Crude Down, Gasoline Up as Storm Isaac Shuts Refiners

U.S. gasoline futures rose Monday while crude-oil prices fell, as refineries along the Gulf Coast began to shut down operations ahead of Tropical Storm Isaac--and fuel traders braced for the possibility of gasoline shortages.

Isaac is expected to reach hurricane strength as it proceeds over the Gulf of Mexico and toward the Mississippi and Louisiana coasts--a region home to about 19% of U.S. refining capacity.

Gulf Coast refineries have begun closing facilities with a combined capacity of more than 1 million barrels a day in preparation for the storm, and fuel traders and brokers say wholesalers are paying higher prices to quickly ramp up their inventories, prompted by the supply shortages that followed hurricanes Katrina and Ike over the past several years.

"This is the classic U.S. Gulf hurricane drill," said Tim Evans, energy analyst at Citi Futures Perspective. "There's no doubt this will accelerate a lot of commercial buying of gasoline. ... If you don't have contingency inventories, then yes, you are scrambling for supplies."

Gasoline futures for September delivery settled 7.68 cents, or 2.5%, higher, at $3.1548 a gallon on the New York Mercantile Exchange, after rising as high as $3.2050 a gallon in electronic trading earlier in the session.

The spot gasoline market is seeing sharp price increases that could eventually be passed on to consumers. U.S. retail gasoline prices have climbed for several weeks, and stood at $3.75 a gallon Monday, according to the Daily Fuel Gauge Report from AAA, formerly the American Automobile Association. A month ago, average prices stood at $3.485 a gallon.

Some grades of regular conventional gasoline along the Gulf Coast traded as much as 35 cents a gallon above the Nymex price Monday. In Chicago, regular gasoline grades, such as CBOB, the benchmark for the region, are trading at a 42-cent premium, up from about 15 cents Friday.

The refinery shutdowns are weighing on crude-oil futures. Light, sweet crude for October delivery fell 68 cents, or 0.7%, to settle at $95.47 a gallon on the Nymex. Brent crude on the ICE Futures exchange fell $1.33, or 1.2%, to settle at $112.26 a barrel

While prices initially surged as oil producers such as BP PLC and Royal Dutch Shell PLC shut down Gulf production and removed workers, refinery closures could result in declines in oil demand.

Energy suppliers and traders are taking heed of a lesson last learned four years ago when Hurricane Ike caused refineries along the Texas coast to shut down ahead of the storm's landfall.

Large swaths of the U.S. Southeast felt the impact for more than a week as gasoline shortages cropped up in states such as South Carolina and Georgia, and panic buying prevented gas stations and wholesalers from replenishing inventories.

This year, stockpiles are already stretched in some parts of the country reliant on shipments from the Gulf Coast.

Gasoline stockpiles on the U.S. East Coast as of Aug. 17 were at the lowest level in 22 years for this time of year. The region receives about 1 million barrels a day of petroleum products from the Gulf.

"In the U.S. gasoline market right now, stocks are tight. ... A one or two day interruption of Gulf Coast product production is meaningful," said Brison Bickerton, head of strategy at energy trading firm Freepoint Commodities.

Wes Loflin, head of Northeast Louisiana Wholesale Oil and Gas, a fuel distributor in Monroe, La., said he hasn't seen any price increases at this point. But supply problems could arise if refineries are knocked offline due to power problems.

"We're preparing and monitoring and hoping we don't take any refinery damage along the coast," said Mr. Loflin, who supplies about 40 gas stations with 2 million gallons of fuel a month. "It has a lot to do with if the refineries get hit in the Baton Rouge area."

September heating oil settled 0.17 cent higher, at $3.1118 a gallon.

Copyright (c) 2012 Dow Jones & Company, Inc.


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