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More New Englanders are expected to hit the road this holiday weekend than in recent years thanks to lower gas prices, but at the start of the Labor Day weekend they’ll be on the lookout for Hurricane Earl. A hurricane watch was issued today north of Sagamore Beach to Plymouth and west of Woods Hole on Cape Cod to Westport. Earl was reclassified a category 4 hurricane as it bore down on North Carolina this morning with 145-mph winds. according to the National Hurricane Center.

The storm is expected to skirt the New England coast, possibly coming within 50 miles of Nantucket, Friday night or early Saturday morning. The American Automobile Association expects 34.4 million people nationwide to travel at least 50 miles this weekend, up 9.9 percent from last year. About 11 percent more New Englanders are projected to travel this Labor Day weekend. More than 90 percent of those who travel this weekend are expected to drive, a statistic Maguire said reflects lower gas prices. Prices at South Shore stations have dropped 10 cents during the past three weeks, according to a Patriot Ledger survey.

And analysts aren’t predicting a widespread price spike this weekend because supply has exceeded demand most of the summer, creating a stockpile of gasoline. “If we had a Gulf Coast hurricane that disrupts supply, it would spike,” said Sander Cohan of Energy Security Analysis Inc. in Wakefield. “But we’re looking at Hurricane Earl and (Tropical Storm) Fiona cutting up the East Coast.”

Cohan expects prices to continue to drop after the holiday, as the vacation season wanes and demand decreases. Eventually, refineries will cut production to stabilize prices. “Gas prices will fall, but they won’t collapse,” he said. He said the average price at the pump could reach $2.40 per gallon. However, some gas station owners say prices could rise as the holiday and Hurricane Earl create an increase in demand.

The Obama Administration is likely to stay focused on toughening regulatory oversight of the U.S. offshore oil industry and may push back lifting a ban on deepwater drilling after the latest accident in the Gulf of Mexico, analysts said on Thursday.

The fire on a Mariner Energy oil and gas platform in shallow waters of the U.S. Gulf on Thursday was a major setback for companies hoping for an early end to the government's drilling moratorium and raised more questions about the safety of offshore drilling.

“This explosion will make it less likely that the moratorium on offshore drilling will be lifted," said Rick Muller, senior analyst for Energy Security Analysis Inc in Boston.

The United States is still reeling from the BP oil spill in the Gulf of Mexico. Interior Department officials declined to comment on whether the Mariner accident would prompt Interior Secretary Ken Salazar to consider expanding the current deepwater drilling moratorium to shallow waters.

Such a action would be a blow to the oil industry, which has complained that the department has been too slow to approve permits for shallow water drilling since the Gulf oil spill. The Interior Department imposed a six-month halt on exploratory deepwater drilling in late May after an explosion on April 20 left a well spewing crude into the Gulf.

The oil industry and regional lawmakers slammed the drilling ban and said it would drive idled rigs to foreign waters, cost thousands of jobs, and cut regional production. On Wednesday, a federal judge ruled against the government's request to throw out an industry lawsuit challenging the moratorium, though this accident could strengthen the government's case, analysts said.

"This will help the government argue in court that it should be careful about putting safety rules in place before letting producers get back to drilling," Muller said. The Interior Department had said it was considering lifting the ban for "certain categories" of rigs before November 30, when the ban is due to end. But after Thursday's accident the department may hesitate to do so, analysts said.

Production slipped 75,000 barrels, or 0.3 percent, to an average 29.15 million barrels a day, the lowest level since January, according to the survey. Output by members with quotas, all except Iraq, dropped 5,000 barrels to 26.805 million, 1.96 million above their target.

Iraqi output dropped 70,000 barrels, or 2.9 percent, to 2.345 million this month, the biggest decrease in OPEC. It was the lowest level since April. The Persian Gulf nation was the group’s third-largest producer in August.

