Sandy & oil, day 2: Demand destruction vs. infrastructure woes…and some TransCanada news

A few observations on day 2 of Sandy:

–Our blog Monday regarding Phil Verleger’s comments received a tremendous number of hits. But the market appeared to go in a different direction Tuesday, with “demand destruction” being the new watchword. As Platts’ Matthew Kohlman, Wajih Choudhury and David Henry reported, most differentials to benchmark NYMEX prices dropped. Gulf Coast ULSD fell 2 cents to December heating oil futures minus 3.75 cent/gal. Heating oil dropped 50 points for New York Harbor barges to November plus 1 cent/gal. Gulf Coast heating oil dropped 4.20 cents to December minus 10.75 cents/gal.

There were some differentials that increased, but clearly, softness was the order of the day. Traders repeatedly cited the realization in the markets that activity in the entire New York/New Jersey region–people going to work, going to school, going to wherever–is going to take a several-days holiday, and with it, some demand for transportation fuels will decline. (To say nothing of the demand for heating oil in houses that have no power, and therefore no way of running their boilers). So whereas tight inventories and lost production were heard most on Monday, Tuesday was all about the demand that will go away.

–With the EIA not releasing its inventory numbers until at least Thursday, a particularly sharp focus was on the American Petroleum Institute stocks data, which came out on time late Tuesday. And if the market needed a reminder about how tight distillate stocks are, it got it: total US distillate stocks, already well under previous years and normal levels, dropped another 2.587 million barrels last week. Of that, 822,000 barrels disappeared from US Atlantic Coast inventories, and 715,000 of that was ULSD.

–The best news is coming out of Philadelphia. The refinery operated by Delta Airlines at Trainer is operating normally; so is Carlyle Group’s Philadelphia Energy Solutions refinery. PBF said their refineries in Delaware City, Delaware, and Paulsboro, New Jersey, both of which had reduced but not shut operations, performed “well” during the storm, without being more specific. A Nustar asphalt plant in Paulsboro also is restarting.

–But the good news out of Philadelphia can’t overcome the fact that there’s flooding and power outages at the Phillips 66 refinery in Linden, New Jersey, also known as the Bayway refinery, and the cat cracker-only refinery operated by Hess at Port Reading, also in Linden. (Hess reported a power outage, but did not report flooding). And terminal after terminal in that whole New Jersey-Staten Island corridor, and at other places in the New York area, almost all reported that they remained closed due to flooding.

–You may not remember it, but the US has two Strategic Petroleum Reserves. One is the more famous crude storage, which holds a little less than 700 million barrels of crude. The other is a 1 million barrel heating oil stockpile held in two storage facilities in Connecticut and Massachusetts. A DOE official told Platts nobody has asked for any of that oil post-Sandy.

–There are still two major pathways into the New York area that remain closed. Late Tuesday, Buckeye Partners said its Pennsylvania system is ready to restart. But the company’s Connecticut, New Jersey and New York City pipeline systems are still without power, with no estimated restart date. Meanwhile, Colonial Pipeline’s Line 3, which runs between Greensboro, North Carolina, and Linden was closed, though problems with shippers more than power outages were being cited by the line as the cause for the closure. Line 3 links up Colonial’s 1.272 million b/d gasoline Line 1 and 1.15 million b/d distillates Line 2 at Greensboro. Lines 1 and 2 originate from Pasadena, Texas.

If there’s a message in all of these little tidbits we’ve lined up here, it might be this: demand destruction may be a big factor in the market. But the infrastructure around New York isn’t in great shape yet and that could ultimately slow supply when demand starts to come back from its “destruction.”

And some news you may have missed….

TransCanada Tuesday gave some of the firmest indications that it will indeed take the main natural gas trunkline that runs from Alberta into Ontario and the Northeast US and convert it to oil, with natural gas, mostly from the Marcellus, pushing TransCanada out of its traditional markets. On the company’s earnings call, its president of energy and oil pipelines, Alex Pourbaix, sent signals that can only lead to the conclusion that this is most likely a “go.” He gave a figure for the project: $5 billion. That’s the first time that number has been heard. He said he is confident the project has met its technical and economic tests. He added that the upper end of the 500,000 to 1 million b/d project wouldn’t be needed to make the project successful. And Pourbaix said he reached these conclusions after six months of consulting shippers. But it won’t be until next year that the final decision is made. Yet the call today went further than TransCanada has gone yet.

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