Gasoline bottoms Gasoline Bottoms as Valero Cuts to Counter Slump

-- Gasoline, the worst energy investment of 2008, is becoming this year’s hottest commodity as production drops to a 17-year low and 24,000 U.S. refinery workers threaten to strike.
Employees from Exxon Mobil Corp. to Royal Dutch Shell Plc are ready to walk off the job should contract talks fail, after negotiations were extended Jan. 31. Valero Energy Corp., the biggest U.S. refiner, already idled as much as 30 percent of its gasoline production capacity because of slowing demand. ConocoPhillips, the second largest, says about 15 percent of its refining capacity is off line.
A walkout may benefit refiners, helping them work off inventories that are up 23 percent since Sept. 19, according to Stephen Schork, president of the Schork Group, an oil consultant in Villanova, Pennsylvania. At the same time, higher gasoline prices would boost consumer costs as President Barack Obama battles the worst slowdown since the Great Depression.
“A significant amount of refining capacity is now under threat,” Schork said in a phone interview yesterday. “We’re talking about a potential $1, $1.25 if you get a prolonged strike that shuts in a considerable amount of gasoline production.”
Gasoline has rallied 14 percent this year, the biggest gain on the Reuters/Jefferies CRB index, to $1.1492 a gallon. The pump price is $1.88 a gallon. Prices tumbled 59 percent last year as a credit crisis pushed the U.S., Europe and Japan deeper into recession, cutting motor fuel demand.

Rising Prices
Gasoline futures may more than double to $2.399 as we approach summer, Schork said. Prices may rise another 83 percent by May, or 95 cents a gallon, to $2.10 a gallon, said Peter Beutel, president of Cameron Hanover Inc., an energy consultant in New Canaan, Connecticut.
The union for refinery workers didn’t receive any new proposals yesterday from The Hague-based Shell, which is representing the companies. The parties extended talks on a new contract after failing to meet their settlement deadline.
The deadline will be rolled over every 24 hours until a deal is reached or the United Steelworkers terminates the contract and gives strike notice. The union hasn’t picketed since 1980. The contract was scheduled to expire at 12:01 a.m. Feb. 1.
The union is seeking higher wages, a cost-of-living adjustment, and full medical, dental and vision-care benefits for workers and retirees. Workers also want improvements in plant safety practices after a March 2005 explosion at BP Plc’s refinery in Texas City, Texas, killed 15 people and injured 170.

Lost Capacity
About 1.7 million barrels a day of capacity, or 8.7 percent of the U.S. total, would be lost in a strike if the companies shut refineries as threatened, according to data compiled by Bloomberg News. Gasoline futures rose almost 10 percent last week on the New York Mercantile Exchange on concern about a walkout.
BP, based in London, plans to close four refineries in California, Texas, Ohio and Indiana in a strike. Valero will idle plants in Tennessee and Delaware. Shell and Exxon Mobil plan to keep operations running with contingency crews and managers.
Even before the strike threat, companies curtailed operations after gasoline sold for less than crude oil in 55 of 66 days last quarter, meaning some lost money on every gallon produced. In December, crude oil cost on average 85 cents a barrel more than gasoline.
Refineries operated at 82.5 percent of capacity in the week of Jan. 23, the lowest rate for this time of year since 1992, according to the Energy Department in Washington.
Gasoline’s premium, called the crack spread, is likely to widen to at least $20 a barrel by the spring in the U.S. from $11.605 on Jan. 30, Beutel said. That increase would yield $196,000 for a trader who sold $1 million of May Nymex crude oil contracts and bought $1 million of May gasoline on Jun. 30.

Maintenance Shutdowns
Maintenance shutdowns are also reducing supplies. U.S. East Coast refineries are expected to cut gasoline output by 164,000 barrels a day next month, five times more than normal, according to the Energy Department.
Valero, based in San Antonio, said Jan. 27 that average operating rates for its refineries’ gasoline-making fluid catalytic cracking units are running between 70 and 75 percent of capacity to end losses that prevailed late last year.
“If the industry does not balance supply with demand, we are going to have negative margins,” Valero Chief Executive Officer William Klesse said on a Jan. 27 conference call.
Houston-based ConocoPhillips expects refinery use rates near 80 percent during the first quarter because of maintenance and narrow margins for some plants. The company said its Wilhelmshaven refinery in Germany will reduce production because of deteriorating profitability.

Gasoline Demand
Falling gasoline demand is keeping prices in check. Consumption, which declined in 2008 for the first time in 17 years, averaged 8.8 million barrels a day in the four weeks ended Jan. 23, down 1.7 percent from a year earlier, Energy Department data show.
Prices are “fighting a fundamentally very weak market that has terrible demand dynamics,” Benjamin Dell, an analyst with Sanford C. Bernstein & Co. in New York, said in a telephone interview.
The decline in gasoline use has slowed, and sales will pick up in the second half of the year as economies recover, Paul Horsnell, head of commodities research at Barclays Capital in London, said in a telephone interview. U.S. growth will be 2 percent in the fourth quarter, rebounding from a 3 percent decline in the three months through March, economic forecasts compiled by Bloomberg show.
“The overall demand profile does look better for the second half of the year,” said Horsnell. “That has justified a move away from these kind of negative” margins of last year.
Stimulus Bill
President Obama’s $819 billion economic stimulus bill, currently moving through Congress, may encourage Americans to drive more, said Andy Lipow, president of Houston-based Lipow Oil Associates LLC and a former Goldman Sachs Group Inc. trader.
The average U.S. pump price, which typically lags behind futures by four to eight weeks, has increased 16 percent this year, according to AAA, the largest U.S. motoring club. Prices fell close to a 5-year low of $1.616 a gallon on Dec. 30, from a record $4.114 in July. Crude oil traded at $40.08 a barrel on the Nymex today, down 10 percent this year.
“We see just a small increase in crude oil, if at all, but we do see gasoline prices improving,” said James Cordier, money manager at OptionSellers.com in Tampa, Florida.

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