* Hess to shut Port Reading refinery by end of February
* U.S. East Coast gasoline stockpiles already low
* HETCO trading arm not impacted by downstream moves
(Recasts, updates throughout)
By Matthew Robinson
NEW YORK, Jan 28 Hess Corp's decision to
close its U.S. East Coast refinery, the latest plant to fall
victim to weak profits in the Atlantic Basin, could threaten
painful gasoline price spikes for regional drivers as local fuel
supplies dwindle further.
Hess will shut the 70,000-barrels-per-day Port Reading, New
Jersey plant in late February, as part of a larger
restructuring, the company said in a statement on Monday.
U.S. RBOB gasoline futures, already near a record high for
this time of year, jumped more than 2 percent after the
announcement, as the supply outlook for the Mid-Atlantic and New
England markets suddenly looked tighter for the summer driving
A tighter East Coast gasoline market could mean national
gasoline prices hit $4 a gallon by the spring if international
oil prices remain above $110 a barrel, threatening to create
additional drag on the struggling economy.
While the plant is relatively small, the timing of the
shutdown comes at a tough time for the gasoline market. February
is toward the end of the heating oil season, and refiners begin
to build inventories of gasoline over the spring to meet peak
summer demand. Refiners shut units for planned maintenance in
the spring, which cuts into inventories.
Stocks of gasoline on the East Coast are already trailing
last year's levels by 10 percent, due to a spate of refinery
closures that cut capacity in the region as well as the
Caribbean and Europe - major exporters to New York Harbor - as
well as supply problems caused by Hurricane Sandy.
"The market is pricing in concern about the supply of
gasoline this summer and the news about Hess is supporting
this," said Stephen Schork, founder and editor of The Schork
Report in Philadelphia.
Analysts say the Northeast will have to bring in more crude
from other regions to make up for the loss of Port Reading,
especially if the remaining refineries are hit by unexpected
outages that are common throughout the industry.
In recent years, the East Coast has imported more than a
third of its supplies, forcing regional prices to remain high
enough to attract shipments from as far away as Europe.
U.S. Gulf Coast refineries have surplus gasoline, but a lack
of space on the Colonial Pipeline and a shortage of domestic
tankers that comply with U.S. shipping legislation mean they
cannot cheaply ship it to customers in the Northeast.
A 40,000-barrels-per-day expansion of the Colonial system
into New Jersey is due to be completed this summer, but the
closure of Port Reading will likely offset much of the increase
in Gulf Coast supply.
Built in 1958, Port Reading refines residual fuel oil and
vacuum gas oil into higher-value products such as gasoline and
heating oil for the giant East Coast market.
Hess said it was also selling 28 million barrels of East
Coast oil storage terminals, part of the logistics network built
up to store fuel from the company's giant St. Croix Hovensa
joint-venture refinery, which was shuttered in 2012 due to poor
ENVIRONMENTAL, MARGIN PRESSURE
Many refineries along the Atlantic Coast have seen margins
erode due to the rising cost of importing high-quality crude
from the North Sea and West Africa, which had served as the
plants' main source of feedstock for years.
Some plants threatened with closure last year survived by
looking to niche markets. Delta Air Lines bought the
Trainer, Pennsylvania refinery last year in order to ramp up
production of jet fuel to help lower the carrier's fuel costs.
Other East Coast refiners have sought to ship more crude
from Texas and North Dakota, where booming production has
brought down prices.
Hess said the Port Reading refinery came under pressure due
to costs associated with complying with environmental
regulations for low-sulfur heating oil as well as weak refining
The plant, shut for three weeks late last year after power
was cut by Hurricane Sandy, incurred losses in two of the last
three years, Hess said.
"By closing the Port Reading refinery and selling our
terminal network, Hess will complete its transformation from an
integrated oil and gas company to one that is predominantly an
exploration and production company," Hess Chairman and Chief
Executive John Hess said in a statement.
Hess said it would continue to supply its retail arm, being
able to supply its marketing businesses through third-party
sellers. A company spokesman said HETCO, the independent trading
arm of Hess, would not be affected.
Goldman Sachs is advising on the sale of the company's
Front-month RBOB gasoline futures traded up more than
2 percent to $2.94 a barrel on Monday after news of Port
Reading's impending closure, the highest level for this time of
year since the contract began trading in 2005.
Prices of fuel on the East Coast have a large impact on the
wider U.S. market, as it is home to New York Harbor, location of
the delivery point for the New York Mercantile Exchange's RBOB
gasoline and heating oil complex.
"This is a plant that is located near the harbor, and people
can be wrong-footed by removing it," said Jan Stuart, Credit
Suisse oil analyst.
Stuart and other analysts noted gasoline demand growth could
prove a surprise this year as the economy improves and provide
the backbone of a tighter market.
While the refinery supplies only a fraction of the East
Coast's roughly 3 million bpd of gasoline demand, the market is
heading into the summer looking tight. Nationally, stockpiles
are above year-ago levels, but inventories of the fuel in the
East Coast are now just under 54 million barrels, compared with
about 60 million barrels this time last year.
Gasoline futures hit a 2012 high over $3.44 a gallon in late
March, before average U.S. pump prices climbed to near $4 a
gallon. Prices broke even higher in some regions, nearing $5 a
gallon, spurring talk the U.S. government could tap its
Strategic Petroleum Reserve or waive domestic shipping
requirements to help drive down prices for motorists.
Nationally, pump prices are averaging $3.349 a gallon, down
from $3.419 a year ago, according to motorist group AAA.
Additional supplies from the major U.S. Gulf Coast refining
center as well as the Midwest - where margins have been strong -
could also be limited by a heavy load of maintenance in the
coming months as plants take down units.
That means the East Coast will likely have to turn to
foreign shipments to make up for any shortfalls, so prices in
the region will have to rise enough to draw sufficient imports
from other areas with supply.
"We're losing capacity in a deficit market by shutting that
refinery. We're going to have to attract the barrels out from
another source since I don't see any more coming from the Gulf
Coast," said one products trader in New York Harbor, who
declined to be identified.
(Reporting by Matthew Robinson, Selam Gebrekidan and Cezary
Podkul in New York and Thyagaraju Adinarayan in Bangalore;
Editing by John Wallace and Dale Hudson)