Blog July 02, 2019

Following the devastating explosion and fire at Philadelphia Energy Solutions’ (PES) 335,000 bpd refinery in Philadelphia on June 21, 2019, the market received shattering news that the facility would be shut down and workers laid off. In a statement released on the afternoon of June 26, PES CEO, Mark Smith, stated “…the recent fire at the refinery complex has made it impossible for us to continue operations.” He later indicated the facility would be positioned for a sale and restart. A return to normal operations could take several months following the sale of the refinery. Extensive damage to the refining complex would require an estimated $200-$300 million to repair or replace the affected units, according to the Financial Times. The refinery serves as a key supplier to the PADD 1A and PADD 1B refined products markets and a major consumer of crude in the region. Therefore, its closure could require pricing shifts and a reshuffling of traditional supply chains to balance supply and demand.

Front-month CME New York Harbor RBOB gasoline prices closed at $1.97/gal on June 26, up $0.09/gal from the day before, as the news of the shutdown and a bullish Energy Information Administration (EIA) inventory report put upward pressure on prices. RBOB prices increased $0.18/gal between June 20, the day before the fire, and June 26.

Meanwhile, gasoline demand in local markets jumped from June 24 to 26 relative to the previous week, likely on supply and retail price fears (See Figure 5 below). While prices for front-month CME light sweet crude futures buoyed this gasoline rally, rising $9/bbl from just above the $50-mark in early June to close over $59/bbl on June 27, the rise in gasoline prices outpaced crude, increasing the equivalent of more than $11.50/bbl between June 5 and 26. Gasoline futures retreated since late June, falling back to $1.88/gal as of 12:20am ET on July 2. This is in line with crude oil futures, but remains at a healthy $21/bbl premium to front-month crude futures.

PES Refinery Remained in Partial Operation Following Incident

Figure 1: Genscape monitors detected high levels of flaring from the PES refinery’s safety system during the morning of June 21. Heavy smoke was also observed in the Girard Point section of the refinery.
Figure 1: Genscape monitors detected high levels of flaring from the PES refinery's safety system during the morning of June 21. Heavy smoke was also observed in the Girard Point section of the refinery. 

While PES is expected to close the refinery within the next month, several units remained online as of June 27 following the fire on June 21, according to Genscape’s North American Refinery Intelligence Service and our real-time infrared monitoring. The fire began in a tank, but quickly spread and severely damaged the nearby 20,000 bpd HF alkylation unit (Unit 433) in the Girard Point section of the refinery. Initial signs of the incident included high levels of flaring as part of the refinery’s safety system, and increased smoke in the area, as seen in Figure 1. 

Figure 2: The incident occurred in the Girard Point section of the PES refinery in Philadelphia
Figure 2: The incident occurred in the Girard Point section of the PES refinery in Philadelphia.

Quickly following the start of the fire, the refinery's 200,000 bpd crude section (Crude Unit 137) shut. This crude section is the largest of three at the refinery and resides in the fire-affected Girard Point section, which is shown on the map in Figure 2.

Figure 3: Crude units in the Point Breeze section remained in operation the afternoon of June 27
Figure 3: Crude units in the Point Breeze section remained in operation the afternoon of June 27.

In the late morning of June 21, the 65,000 bpd gasoline hydrotreater (LSG HDS 870) shut. The hydrotreater is located in the Point Breeze section of the refinery, which recovered from an earlier, June 10, pump fire at the 50,000 bpd fluid catalytic cracker (FCC 868).

All monitored units at the Point Breeze section, apart from the FCC and gasoline hydrotreater, remained online the afternoon of June 27, including the refinery’s two smaller crude sections (Figure 3). Genscape will utilize its real-time infrared monitoring to observe and report on the long-term shutdown of the facility as it progresses.

 

Gasoline Market Tightens with Impending Loss of Key Refiner

The loss of the PES Philadelphia refinery will take a significant volume of gasoline supply out of PADD 1B. The region is typically short gasoline and relies on pipeline movements via the Colonial pipeline system, which delivers products from the Gulf Coast, as well as waterborne gasoline imports from eastern Canadian refineries and transatlantic cargoes. The PES refinery produced an average of 140,000 bpd of gasoline in 2018, which accounts for approximately 28 percent of all gasoline produced in the region, according to Genscape estimates.

Gasoline demand, on average, for PADD 1B ranged between 900,000 bpd and 1.04mn bpd since 2017, according to Genscape Supply Side Prime Normalized data. This means that the loss of PES’s Philadelphia facility equates to roughly 14 percent of PADD 1B gasoline demand. In addition, PADD 1A (New England) does not have any refining capacity and relies on waterborne imports and barge/pipeline movements from PADD 1B. PADD 1A presents an additional 350,000 to 440,000 bpd of gasoline demand, according to Genscape Supply Side data

Figure 4: Genscape’s Supply Side Prime Normalized Data shows PADD 1B gasoline demand from 2017-19.
Figure 4: Genscape's Supply Side Prime Normalized Data shows PADD 1B gasoline demand from 2017-19.

In general, 2019 demand in PADD 1B fell short of last-year’s levels through May. However, the difference narrowed in June, especially given the recent uptick in rack activity seen after the refinery fire. Consumer concerns likely spurred higher demand amid rising prices and the June 26 news that the refinery would shut down in mid-July. In Philadelphia, gasoline rack activity jumped 23 percent, 22 percent, and 12 percent from week-ago levels between June 24 and 26, according to Genscape Supply Side rack data (see Figure 5). This contributed to the 9 percent week-over-week gasoline rack activity increase for all of PADD 1B on June 26. In general, Philadelphia accounts for 8 to 9 percent of total PADD 1B rack activity. 

