Oil prices surged overnight and into Friday morning on the back of the explosion at Philadelphia Energy Solutions, the biggest refiner on the U.S. East Coast.
But by about 11:00 a.m. Eastern time this morning, the gains had been largely stabilized without significant upward momentum.
Since the start of the trading day on June 19, oil prices have been on a classic roller-coaster. They surged over the course of the trading day on the 19th, with the WTI crude oil benchmark contract on CME rising more than 5.3 percent and ultra low sulfur diesel (ULSD) increasing 3 percent. The cause of that was assumed to be buying in the wake of the Iranian downing of a U.S. drone. In particular, there are signs that financial investors who had pulled out of the market in recent weeks (according to positions data supplied by the Commodity Futures Trading Commission and the ICE commodity exchange) had started to come back in over the past several days.
But those gains were all but completely reversed overnight when the news spread that the U.S. had called off a retaliatory strike. For example, WTI settled Thursday at $57.07/barrel but dropped as low as $56.66/b in the overnight trade.
Then came the news of the explosion at PES, as it's known, a 335,000 barrel per day (b/d) refinery in south Philadelphia near the Philadelphia airport. It's so big that the next biggest East Coast refinery, the Linden, New Jersey refinery operated by Phillips 66 known in the industry as Bayway, is 238,000 b/d, almost 100,000 b/d less than PES, which actually is two separate refineries operating side-by-side and in cooperation. That could mean that one refinery might need to be shut but the other can continue operating.
By 11:15 a.m. this morning, ULSD was up 1.85 percent from its close yesterday, and RBOB gasoline was up even more, increasing 3.28 percent. Crude oil barely rose but that is to be expected; a refinery going down means less demand for crude but more demand for the products in storage needed to fill the loss created by the refinery closure.
But in both cases, those prices were less than the intra-day highs set in the immediate wake of the explosion. The actual price for ULSD at 11:15 a.m. was $1.9119/gallon; the earlier high was $1.9309/g. For RBOB gasoline, the mid-morning price of $1.8455/g was less than the intra-day high of $1.8674/g.
What the market does not know at midday Friday is just how long the refinery will be down or how extensive the shutdown will be. The explosion, as spectacular as it was, was in a vapor storage unit and does not appear to have impacted any key facilities, such as a crude distillation unit, the most basic unit of any refinery. There was some speculation that the explosion may have taken out an alklylation unit, which is used to make a blendstock that goes into gasoline. It would be a significant loss but alklylate can be bought on the open market (albeit at a hefty price).
A bigger concern for consumers might be whether the explosion is the final straw that ends the PES experiment. Private equity led by the Carlyle Group, spurred by the city government that didn't want to lose more than 1,000 good-paying blue collar jobs at the refinery, cobbled together the deal in 2012 that put the two refineries into PES.
PES is a merchant refinery, which means it doesn't have a wholesale distribution unit or a retail division. The complicated rules of renewable fuels and the technical limitations of ethanol blending means ethanol can only be put into the finished gasoline product in a downstream facility that PES, as a merchant refiner, doesn't operate.
That means PES needs to buy renewable fuel credits known as RINs on the open market. Although the renewable fuels industry has a counter-argument, PES has been in and out of bankruptcy once on the back of its RINs costs and the exit from Chapter 11 this year was followed by immediate new reports of problems.
The presumed loss of supply from PES as a result of the explosion is coming at a time when the U.S. diesel market is well supplied. In the most recent Energy Information Administration weekly report, East Coast ULSD inventories of roughly 37 million barrels were the highest they'd been since the end of February. The category of total distillate product supplied for the entire U.S., a proxy for demand, was at a bit more than 4 million b/d in that report, a healthy but not excessive number.
For diesel, at least, a loss of output from PES should not be a crushing blow in the short- to medium-term.
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