“This shows Iraq is still a risky place to do business,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The events of the past week and drawdown of the U.S. presence will add to the uncertainty.”

Iraqi oil exports by pipeline from the northern Kirkuk fields to the Turkish port of Ceyhan were halted from Aug. 20 to Aug. 26 after a bombing stopped the flow of crude. The last U.S. combat unit left Iraq on Aug. 18, seven years after the invasion that ousted Saddam Hussein. Fewer than 50,000 U.S. troops remain in the country, mainly to train Iraqi forces. On Aug. 25, Iraqi cities were hit in bombings that targeted the police, killing at least 37 people and injuring 126.

US refiners must cut benzene content in gasoline by 50% by 2011. Supplies freed up could slash Asian imports.

Asia's exports of benzene to the US are expected to fall next year with the implementation of a new US regulation that will limit the use of the carcinogenic chemical in gasoline. Effective January 1, 2011, major US refiners will be allowed only a 0.62% annual average of benzene content in their systemwide gasoline pool under the Mobile Source Air Toxics (MSAT) II regulations set by the US Environmental Protection Agency (EPA). Smaller refiners are being given longer to meet the MSAT requirement - by January 1, 2015.

The new regulation represents a near 50% cut in the current 1.3% benzene content of reformulated gasoline, or what is commonly known as E-10 - a motor fuel with 10% ethanol content.

LESS OF AN IMPACT?

But some market players downplayed the potential impact of the new gasoline regulations, saying that excess benzene volumes in the US will be lower than initially expected and that regional plants can easily tweak production rates. "We had thought three years back that the excess benzene in the US would be about 700,000 tonnes/year, but now it seems that the surplus would be about half of this volume," said one Korean producer. "The Asian market is forever in long supply [of benzene], so Asian producers are usually ready to cut back [on output]," he added.

In the US, sources said the new regulation would have a minimal effect on benzene and gasoline refiners. The EPA estimated in a November 2009 report that one=quarter of the 110 refiners it surveyed were already compliant with the lower benzene requirements. Most of the remainder planned on installing equipment that would generate less benzene in the refining process, said analyst Vivek Mathur at Energy Security Analysis.

"I doubt whether (MSAT II) will be a game changer for benzene prices," Mathur said. "Refiners are investing in pre-fractionation technologies."

Asia-Pacific is close to ditching entrenched but volatile local benchmarks in favour of European bellwether Brent to price Southeast Asian crudes, as the top oil consuming region increases imports from across the globe. The move would homogenise and simplify a fragmented pricing structure in Asia, user of a third of global crude, extending Brent's influence as a cross-continent price marker beyond the 70 percent of world supplies that now use it as a reference.

It would boost transparency by putting Asian crude on a common platform with growing imports of rival Brent-linked sweet grades from the Atlantic Basin, Central Asia and Latin America. Brent may also be a stepping stone for the evolution of other markers, such as Russian ESPO Blend, some traders said. Net crude imports into Asia will need to grow almost 3 million barrels per day (bpd) by 2015, FACTS Global Energy projects. By 2012, Brent will have replaced regional benchmarks such as the Asia Petroleum Price Index (APPI) and Indonesia Crude Price (ICP), a Reuters survey of traders showed.

Local markers suffer from low liquidity due to production decline at mature fields, with prices frequently diverging from global benchmarks, traders and analysts said. Output of Malaysian light sweet benchmark Tapis has fallen to around 190,000 bpd from a peak of more than 350,000 bpd in the 1990s. Most of that is kept for refining by equity producers ExxonMobil and national oil company Petronas, leaving little for the spot market. Output of Indonesian Minas, marker for heavy sweet crudes, is estimated to have fallen to 185,000 bpd from over 400,000 bpd in the late 1990s.

In the poll of 12 traders active in the Asia-Pacific physical crude market, 11 said Brent would become the benchmark for most of the region's sweet grades. Eight traders said that would happen within two years. A switch could lift Brent futures trading volume on the ICE Exchange and boost Brent's use in the over-the-counter market.

