From This Week in Petroleum (Aug. 19, 2015)
As previously reported by EIA, Midwest retail gasoline prices rose significantly as a result of the unplanned outage at BP’s refinery in Whiting, Indiana. Following the outage, the supply chain is now in the process of adjusting and the availability of replacement supply is apparent. The wholesale spot price for gasoline in Chicago, Illinois, which increased 60¢ per gallon (gal) from the previous day to $2.47/gal on August 11, has since fallen 23¢/gal on August 14, and has fallen a further 17¢/gal since then, to close at $2.07/gal on Tuesday, August 18.
On August 8, the BP refinery in Whiting, Indiana, the largest petroleum refinery in the Midwest, had an unplanned outage and was forced to reduce production. The BP Whiting refinery has a crude oil distillation unit (CDU) capacity of 413,500 barrels per calendar day (b/d), and it is an important source of gasoline and distillate fuel oil supply to the region.
Press reports indicate that the largest of three crude oil distillation units at the refinery was shut down because of leaking pipes, cutting the refinery’s total operable CDU capacity by roughly 50%. EIA estimates the loss of gasoline production from that unit to be between 120,000 b/d and 140,000 b/d, based on May 2015 refinery yield data for the region and press reports of the refinery running at 40% capacity. It may take BP a month to fix the problem.
Regional spot gasoline prices can be compared to the front month futures contract of reformulated blendstock for oxygenate blending (RBOB, the petroleum component of gasoline) from the New York Mercantile Exchange (Nymex). The spot price in Chicago went from a 3¢/gal discount to the Nymex RBOB on August 7 to a 78¢/gal premium on August 11, and was 43¢/gal over Nymex on Tuesday, August 18 (Figure 1).
The increase in spot prices has led to higher retail gasoline prices throughout the region. On August 17, regular retail gasoline prices in the Midwest (PADD 2) increased 32¢/gal from the previous week to $2.79/gal, the largest weekly increase for Midwest gasoline prices since the aftermath of Hurricane Katrina in 2005. Average retail prices for regular gasoline in Chicago and in Cleveland increased 68¢/gal and 43¢/gal, respectively, from the previous week to $3.37/gal and $2.83/gal, respectively (Figure 2).
It can take markets days or weeks to adjust to the sudden loss of production during unplanned outages, often resulting in sudden price increases. The severity and duration of the higher prices depend on how quickly the refinery problem can be resolved, how soon alternative sources of supply can arrive, and the marginal cost to bring alternative supply to the region. Refinery outages also occurred on the West Coast earlier this year. Bounded by the Pacific Ocean and Rocky Mountains, the West Coast is relatively isolated from other markets and thus the West Coast’s alternative sources of supply are more costly and harder to obtain quickly. The upper Midwest has closer, less costly resupply alternatives.
The upper Midwest is supplied predominantly by in-region refinery production, with additional supplies arriving by an extensive pipeline and inland river system connecting the different Midwest markets to each other and to the Gulf Coast. Chicago gasoline prices moved $1.03/gal higher than those on the Gulf Coast last week, which will likely prompt supplies to move north along pipeline systems such as the Magellan and Explorer to markets in the upper Midwest.
Until those supplies arrive, the Midwest is likely to draw down inventories of motor gasoline, drawing 749,000 barrels for the week ending August 14, to levels 1.6 million barrels below the five-year average inventory level. Additional refinery outages, planned or unplanned, will require further adjustments to the supply chain. Trade press reports indicate a planned maintenance outage is currently underway at Marathon Petroleum’s 212,000 b/d refinery in Robinson, Illinois. Alternatively, higher gasoline prices and the resulting higher margins may cause other regional refiners to reconsider the timing of upcoming planned maintenance, delaying until the outage at Whiting is resolved or prices subside.