By Janet McGurty
NEW YORK (Reuters) - More than two-thirds of the U.S. East Coast's refining capacity shut on Monday ahead of Hurricane Sandy, sending gasoline futures up as much as 4 percent as operators braced for potentially damaging power outages and flooding.
With Sandy gaining strength overnight as the vast storm turned westward toward New Jersey, Philadelphia Energy Solutions began the precautionary closure of key units at its 330,000-barrels-per-day (bpd) Philadelphia refinery, the biggest in the region, a source familiar with operations said.
Oil traders were factoring in a potential squeeze on fuel supplies, sending gasoline prices up almost 12 cents a gallon in early trade before pulling back. Inventories were already at relatively low levels across the region.
"Given the recent tightness of supplies in New York Harbor, this weather event is only likely to perpetuate strength in gasoline prices," BNP Paribas oil analysts Harry Tchilinguirian and Gareth Lewis-Davies said in a research note.
"Lost distillate (heating oil and diesel) output in turn will act to depress inventories further."
Benchmark U.S. gasoline futures rose as much as 4 percent before paring gains to trade up 5 cents at $2.75 a gallon. Heating oil gained 1 percent to $3.13 a gallon in thin trading on the New York Mercantile Exchange's (NYMEX) electronic system.
Nearly 70 percent of the region's refining capacity was on track to be idled. Phillips 66 confirmed it was shutting its 238,000-bpd Bayway, New Jersey refinery. The plant is known as the "gasoline machine" for its key role supplying motor fuel to the New York City area.
Two other plants also moved toward a full shutdown: Hess Corp said it was closing its 70,000-bpd refinery in Port Reading, New Jersey; and PBF Energy's 180,000-bpd Paulsboro plant in southern New Jersey, across the Delaware River from the Philadelphia area, was shutting, a source said. The company said it was reducing rates.
Brent crude futures for December delivery rose 48 cents or 0.4 percent to $110.03 a barrel, after hitting an intraday low of $108.51, down $1.04. Brent lost 0.5 percent last week.
U.S. crude was down 22 cents, or 0.2 percent, at $86.06 a barrel.
While oil futures continued to trade electronically, the NYMEX's open-outcry trading floor was shut due to mandatory evacuations of low-lying areas around Manhattan's southern tip.
While prices rose in response to the refinery closures, some analysts said the storm would also cut heavily into oil demand in the densely populated region, with most people avoiding driving and airlines grounded during the storm.
LOW HEATING OIL INVENTORIES
Sandy, forecast to come ashore late Monday or early Tuesday as one of the widest storms ever to hit the area, grew slightly stronger overnight, with wind speeds up to a maximum of 85 miles per hour, 10 mph faster than before. Tropical storm-force winds extended as far as 485 miles from the center.
The storm comes as low inventories of refined products, especially distillates and heating oil, have stirred concerns of potential price spikes during the winter heating season.
The precautionary refinery closures are more widespread than during Hurricane Irene in August 2011, when only the Bayway plant shut completely.
While refiners escaped any serious damage during that hurricane, many fear Sandy's massive storm surge - forecast to be as high as 11 feet - could breach plant defenses and cause damaging flooding, which can sometimes take weeks to repair. Abrupt power outages can also damage refinery equipment.
Oil pipeline and terminal operators on the East Coast were monitoring the storm.
Colonial Pipeline, the largest U.S. product pipeline, was still shipping gasoline and diesel up from Gulf Coast refineries to the Linden, New Jersey terminus in the New York Harbor, spokesman Steve Baker said. That could change once the full force of the storm is felt.
Several terminals and pipelines in the Linden area have closed and other pipeline companies were deciding what to do.
Over the weekend, PBF Energy began cutting rates by an unspecified amount at the crude unit, coker and gasoline-making fluid catalytic cracking unit at its 190,000-barrels-per-day plant in Delaware City, as well as some downstream units, a source familiar with refinery operations said on Sunday.
Delta Air Lines' 185,000-bpd Monroe Energy plant in Trainer, Pennsylvania, was monitoring the storm.
"We are taking it hour to hour," a source said.
(Reporting by Janet McGurty; Writing by Jonathan Leff and David Sheppard; Editing by Maureen Bavdek, Sofina Mirza-Reid and Dale Hudson)