July 26, 2019

Refinery Outage Firms East Coast Product Prices

According to the EIA, there were a total of 135 operable US petroleum refineries as of January 1st, 2019. At the end of last month the historic Philadelphia Energy Solutions (PES) refinery erupted in flames with a series of explosions that were heard for miles away. PES started shutting down the 335 mb/d Philadelphia plant without a planned restart. PES has also filed for bankruptcy for the second time in two years and is unlikely to rebuild its facility. Its previous bankruptcy process last year was to reduce debt, but cash on hand waned even after it emerged from bankruptcy last summer. This now means that the largest product demand region in the United States with more than 4 mmb/d of demand has less than 1 mmb/d of refining capacity. Despite this stark disparity, price reactions quickly stabilized, although product prices on the East Coast retained some strength. Below we explore several options available to balance regional product supply and demand through the rest of the summer. 

It is unlikely that East Coast refiners will be able to increase utilization enough to fill the gap. In 2018 East Coast refinery utilization averaged 98% and this year has been only slightly lower. Taking into account the lost capacity, East Coast refinery utilization has been in the high-90% range the last few weeks, with little room available to increase runs substantially.

Difference between product supply and demand by PADD

Source: Stratas Advisors, EIA

The closure of one of the largest refineries on the already short-supplied East Coast will likely put more pressure on product prices to cover the cost of additional transport. US East Coast gasoline futures RBOB rose 6.16% to $1.97/gal three days after the explosion and peaked at $2.01/gal on July 10. Prices have now moderated closer to $1.90/gal but remain supported. The differential between NY Regular Gasoline - Gulf Coast Regular Gasoline doubled on July 2 at $0.08/gal from $0.04/gal on June 21st and remains above $0.05/gal.

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