Refining Juggernaut Moderates Gas Prices

Investor's Business Daily

A two-month advance in gas prices weakened over the past several days, as sidelined refineries returned to operation and the expanded portion of a massive Port Arthur, Texas, facility owned by Motiva flickered to life after being idled since June.

That could be good news in the short run for drivers. Long term, bringing the No. 1 U.S. refinery fully online creates a huge competitor. That will pinch margins at domestic rivals, which have been stock market standouts in 2013. But foreign facilities may come under even more pressure.

"The restart of Motiva is a big step forward," said Phil Flynn with the Price Futures Group. "I think that is one of the reasons why the RBOB futures have been getting crushed (in recent days).

Motiva — a joint venture between Royal Dutch Shell (RDSA) and Saudi Armaco — more than doubled the facility's capacity to 600,000 barrels a day. The $10 billion project suffered a severe failure upon start-up last June.

After several misfires, the expanded unit fired up in February's last weekend. Shell spokesperson Kayla Macke confirmed the unit was "running satisfactorily" and should soon reach "economic optimum rates.

Gasoline futures began dropping several days before the re start. On Tuesday the April RBOB gasoline contract was about 4% below its late February high. July RBOB gas was down 7%.

The Motiva plant, and various other refineries returning from planned and unplanned outages, faces a landscape of continued weak fuel demand. U.S. gasoline use has been declining year-by-year since its 2007 peak, points out Larry Goldstein, director of special projects with the Energy Policy Research Foundation.

Geared To ExportDoes that mean gasoline supplies are headed for a glut and price crash similar to natural gas? If so, are stock market stars such as Phillips 66 (PSX), Northern Tier (NTI) and Marathon Petroleum (MPC) bound for a shakeout

Not likely; Goldstein says "the irony is foreign refiners might feel it more" for two reasons:One is that a rash of closures in the past two years among East Coast suppliers have worsened the region's "refining deficit.

So, East Coast demand to attract outside refined product "has grown even though (national) demand has declined.

That has also maxed out capacity on the Colonial Pipeline, the Gulf's major refined product conduit to the East Coast. The same is true for the Jones Act tankers designated by U.S. law as the Gulf's sole domestic shipping option.

The alternative for Gulf refiners: exports.

The bulk of the Motiva plant's production is — like a growing share of refinery capacity along the Gulf Coast — geared for export, said Bank of America Merrill Lynch analyst Doug Leggate.

U.S. refiners have been helped by low-cost oil from unconventional plays in the Midwest, Texas and Canada. In addition, Leggate emphasizes, cheap natural gas has slashed refiners' energy and product input costs.

"We can export gasoline and diesel to northwest Europe cheaper than they can produce it locally," he said.

The same is true for Mexico and Venezuela. As a result, monthly gasoline exports have risen to record levels in the past three years, hitting 18.3 million barrels in December.

Global Crude ShiftThe Motiva restart, alongside a boost in Saudi oil production in February, points to rising pressure on Europe's Brent crude benchmark, which continues to dictate gasoline prices.

Brent crude hit its 2013 high just below $118 a barrel on Feb. 14. On Tuesday, it was trading about 7% off that mark. WTI peaked at $98.66 on Jan. 30. It is now 8% below that mark.

Analysts expect the spread to narrow, though they differ over how much. All agree retail gasoline prices should fall somewhat.

Among U.S. refiners, Leggate sees Midwest plants continuing to thrive. Gulf facilities and eventually East Coast sites will also benefit as cheaper crude pulls down prices.

"You have obviously seen that incremental glut move to the Gulf Coast, to the point where Valero (VLO) and Marathon Petroleum said on their conference calls they were no longer importing (Brent crude) but were using domestic," Leggate said.

Refinery operators Delek US Holdings (DK) and Alon Energy (ALJ) report earnings on Wednesday and Thursday, respectively.

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