* Tesoro got caught on short side - traders
* Fundamentals can't explain surge in CARBOB gasoline prices
* Few pipeline connections leave Calif open to shortages
By Erwin Seba
HOUSTON, Oct 5 The unprecedented surge in
California's wholesale gasoline market this week has many
hallmarks of a classic short squeeze, traders said on Friday,
evoking a once common ploy in unregulated oil markets.
With the isolated West Coast gasoline market already reduced
by refinery outages and a pipeline closure that had diminished
stockpiles to near their lowest in over two decades, the pump
was already primed for a rise in prices, especially as refiners
prepare to switch to winter fuel production.
But industry sources who operate in the close-knit, fiercely
competitive market say fundamental factors alone cannot explain
the 97-cent surge in the premium for prompt-delivery CARBOB
gasoline this week. Even in the notoriously
volatile California market the spike was unprecedented, pushing
retail prices to near a record high of nearly $5 a gallon.
Multiple trade sources say West Coast refiner Tesoro
was caught short, forcing it to scramble to buy additional fuel
from other companies in order to meet its commitments.
Traders said no single party appeared to be withholding
supply intentionally, a move that could provoke accusations of
price gouging and draw the scrutiny of regulators. And there was
no suggestion that traders had conspired in order to drive up
prices, which would fall foul of competition authorities.
Instead, many participants may have seen an opportunity to
profit from one company's apparent shortfall.
Tesoro has declined to say if it went into spot markets to
meet supply, but on Monday it posted notices at southern
California pipeline terminals and at its Los Angeles refinery,
saying "unbranded open rack gas out till further notice,"
referring to fuel supplies that are sold in bulk on the open
market at truck "racks," according to trade sources.
The company said on Friday their refineries in Los Angeles
and San Francisco have operated as planned throughout the week,
and they have met all contractual obligations.
Tesoro declined to discuss what steps it may have taken to
purchase gasoline in the West Coast spot markets this week,
saying such information was confidential. It also declined to
discuss whether it saw rapid increases in prices for gasoline
purchased in spot markets this week.
"Through our integrated West Coast system, Tesoro is working
to bring additional gasoline supply that meets California
standards to the Southern California area," spokeswoman Megan
Arredondo said in a statement.
By Friday the worst seemed to have passed. The CARBOB
premium fell to 90 cents over the futures contract, still a high
level but down 55 cents from Thursday. Exxon had restarted a
refinery that had been hit by a power outage, and Costco
Wholesale Corp was preparing to reopen several service
stations that had been shut after they ran out of fuel.
"The squeeze is over, I guess," a trader said.
This week's activity may be particularly sensitive in
California, which already lays claim to the most costly gasoline
in the United States and still smarts from the trading scandals
that emerged from its deregulated power markets a decade ago.
The Federal Trade Commission, which has some authority to
prevent manipulation in physical oil markets, had no comment.
The agency has investigated allegations of efforts to push up
prices in oil and gas markets. It has nearly always found that
price jumps were caused by market factors such as closed
pipelines, refinery outages or other production problems.
In August, Senator Dianne Feinstein of California urged the
FTC to "investigate whether the use of market power is inflating
gasoline prices" in the state, arguing that the run-up in pump
rates following a major fire at Chevron's large San Francisco
area refinery was excessive based on fundamentals.
The CFTC is reviewing the situation as part of its normal
surveillance, according to a source familiar with the matter. An
agency spokesman declined to comment.
California is particularly susceptible to short-term supply
disruptions because of the ultra-clean specifications for its
gasoline, a blend few other refiners can make. It is also
largely isolated from major refining centers in the Midwest and
Gulf Coast, with no major pipelines to speed supplies.
The problems were specially acute this week, with the
state's second-largest refinery shut since August, smaller
plants struck by short-term glitches and a key pipeline also
idle. Regional gasoline inventories were the third-lowest on
record for this time of year, U.S. data show.
Even so, gasoline production in the state last week was
almost as high as a year ago, and stockpiles of gasoline and
blending components combined were equal to this time last year,
state data show.
Independent U.S. refiner Valero Energy Corp said on
Thursday that it was exiting the California spot refined
products markets temporarily to assure supply to branded and
unbranded retailers with which it has contracts.
Valero is a major player in the Los Angeles and San
Francisco spot markets, whose actions can be a major factor in
moving prices up or down.
WHEN REGULATORS CAN REACH
Intentional squeezes were once common in world markets and
even in the United States, but they have become much rarer in
recent years as high prices have stoked political pressure for
regulators to crack down on malicious trading activity.
Still, the physical oil markets - where trades are generally
conducted over the counter between big companies or merchants -
remain largely beyond the reach of most regulators, w h ose
authority extends only over derivatives markets.
It is entirely legal for traders individually to seek higher
prices but not lawful for them to coordinate on the price they
will sell to a customer, said one antitrust expert, who asked
not to be named to protect business relationships.
"If the word on the street is that a buyer is short on
product, then individual traders might make the unilateral
decision to hold back to get a higher price," said the expert.
"That might make the buyer feel squeezed between its
purchase price and its resale price, but it would not be
But if the impact of the California activity were seen to
have affected the New York Mercantile Exchange (NYMEX) futures
market, for instance, regulators could step in. Benchmark RBOB
gasoline futures surged this week, far outpacing crude,
but the gains were seen mostly tied to a fire at ExxonMobil's
Baytown refinery in Texas, the nation's second largest.
In 2007 the CFTC won a record $303 million settlement with
BP over charges it tried to corner the propane market
along a key pipeline network.