Easing NY pump pain could net oil traders millions

NEW YORK/LONDON Mon Nov 5, 2012 11:02pm EST

NEW YORK/LONDON (Reuters) - With gas lines still snaking from filling stations in the U.S. Northeast after Hurricane Sandy, nimble oil traders like BP Plc (BP.L) may be poised to reap millions in profit by supplying fuel to the storm-struck region.

Call it disaster arbitrage: Aided by Friday's federal government waiver allowing foreign tankers to ship oil between U.S. ports, a few firms are racing to deliver fuel from the U.S. Gulf Coast to the East Coast, where it can fetch a handsome premium.

To make a buck, they will have to move fast. Waivers to the Jones Act -- a 92 year-old law that protects the U.S. shipping industry by keeping foreign tankers from transporting goods between U.S. ports -- are valid only until November 20, the deadline for unloading exempt cargoes.

Successful oil traders could profit by nearly $2 million on each exempt cargo of gasoline they're able to ship from Houston to New York, according to Reuters' calculations. The journey takes around a week.

In recent days, BP has sought exemptions to divert at least two cargoes of oil from the U.S. Gulf Coast to the East Coast region, according to sources at two shipbrokers who track tanker charters and asked not to be named.

So far, two oil companies have informed the U.S. government they intend to use Jones Act waivers to ship fuel from the Gulf Coast to the East Coast on foreign-flagged vessels, a government source said on Monday.

Others may also be involved. Firms, which could include U.S. oil majors, aren't required to tell the government they're engaged in the Jones Act arbitrage until after they load fuel into ships on the U.S. Gulf Coast.

Another shipping expert reported a huge jump in interest for tankers.

"The sudden announcement of Jones Act waivers on Friday was immediately followed by a flurry of inquiries to transport product cargoes from the U.S. Gulf to the Northeast," said George Los of shipbroker Charles R. Weber in Greenwich, Connecticut.

The cost to charter a suitable oil tanker in Atlantic waters has already surged since Sandy hit, to between $19,000 and $26,000 per day this week from $10,000 or less before Sandy, shippers said.

BP USES LIBERIAN, GREEK-FLAGGED TANKERS

BP earlier chartered the Liberian-flagged tanker Mercini Lady to pick up fuel in Texas and ship it to Canada or Europe, according to shipping sources and tracking data.

After Jones Act waivers were unveiled, the sources said, the Mercini Lady was diverted to New York Harbor, where it awaits a berth to unload. The ship's size indicates it can carry a load of 300,000 to 400,000 barrels of light fuel like diesel or gasoline.

In recent days, sources said, BP also chartered the Greek-flagged Minerva Ellie, which carries heavier refinery feedstocks such as crude oil, vacuum gas oil or fuel oil, often used for heating.

The Minerva is slated to load up on fuel in the Gulf Coast around November 8 and proceed to the U.S. East Coast, shipping sources told Reuters.

BP did not return an email or a phone call seeking comment on tanker charters or its oil trading on Monday. The charters appear on private booking lists shared by shipbrokers. With software that tracks tankers by satellite, reporters verified the location of both tankers.

The cargoes should help to relieve fuel shortages caused by Sandy, the government source said.

But the oil firms are driven by more than an urge to help storm-hit consumers. They also stand to turn millions in profit, Reuters pricing data show.

HOW THE TRADE WORKS

Here's how the disaster-driven trade works: An oil firm, making use of the Jones Act waiver, charters a foreign-flagged vessel to load up on fuel on the refinery-rich Gulf Coast. The vessel then sails to a harbor along the East Coast and unloads the fuel into a market where it commands a premium. The trader pockets the difference, after shipping costs.

A typical medium-range tanker carries more than 300,000 barrels of light fuel. On Monday, wholesale gasoline in Houston traded for a 20 cent per gallon discount to gasoline in the New York Harbor. That amounts to around $7.65 per barrel of fuel, or more than $2.3 million per tanker cargo.

Strip out tanker shipping costs -- around $1.25 per barrel to New York -- and the trade would net a profit of $6.40 per barrel, or around $1.9 million per cargo.

To make it work, an oil firm must also find fuel terminals and customers in the Northeast that can take delivery.

Some maritime terminals were damaged by Sandy, including several at the New York Harbor, where massive tank farms can hold a combined 75 million barrels of oil products.

The arbitrage is unlikely to affect global oil and shipping markets for long.

While the Jones Act waivers are likely to prompt "several extra cargoes" of fuel on foreign-flagged vessels, "we expect the overall impact to be relatively minor," said Michael Weber, a shipping analyst with Wells Fargo Securities.

GASOLINE MACHINE

The East Coast already relies heavily on fuel imports, including gasoline cargoes from Europe.

But tanker traffic between the Gulf Coast and ports in the Northeast is normally limited to U.S.-manufactured tankers that qualify under the Jones Act. There are just 56 qualified oil tankers, according to U.S. government data, and many are engaged on regular routes.

Exempted cargoes will supplement refined fuel shipments into the Northeast on pipelines, barges, domestic tankers and ships from overseas.

After its partial shutdown due to Sandy, the 800,000 barrel per day Colonial Pipeline network, which ships fuels from Houston to New York, is running near full capacity, its operator said.

But snags at refineries remain, a scenario that could leave disaster-related arbitrage opportunities open to traders in the weeks to come, analysts said.

The largest of two northeastern refineries still shut is Phillips 66's (PSX.N) 285,000 barrel-per-day Bayway plant in New Jersey. Among oil traders it's known as the "gasoline machine," whose catalytic cracker can churn out enough motor fuel to feed half the cars in its home state.

Bayway will likely need two to three more weeks before it restarts, after salt water flooded parts of the plant.

Substituting the plant's gasoline yield would require around 20 extra tanker cargoes per month into the region, including tankers from overseas, according to Urs Dur, a shipping analyst at Clarkson Capital Markets.

That could keep tanker demand high as oil arbitrageurs ply the trade route in Sandy's aftermath.

(Additional reporting by Tim Gardner in Washington; Editing by Matthew Robinson and Michael Urquhart)