Figure 5: Gasoline rack activity week-on-week change for Philadelphia, PA and PADD 1B, Genscape Supply Side
Figure 5: Gasoline rack activity week-on-week change for Philadelphia, PA and PADD 1B, Genscape Supply Side

Gasoline inventories for PADD 1B were at their lowest levels for the third week in June since 2015 at 31.9mn bbls, according to EIA weekly stock data. While storage levels were not as low in PADD 1B as seen in 2014-15, these lower inventories mean there is less stock cover with the upcoming loss of PES’ estimated 140,000 bpd gasoline production ahead. Genscape New York Harbor (NYH) gasoline storage data showed NYH storage capacity utilization dipped to 46 percent for week ending June 21, whereas the historical low for NYH gasoline was 34 percent in November 2017. NYH accounted for 45 percent of PADD 1B gasoline volumes in mid-June.

Waterborne Movements Could Play Key Role in Supplying Gasoline to East Coast

With the loss of PES’ Philadelphia as a gasoline supply source for PADD 1B and PADD 1A, waterborne movements, either inter-U.S. or transatlantic, could make up for the shortfall in production. Colonial Pipeline has 1.6mn bpd capacity on Line 1 from Pasadena, TX, to Greensboro, NC, and then 900,000 bpd on Line 3 north of Greensboro, but this line supplies states in PADD 1C before arriving in NYH.

Additionally, this line runs on allocation throughout the summer amid higher seasonal demand. Wider spreads between gasoline prices in PADD 1B versus PADD 1C could encourage more gasoline to flow into the northeastern U.S. via Colonial and additional sources could also come via water.

However, regional prices (i.e. New York gasoline spot and futures prices) would need to remain strong enough relative to other markets to keep arbitrage opportunities open. Gasoline loadings from Europe to the Americas totaled 4.8mn bbls (approximately 700,000 bpd) provisionally for week ending June 28, down from the revised 5.42mn bbls (775,000 bpd) seen for the previous week, according to Genscape’s European Waterborne Products Data. Around 2.3mn bbls (400,000 bpd) of gasoline cargo loadings in Europe had New York as their declared destination for the week ending June 28.

In the medium-to-long term, additional supply for PADD 1A and PADD 1B could also come from the U.S. Gulf Coast, but this would require wide spreads given the high freight cost of Jones Act US-flagged clean vessels. On June 27, CME Gulf Coast conventional gasoline swap futures for July were at 7.75 cents/gal below CME front-month RBOB.

Pipeline Reversal Could Create Supply Opportunities from Mid-Continent

In the long-term, the loss of the PES refinery could spur support of Buckeye Partners’ proposed bi-directional flow change on a portion of their 180,000 bpd Laurel Pipeline to bring gasoline and distillate from the Mid-continent to near Pittsburgh, PA (Altoona, PA), which they expect to begin service by mid-2019. Historically, this line carried refined products from Philadelphia to central and western parts of the state.

Last year, the Pennsylvania Public Utility Commission denied Buckeye’s application to reverse this section of the pipeline. Local gasoline retailers in the state said it would reduce competition and drive prices higher. Buckeye then proposed to offer bi-directional service in response and filed with FERC for approval. Retailers filed a protest against the bi-directional plan to FERC in April, citing this would be a first step in bringing Mid-Continent gasoline all the way to Philadelphia, and would prevent “lower-cost” East Coast fuels from flowing into western and central Pennsylvania.

Refinery Closure to Displace Large Amount of Crude

The idling of the PES refinery will displace a large amount of crude in the market. The refinery imported about 245,000 bpd of foreign oil this month through June 20, with 162,000 bpd coming from Norway, 59,000 bpd originated from the United Kingdom, and 23,000 bpd from Canada, according to Genscape import data. Genscape data showed crude from international locations accounted for about 274,000 bpd in May, 199,000 bpd in April, and about 155,000 bpd in March. PES received nearly 81,000 bpd of Norwegian oil overall this year through June 20, 58,000 bpd from the U.K., and 22,000 bpd and 20,000 bpd from Algeria and Canada, respectively. 

Figure 6: Crude origin locations for the PES refinery according to Genscape’s North American Waterborne Crude Report and, PetroRail Report
Figure 6: Crude origin locations for the PES refinery according to Genscape's North American Waterborne Crude Report and PetroRail Report.

Also making up part of the refinery’s crude slate was Bakken crude from the North Dakota shale play. The PES rail terminal received about 39,000 bpd of Bakken crude this month as of June 21, according to Genscape’s PetroRail report. The refinery’s highest monthly average was 131,000 bpd in May 2015. 

The June 21 explosion did not seem to affect train activity, as operations at the rail terminal appear to be normal, according to Genscape. One unit-train delivered on June 24 to the refinery. The rail facility sits at the north end of the plant in the Point Breeze section. 

Conclusion

The impending closure of the PES refinery promises to reshape U.S. East Coast supply and demand fundamentals for both crude and refined products. The immediate loss of gasoline production, and key distillate production as we move into the winter months later this year, could set a new floor for regional refined product prices, as prices would need to be high enough to attract supply via pipeline from the southeastern U.S or via waterborne movements. For crude, a recently reliable consumer of Bakken crude will be taken out of the market, while displaced transatlantic crudes from the North Sea and west Africa will have to seek other buyers. To learn more about our oil product offerings or to request a demo, please click here.