Visions 2012

Commodities market reform, the effect of Northeast refineries closing or being sold, and the importance of attending to margin in a time of decreasing volume were among topics treated at the 2012 Visions Conference hosted by the New England Fuel Institute (NEFI) and the Petroleum Marketers Association of America (PMAA). The event was held June 5-6 at the Sheraton Framingham Hotel & Conference Center in Framingham, Mass.

Discussion of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and its effect on hedging practices was a last-minute addition to the program. (It replaced a scheduled session on the effect of low-sulfur fuel oil on the marketplace.)

Speaking of Dodd-Frank and the overall effort to reform the commodities markets, Jim Collura, NEFI’s vice president for government affairs and founder and coordinator of the Commodities Markets Oversight Coalition, said, ‘Market stability is the number one concern.”

Part of the challenge of achieving market stability arises from the fact that Dodd-Frank does not include specific reforms, but instead ‘leaves regulators to fill in the blanks,” Collura said. Coming up with specific regulations now is an ongoing process, which the Coalition continually monitors and comments on. For example, the Coalition has sent letters to Senate and House committees opposing enactment of legislation that would obstruct derivative market reforms outlined in Dodd-Frank, and it has also sent letters to House members asking them to support the ‘Halt Index Trading of Energy Commodities Act.” The ‘HITEC Act” is designed to prevent energy trading that drives up fuel prices for businesses and consumers ‘without regard for supply and demand fundamentals,” the Coalition said.

Ongoing changes in the refining landscape of the Northeast were discussed by Kevin Lindemer, a Boston-based consultant. The closing of a Sunoco refinery in Marcus Hook, Pa., the potential sale of another Sunoco refinery in Philadelphia, and the sale of a ConocoPhillips refinery in Trainer, Pa., to Delta Airlines, have fueled speculation about possible shortages in the Northeast, but refinery closures in the U.S. are ‘business as usual,” Lindemer said. In fact, the East Coast has significant surplus capacity, including fuel oil, Lindemer said in his presentation at the conference and in an interview afterwards with Fuel Oil News.

‘The market did not need those refineries at average utilization rates,” Lindemer said of the Northeast plants. The plants had decreased production in order to avoid flooding the market, he said. Further, their cost of production works against them. ‘The refineries in the East Coast run higher-cost light, sweet crude oil,” Lindemer said. ‘The refineries in the Gulf Coast run on a lot of very heavy sour crude oil. That’s much lower-cost.

‘If low-cost refineries continue to expand and high-cost refineries don’t, the high-cost refineries go out of use,” Lindemer said. ‘Expanding an existing refinery is cheaper than building a new one.”

Concern about supply frequently comes up when there are refinery closures, Lindemer said, but the trend over the past fifty years, with one decade-long exception, has been toward fewer refineries, more capacity. The number of plants in the U.S. stood at approximately 330 by 1980 because of government policy to encourage new refinery construction during the 1970s, Lindemer said, citing data collected by the Energy Information Administration (EIA) and the American Petroleum Institute (API). That policy was discontinued in 1980, Lindemer said, and subsequently the industry resumed closing refineries. ‘We’re a little below 150 [refineries today],” he said.

Lindemer forecast that there will continue to be pressures to close refineries, ‘particularly with CAF