compiled by Bloomberg. Since June, at least eight foreign import cargoes originally booked to supply New York were sent instead to the U.S. Gulf Coast and Mexican West Coast.

Gasoline stockpiles on the East Coast rose to a record 72.5 million barrels in the week ended July 22, though the growth was primarily in blending components that are mixed with gasoline, according to the latest government data. Regional supplies of reformulated gasoline, known as RBOB, dropped 1.252 million barrels to a four-week low of 22.7 million, signaling that glut has eased or shifted to other regions.

Summer-Grade Fuel

A complicating factor in reducing supplies is that refiners make different grades of gasoline for use in the summer and winter because of environmental regulations. Summer-grade fuel typically must be used up before the market begins transitioning to winter-grade gasoline in mid-September.

But it may now be possible to profit from buying summer-grade gasoline and storing it until April because prices are so depressed by the record-high stockpiles along the East Coast, Philip Verleger, president of the economic-consulting company PKVerleger LLC, said in a note Monday.

“The situation is extraordinary,” he said in the note. Oil-industry executives “probably understand that the agricultural industry stores corn, wheat or soybeans from the fall harvest for delivery in the spring. Surely none of them, though, expected they would be storing gasoline manufactured for summer specifications this year for delivery in April 2017.”

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