NEW YORK: Two significant US refineries were recovering on Monday after damaging and disruptive fires over the weekend, incidents that may offer a temporary bottom to oil product markets while piling more pressure on crude prices.
Oil traders will watch to see how quickly Philadelphia Energy Solutions' (PES) 355,000-barrel-per-day (bpd) refinery, the largest on the East Coast, and Husky Energy Inc's 155,000-bpd Lima, Ohio, plant will be fully up and running after both were hit by fires on Saturday.
The timing of the blazes, while apparently coincidental, will intensify their impact on the market. Combined, the two plants account for over one-tenth of the total refining capacity for the East Coast and Midwest regions known as Padds I and II. On Sunday evening, US crude oil prices fell by 1.7 percent, while gasoline and diesel dipped 0.5 percent.
The impact was most apparent on spreads between front- and second-month contracts, which spiked as dealers anticipated less immediate fuel in New York harbor.
"The compounding effect from all these refinery incidents this weekend should mean a relatively more supportive trading environment for product markets to start the week," said Matt Smith, an analyst at Schneider Electric in Louisville, Kentucky.
The larger disruption, at the Philadelphia plant, appeared likely to be shorter-lived.
On Sunday afternoon, PES said it was already in the process of restarting units at the 200,000-bpd Point Girard section of the plant, which was shut after utility system problems caused "cascading operational issues," including several small fires and heavy flaring.
It expected to finish restarting the units by Tuesday.
The outlook for the facility in Lima was far less certain. One source said it was too early to say when the refinery was likely to resume operating.
An explosion and subsequent fire caused extensive damage to the facility's 26,000-barrel-per-day isocracker unit, which uses hydrogen under high heat and pressure to increase the amount of motor fuels made from crude oil.
The blast also affected the nearby ultraformer, which boosts the octane in gasoline. The entire refinery has been put into circulation, which halts production but allows key units to remain warm.
A spokesman said it was too early to assess the impact on production.
The incidents, the first extensive refinery outages in months, could be a catalyst to boost a slumping oil products market, according to analysts.
In 2012, a fire at the same Girard Point unit caused cash New York harbor price premiums to rise by several cents as dealers anticipated a shortfall.
A source familiar with operations at the Lima facility said the refinery had sufficient stockpiles of diesel and jet, but gasoline tanks were only at 60 percent of full capacity.
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For physical crude oil markets, however, the outages may add to pressure that has been steadily building for months, reducing one source of potential demand for West African crude trading at its weakest differentials since 2009 and knocking out a significant buyer of Canadian synthetic crude.
Lima mostly processes light, sweet crude oil, according to Husky's website.
It mainly receives oil through Sunoco Logistics Partners' Mid-Valley pipeline, which picks up crude from Longview, Texas, near the Permian Basin, moves through Patoka, Illinois, toward Samaria, Michigan.
But it has also been running about 60,000 bpd of light, sweet crude imported from Canada, according to US government data. Reduced buying could back more crude into Cushing, Oklahoma, where stocks have already been rising quickly.
Meanwhile, PES heavily relies on railed Bakken crude from North Dakota and, when competitively priced, imported African crudes.
The discount for February Bakken crude at Clearbrook, Minnesota, in relation to US crude prices widened last week, trading on Friday at a discount of between $5.10 to $5.80 a barrel under West Texas Intermediate.
Some traders have indicated the narrower US crude to Brent arbitrage and the threat of imports was deepening the Bakken discount. The impact on product markets may be muted by rising inventories.
US gasoline and distillate fuel stocks staged their biggest ever increase last week, rising by more than 19 million barrels, US data showed.
A high run rate may also dampen market response.
The refinery utilization rate in the week ended Jan. 2 was 93.8 percent, the highest for this time of year since 2005.
"It wouldn't surprise me to see the gas market jump 10-25 cents a gallon pretty quickly when it opens," said Phil Flynn at Price Futures Group in Chicago. "What usually happens is that cooler heads will prevail."
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