The closure of the Philadelphia Energy Solutions refinery has not only stretched the trans-Atlantic gasoline arbitrage wide open but it leaves a gaping hole in US East Coast supply that could last for months, with demand for diesel also possibly getting a boost this winter.
The fire at an alkylation unit in June and subsequent mothballing of the site resulted in the loss of some 150,000 b/d of gasoline and around 100,000 b/d of distillates, according to Mark Routt, Chief Economist Americas at KBC.
"The immediate shortage are these numbers," said Routt.
The result is "additional import requirements, most of which will likely be sourced from overseas," according to the International Energy Agency's latest monthly report.
Europe has already seen a significant pull of volumes, which propped up its subdued gasoline market.
"As soon as the extent of the outage was made public, we saw a huge increase in the amount of gasoline shipped to the US," said WoodMac's Mark Williams, principal analyst, EMEARC refining.
Gasoline flows to the US and Canada from Northwest Europe in July are so far expected to be around 1.4 million mt, amid short covering in North America, according to shipping fixtures and S&P Global Platts trade flow software cFlow.
"With the PES issue, the arb is spiking and bringing Eurobob up and the Med is following," a European trader said.
Expectations from both traders and analysts are for the arbitrage to remain open in the coming months.
LIMITED LOCAL SUPPLY
Hence, the closure of the PES "is a good news" for European and Eastern Canada refiners, according to the International Energy Agency.
The Eastern seaboard, known as PADD 1, already depends heavily on other US regions and imports from overseas "to cover almost 80% of its product needs," the IEA said, adding that if the district was a separate country "it would be...the largest importer of oil products."
Consultancy KBC's Mark Routt noted: "The East Coast accounts for just under one third of all American demand and roughly 71% of all gasoline imports to the US come to the East Coast."
"Demand is not disappearing but supply is disappearing," he added.
While the US Gulf could be a potential supplier, that possibility is hindered by a lack of pipeline capacity and expensive marine shipments.
"The closure of the Philadelphia refinery would result in additional import requirements, most of which will likely be sourced from overseas, due to logistical constraints," said the IEA.
And while other regions could also benefit from the open arbitrage, "it's a very big deal for Europe if [PES] shuts down," a gasoline source said.
Even provided that PES restarts some units, rumors about which have been circulating recently, the loss of the alkylation unit cannot be easily replaced as "17% of the gasoline pool depends upon alkylate," according to KBC's Routt.
Meanwhile, the fire had not only supported physical prices on both sides of the Atlantic but the paper market in Europe had also factored in the bullish sentiment.
"Much of the paper is pricing in the lost barrels [due to PES], further along the curve," a NWE trader said.
DIESEL IMPACT
So far the Philadelphia outage has mostly been viewed in terms of the gasoline impact, as the fire occurred just before the peak of the summer driving season.
"We speak a lot about gasoline but it should have an impact on diesel in the winter," a diesel trader said.
In winter, the US Atlantic Coast imports diesel for use as heating oil, with most US states now using ultra-low sulfur diesel for this purpose.
The colder the winter, the more imports head to the US East Coast, from either Europe or the East of Suez region, notably the west coast of India.
"Last winter we had record exports to the US," an Indian refiner said, talking about ULSD.
Even though Europe gets supplies mostly from other regions, it can also feel the bite of the drop in US exports.
Overall "in terms of supply and price, Europe is not better with respect to diesel and the US is not better in terms of gasoline," said KBC's Routt.
CAPACITY ISSUES
A less heralded effect is the loss of refinery capacity in PADD 1 of taking out the 335,000 b/d PES plant, outside Philadelphia, Pennsylvania.
The district "suffered" like Europe from deteriorating refinery economics in the 2000s and early 2010s, said the IEA, which "led to capacity closures." Total capacity has been reduced by 500,000 b/d to 1.2 million b/d "since the start of the millennium," the agency said in its latest report.
Analysts have expected the refineries in the region to come under further pressure.
But "this event will allow the remaining refiners on the East Coast to remain in operation for a longer period of time," according to WoodMac's Marc Amons, senior analyst Americas refining.
