Refinery restrictions distort crude oil, gasoline prices

By MORRIS R. BESCHLOSS

PVF & economic analyst

The justifiable anger generated by many regarding gasoline prices caused me to contact top energy expert, Chicago trader, and savvy analyst Phil Flynn regarding what is really behind this latest price spike.

What particularly puzzled me was the level of gasoline prices that had only reached such elevated price levels after the 2005 hurricanes, when oil prices were in the high $78 per barrel range, rather than today’s low $60s.

Although California gasoline users normally pay an extra 50 to 60 cents a gallon more than the national average, due to the multiple blends reflecting California’s clean air provisions, today's price at the pump exceeds even these highs.

For clarification, Phil Flynn updated me on other global energy distortions that have elevated the nation’s gasoline prices generally, and kept crude oil prices lower than the public should have expected at this particular time.

The key to this problem is the increased bottleneck of refinery shortages, compounded by the still prevalent 2005 hurricane shutdowns, maintenance problems, the seasonal shift from heating oil to gasoline and a fire at one of the nation’s largest refineries.

Also, gasoline and distillate imports have been lagging, as other nations are competing for supplies from available global refinery capacity. Ironically, Iran, with only one refinery for almost 80 million people, who are driving more cars than ever, is importing record amounts to soothe a restive population with subsidized gasoline.

The huge Valero-McKee refinery in Sunray, Texas has been shut since a fire disabled it in February. The large amount of crude oil destined for that processing unit has instead been diverted to storage units in Cushing, Oklahoma, creating a domestic U.S. crude oil glut. Simultaneously, the available American supplies of refined product, especially gasoline, have declined by 10% in the last year, foretelling a multi-year shortage before the official driving season commences on Memorial Day.

This has caused the New York Mercantile Exchange to depress crude prices, while nationwide gasoline costs keep rising. Also adding to the travail is the additional cost of mandated ethanol-blended gasoline, which is just beginning to impact the market at a vulnerable time.

With Brent heavy, high sulfur crude fetching $68 per barrel in London’s ice Futures Exchange, this disparity with NYMEX should vault that exchange’s light sweet crude into the $70 and above range, once the current refinery glitches are eliminated. London’s oil futures, reflecting such crude, mainly from the Mideast, have historically brought cheaper quotes, due to the need of greater refining costs.

The NYMEX, which has practically shed the ongoing geopolitical risk factor, will likely reflect higher oil prices as the unexpected glut disappears, and domestic refining capacities return to normal levels. At present, these are operating well below the 90% mark, which would normally be expected at this time of the year.

The easing of pain at the pump will depend on a combination of sufficient refinery runs reaching the mid-nineties level, and a pickup in imports of both gasoline and distillates, such as diesel and jet fuels. Barring this turn of events, expect gasoline to reach $4 per gallon this summer before it backs off to $3 or below after Labor Day.