Hovensa: Why Gas Prices Will Spike

The announced closing of a major U.S. Virgin Islands oil refinery partly owned by Hess Corp. (NYSE:HES) sent gasoline prices skyrocketing Thursday to seasonal highs.

According to a statement posted by the company, its 350,000-barrel-per-day HOVENSA refinery in St. Croix has already begun shutting down and will be non-operational by February. The refinery, a joint venture between Hess and the Venezuelan government oil company PDVSA, had been unprofitable for at least three years, losing $1.3 billion for that period, according to the statement.

The statement cited the low price of natural gas in the United States as well as the global economic slowdown and the addition of new refining capacity in emerging markets

We deeply regret the closure of the HOVENSA refinery and the impact on our dedicated people, Brian K. Lever, President and Chief Operating Officer of HOVENSA, said.

Closure good for the company, bad for consumers

Analysts said the closure will be positive for Hess.

The persistent financial underperformance and disadvantaged market positioning of the refinery was a head wind for the stock, Simmons Co. analyst Bill Herbert wrote in a note to clients, according to the Wall Street Journal.

But the coming loss of gasoline supply shocked markets for gasoline futures, which are likely to be soon reflected at the pump. Gasoline for February delivery rose 5.41 cents to $2.8254 a gallon on the New York Mercantile Exchange on Thursday, settling at the highest point since Sept. 8.

New York Harbor is the delivery point for gasoline to the East Coast of the United States, and the HOVENSA refinery provided 2.7 percent of the total volume normally traded there.

The national average price for regular gasoline at the pump was $3.378 Thursday, according to AAA, unchanged from the previous day, but that number, which lags the price of gasoline futures, is likely to rise.

The average price of gasoline in many East Coast states, including New York ($3.67 per gallon), Connecticut ($3.66) and Maine ($3.50) is among the most expensive in the nation, also according to data from AAA.