Gasoline futures prices soared as high as 4.2% during intraday trading on Monday as fuel output on the U.S. East Coast was scaled back sharply in response to the threat of Hurricane Sandy.
The Bayway plant in New Jersey, the largest oil refinery on the East Coast, started to shut down late Sunday and operators of four other refineries have confirmed they are reducing the rate at which crude oil is converted into fuels such as gasoline and diesel.
The run-up in gasoline prices reflects worries of a possible fuel shortage, traders and analysts said, one that could be exacerbated if the plants lose power.
"The worst-case scenario has become closer to becoming a potential reality," said Matt Smith, an analyst at consultancy Summit Energy. "It depends on what we see with power outages. All it would take would be for one of these big refineries to go down" for gasoline prices to stay high.
Gasoline futures on the New York Mercantile Exchange later pared gains, closing 2.1% higher at $2.757 a gallon.
Front-month Nymex crude-oil futures, for December, fell 0.9% to $85.54 a barrel, reflecting less demand from refiners. Brent oil futures closed 11 cents, or 0.1%, lower at $109.44.
Analyst Stephen Schork said the fact that gasoline prices retreated from their earlier highs Monday reveals the market's gloomy outlook on crude oil demand.
The precautions taken by refinery operators to shield equipment from damage have reduced fuel production by at least one-third of refining capacity, according to analyst firm Tudor Pickering & Holt. About 6.5% of the total U.S. refining capacity is near Sandy's forecast path, according to the U.S. Energy Information Administration.
Sandy is the latest blow to supplies in the region, where total refining capacity has declined in the past year amid the closure of three refineries due to weak profitability.
PBF Energy Company LLC on Monday became the latest refinery operator to reduce processing rates, saying it was cutting operations by an unspecified amount at a 180,000-barrel-a-day plant in Paulsboro, N.J., and a 190,000-barrel-a-day facility in Delaware City, Del.
The PBF news follows earlier announcements by Phillips 66 Co. that it was shutting its 238,000-barrel-a-day Bayway refinery and that Hess Corp. would reduce rates at its 70,000-barrel-a-day refinery in Port Reading, N.J.
Some other East Coast refineries have said so far that their plants are running at normal levels.
Analysts said it was still too soon to gauge the more lasting medium-term effect of Sandy on gasoline markets. While the loss of significant refining capacity will pinch supplies, the reduced refining capacity is counteracted by the loss of an estimated 1 million to 2 million barrels per day of reduced gasoline demand due to less driving in the Northeast because of the hurricane, AAA spokesman Avery Ash said.
"You're talking about a huge portion of America's motoring public that could be keeping off the road for the next several days," Mr. Ash said
Outside of the gasoline market, traders are also concerned about heating-oil supplies, said Addison Armstrong, director of market research for brokerage Tradition Energy, noting that heating-oil stockpiles are well below their five-year average.
"Certainly, if we were to have a big power outage hitting refinery restarts, we could expect to have a big run-up in heating oil [prices]," Mr. Armstrong said. Nymex heating oil futures for December settled at $3.115 per gallon, up 1.74 cents, or 0.6%.
Changes in futures prices tend to foreshadow changes to prices at the pump, but for now, consumers in Sandy's path have been spared. On Monday, the per-gallon price for regular gasoline in New Jersey stayed mostly flat compared with Sunday at $3.60 in New Jersey, according to AAA's Daily Fuel Gauge Report. Prices in Delaware dropped to $3.563 from $3.575. Prices in metropolitan New York fell to $3.858 from $3.865.
Volume in the oil and oil products markets was lighter than usual, but the fact that Nymex shut down its New York trading floor--due to the threat posed by Sandy--wasn't blamed. Investors still could trade electronically.
"Most people by now are well used to electronic trading," Mr. Armstrong said. "That's why the exchange felt comfortable leaving the markets open today while most other exchanges are closed."
Copyright (c) 2012 Dow Jones & Company, Inc.
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