Baywatch 2018? Downtime for Key Refinery Could Ignite RBOB Futures Fuse
In the celebrated, but widely panned, TV series "Baywatch," there was little room for plot but plenty of glossy slow-motion action that tracked fetching lifeguards patrolling a crowded recreational beach. A subsequent movie bombed, but now the oil industry's version of Baywatch is about to launch. In this case, the eyes won't be focused on slow motion red swimsuits, but instead on the pace of blue collar workers at perhaps the most strategically located refinery in all North America.
In a few weeks, the critical 285,000-b/d Bayway, N.J., refinery will begin one of the most extensive refinery turnarounds in its 110-year history. The refinery can manufacture about 145,000 b/d of gasoline and 115,000 b/d of distillate, and it's located within the confines of NYMEX delivery facilities for the RBOB and ULSD futures contracts. The work, mostly concentrated on the fluid catcracker or FCC, will take place during a six- or seven-week period that under normal circumstances brings some of the most frenetic action of the year for RBOB.
The refinery has had turnarounds in this period before, but as one veteran trader noted, "It's never been down for maintenance in this huge of a gasoline market."
RBOB futures are, to some extent, the proxy or at least the starting point for cash gasoline markets all over the world, and participation in NYMEX RBOB futures and options is on the threshold of reaching 500,000 contracts. That's the paper equivalent of 500 million bbl, or about twice as much gasoline as has ever been stored in the U.S. on any given day.
The turnaround will begin next month and end in early April if all goes well.
Plenty of speculators have already bet that RBOB has barely scratched the surface of what could be a steep ascent. The turnaround coincides with the transition from winter to summer gasoline specifications, which always provides drama (and occasionally tragedy) for refiners, marketers and motorists.
There were rumors earlier this week that suggested Bayway's owner, Phillips 66, might put off the turnaround until next August or September. OPIS exhaustively checked with sources in marketing, trading and maintenance and could find no justification for such reports. The reports may have stemmed from some present inaction in looking to store the vacuum gasoil (VGO) that could accrue while the FCC is down, but sources assure OPIS that the turnaround remains on schedule.
By some estimates, the New York Harbor could miss 6 or 7 million barrels of local gasoline that would otherwise be produced during the downtime. Combine that loss with much less abundant European imports and some critical maintenance on the Colonial Pipeline segment that brings Gulf Coast gasoline to the region, and there is cause for concern.
But the largest concern is tied to the still-cascading money flow that sparked what some have called a "runaway market" in crude oil. Huge financial flows are believed to be the primary culprit for Brent exceeding $71/bbl and WTI topping $66/bbl recently. Gasoline values are already lofty in spring months like April and May, fetching about $17/bbl to $18/bbl over Brent crude. But money flow could push those spring cracks at least temporarily to the $25/bbl level, some bullish traders suggest.
Last weekend's bankruptcy filing by Philadelphia Energy Solutions helped neuter a few overzealous gasoline bulls. With a massive debt payment looming, February and March would have brought constant worries that the huge plant might shut down all or part of its refining complex. With a for-the-moment comfortable bankruptcy financing, the 336,000-b/d refiner is now capable and motivated to run near maximum levels in coming weeks and months.
With Bayway down, however, a bobble or burp or unexpected downtime at the two PBF refineries, the Monroe Energy plant in Trainer, Pa., or any issues for Canadian refineries in the Maritimes could be amplified.
There are some futures analysts who believe that the market has already factored in Bayway downtime. The CFTC Friday measured net length among large funds at 89,615 contracts or nearly 90 million bbl. Adding some of the "small fry" speculators to that non-commercial total brought the net length up to nearly 99 million bbl.
But the ratio of longs to shorts in the fund category is nowhere near close to some historical record skews. CFTC data shows 106 traders on the long side (there is a threshold of size where one must report positions), compared to 49 on the short side. The ratio of long-to-short in last week's CFTC Commitments of Traders report was about 2.13-to-1. There have been many late winter or spring rallies that have seen longs outnumber shorts by double-digit ratios.
Footnote: There is another reason why pushing back a turnaround at Bayway doesn't make sense. Thanks to descending crude prices, implied returns for September gasoline and diesel are quite attractive. Gasoline sells for about $15.50/bbl above Brent and diesel commands about $17.80/bbl versus the benchmark. Those numbers don't factor in possible upside from hurricane influence, nor do they account for the penalties that a refiner might incur in canceling scheduled winter maintenance.
--Tom Kloza, email@example.com
Copyright, Oil Price Information Service