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February 27, 2015

Petroleum refinery outage in California highlights markets’ quick price reaction

map of West Coast petroleum product supply, as explained in the article text
Source: U.S. Energy Information Administration, This Week in Petroleum
Note: Click to see the entirety of PADD 5.

On February 18, an explosion and fire occurred at ExxonMobil's refinery in Torrance, California. The Torrance refinery, the third-largest refinery in Southern California, has about 20% of the region's fluid catalytic cracking capacity and is an important source of gasoline and distillate fuel oil supply for Southern California.

Unplanned refinery outages can have noticeable effects on liquid fuel markets, disrupting supplies of gasoline and distillate, particularly in regions that are tightly balanced, such as the West Coast (defined as Petroleum Administration for Defense District (PADD) 5). When refineries undergo planned maintenance, they make arrangements for alternative sources of supply to ensure that obligations are met. Upcoming planned outages are examined in EIA's Refinery Outages report, released February 26.

However, the sudden loss of production during unplanned outages can sometimes take days or weeks for markets to adjust. As a result, unplanned outages often result in a reduction in supply that causes prices to increase, sometimes dramatically. The severity and duration of these price spikes depend on how quickly the refinery problem can be resolved and how soon supply from alternative sources can reach the affected market.

Bracketed by the Pacific Ocean and the Rocky Mountains, the mainland portion of the West Coast region (PADD 5) is relatively isolated from other U.S. markets and located far from international sources of supply, so the region is dependent on in-region production to meet demand. Additionally, California's more-restrictive gasoline specifications limit the availability of supply from other markets. Mainland PADD 5 has three distinct supply/demand centers near Seattle and the Canadian border, as well as San Francisco and Los Angeles in California. As a result, moving product to Southern California requires longer lead times.

West Coast product markets reacted immediately to the situation at the Torrance refinery. Spot prices in Los Angeles (LA) for CARBOB (California Reformulated Blendstock for Oxygenate Blending) gasoline increased $0.22 to $2.02 per gallon (gal) between February 17 and February 23. Spot CARBOB prices increased from a $0.25/gal premium above the New York Mercantile Exchange (Nymex) Reformulated Blendstock for Oxygenate Blending (RBOB) front month futures contract, a standard pricing basis for gasoline, to $0.41/gal above Nymex over the same time.

This rapid price response is not unusual and is similar to what happened following past unplanned outages. West Coast supply disruptions in 2008, 2009, and 2012 caused spot price spikes that led to higher retail prices. As with previous disruptions, prices should stabilize as more information about the severity and duration of the expected outage becomes available.

Principal contributor: Hannah Breul