Getting crude oil to the Northeast might not even matter if there is no place to refine the hydrocarbons. Sunoco’s (NYSE:SUN) Marcus Hook refinery, along with a facility owned by ConocoPhillips (NYSE:COP), are responsible for about half of all the jet fuel, gasoline and diesel produced on the East Coast. And both are losing tons of money. Almost all East Coast refineries are built to “crack” only light, sweet oil (i.e. Brent crude). With Brent pricing being the global standard, it is more directly tied to those nasty geopolitical events and growing demand than Midwestern WTI.
Following Hess’ (NYSE:HES) lead, Sunoco plans to exit and close these facilities. Conoco is expected to follow suit. Ultimately, drivers in the East will pay 5 to 10 cents more because of logistics costs related to getting refined gasoline from the Gulf or the Midwest.
Profiting From the Problem
Since many of us will be paying more to fill our tanks, it’s natural that investors might want to seek a way to get a little money back from the upcoming refining crunch. An easy way is through the United States Gasoline Fund (NYSE:UGA). The fund tracks gasoline futures and has been steadily climbing as the price per gallon has risen.
Unfortunately, no major firm has stepped forward and proposed an east-west pipeline — most likely because many refiners can’t handle the heavier crude anyway. The previously mentioned Colonial pipeline is owned by a consortium of private firms, as well as Royal Dutch Shell (NYSE:RDS.A, RDS.B). While I am enamored with Shell’s operations, this pipeline is such a small part of RDS’ overall business, it’s almost meaningless.
Better plays lie with pipeline duo Enbridge (NYSE:ENB) and Enterprise Product Partners (NYSE:EPD). The pair already have made plans to reverse the flow of the Seaway pipeline and enable Bakken shale oil to flow from Cushing to refiners in the Gulf. That’s big news, as the refiners along the Gulf Coast will require more oil to support gasoline demand in the East. The more liquid flowing through their pipelines, the more money Enbridge and Enterprise make.
A second play could be refiner HollyFrontier (NYSE:HFC). The firm’s six operations are concentrated in Texas, Oklahoma, Kansas, Utah and Wyoming. By selling more gasoline in the East and using only WTI-priced crude, HollyFrontier should be able to increase its profits as it picks up the slack from the East Coast’s dwindling output. Unlike many refiners, HollyFrontier made about $1 billion in profit during 2011 thanks to its low-cost WTI feedstock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.