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Insights across the energy value chain

Although it is still too early to estimate the extent of the damages, this morning’s explosions and fire at the Philadelphia Energy Solutions (PES) refinery are reported to have affected an alkylation unit. Today’s incident comes just two weeks after a fire shut down a 50 MBD catalytic cracking unit, causing the refinery to operate at reduced rates. If the affected alkylation unit was significantly damaged or destroyed, PES may find it difficult to recover.

So far in 2019, crude runs in PADD 1 have been below normal seasonal levels due to heavy maintenance and unplanned refinery downtime. In recent years, however, PADD 1 has at times struggled with excess refining capacity and less-than-stellar margins. A prolonged or even permanent shutdown of a significant portion of the region’s capacity would help underpin refining margins for the refiners that remain operating. Of course, prospects for a more supportive margin environment would come as the result of higher gasoline prices during periods of high seasonal demand and/or refinery maintenance. In the short term, Northeast gasoline prices will likely see gains due to the unfortunate timing of the PES fire with the beginning of this year’s summer driving season. Westbound cargos from northwest Europe are the natural solution to any short-term supply crunch that results from today’s event, and arbs will have to be supportive to keep cargos flowing to PADD 1.

In terms of crude supplies affected by the PES fire, it is worth noting that the refinery imports most of its slate from foreign waterborne sources. In recent months, North Sea grades such as Ekofisk, Grane, Brent, Kraken, and Flotta have made up a growing share of the refinery’s imports. Algerian Saharan Blend has also been a longtime staple in the refinery’s diet, as have various West African grades.

PES is also known for processing Bakken crude by rail, which unlike the waterborne grades mentioned above, has fewer possible avenues to market given the increasingly tight availability of pipeline capacity out of the Williston Basin. If forced to shut down or substantially reduce rates, PES may need to find alternative outlets for the railcars it is committed to load in North Dakota. Those barrels may ultimately find their way back into the field, depressing Bakken differentials as a result.

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Jesse Mercer is the Senior Director of Crude Market Analytics, based in Denver. Prior to joining Drillinginfo in 2019, Jesse held positions at Phillips 66 spanning North American crude oil trading strategy and long-term NGL projects. In addition to his expertise in North American liquids markets, Jesse has considerable background in international oil markets through his experience at PFC Energy, where he oversaw analysis for the company’s flagship Market Intelligence Service. Jesse holds a Master’s degree from the Georgetown University School of Foreign Service, where he concentrated on Global Commerce and Finance.