ESPO FACTOR

Those who argue against Brent as the sole benchmark said a buffet of markers could offer refiners a better hedging tool and allow players to trade on the arbitrage between markers. "One price marker is too simple and will allow another competitor into the market," the industry source added.

That may open the door for Russia's ESPO, a growing crude stream with output set to hit 1 million bpd by 2012. That would be a high enough volume for it to be a marker, said Andrew Reed, consultant at Energy Security Analysis in the U.S. Still, ESPO's sulphur content, higher than some Asian sweet crude, may hinder its acceptance as a benchmark, he added.

Supplies of the distillate fuels rose 1 million barrels, or 0.6 percent, in the seven days ended Aug. 20 from 174.2 million a week earlier, according to the median of 18 analyst estimates before an Energy Department report tomorrow. The last time supplies were so high was January 1983, two months after the U.S. exited a recession.

Heating oil for September delivery lost 1.97 cents, or 1 percent, to $1.9357 a gallon on the New York Mercantile Exchange today, the lowest settlement since July 6. Futures have fallen 8.6 percent this year. Prices have reached their annual peak in September, October or November in four of the past six years.

Total Petroleum Stockpiles

U.S. stockpiles of oil and fuel climbed 5.3 million barrels to 1.13 billion in the week ended Aug. 13, the highest level since at least 1990, when the Energy Department began to collect weekly data. On a monthly basis, supplies are at the highest level since November 1983. “Demand has been OK this summer, but not as strong as we would usually see coming out of a recession,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

U.S. distillate-fuel consumption peaked at an average 4.96 million barrels a day in 2007, according to the Energy Department. It has averaged 3.72 million barrels a day this year, down 13 percent from the same period in 2007.

Demand rose 5.8 percent to 3.534 million barrels a day over the past four weeks from a year earlier. Distillate fuel exports surged to a record 756,000 barrels a day in May, the most recent month available, according to the Energy Department.

Crude oil fell to a six-week low as rising U.S. jobless claims and a contraction in manufacturing in the Philadelphia area bolstered concern that the economic rebound in the world’s biggest oil-consuming country is slowing.

Oil declined 1.3 percent after the Labor Department said initial jobless claims rose to the highest level since November. The Federal Reserve Bank of Philadelphia’s general economic index dropped to the lowest reading since July 2009. Total U.S. petroleum inventories are at the highest level in at least 20 years, according to the Energy Department.

Crude oil for September delivery fell 99 cents to $74.43 a barrel on the New York Mercantile Exchange, the lowest settlement price since July 7. Futures are up 2.8 percent from a year ago. Brent crude oil for October settlement slipped $1.17, or 1.5 percent, to end the session at $75.30 a barrel on the ICE Futures Europe Exchange in London.

Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed. Claims exceeded all estimates of economists surveyed and compared with the median forecast of 478,000.

Roller-Coaster Ride

“Oil is tracking some other markets because we are all looking at the same economic indicators,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The market has been a roller-coaster ride, given that what oil does each day depends on economic headlines. Employment is one indicator that’s shown no positive signs.”

The Standard & Poor’s 500 Index declined 1.7 percent to 1,075.59 at 4:02 p.m. in New York, and the Dow Jones Industrial Average dropped 1.4 percent to 10,270.98. The dollar climbed to $1.2819 per euro, up 0.3 percent from yesterday, reducing the appeal of commodities as an investment.

Gasoline futures rose as U.S. equities advanced and the dollar gave up some of its gains against the euro, increasing the investment appeal of dollar- denominated commodities. Prices erased an early loss as the Standard & Poor’s 500 Index advanced 0.1 percent after slipping as much as 0.6 percent. The dollar was up 0.2 percent against the euro as of 3:47 p.m. after earlier gaining as much as 0.5 percent. Gasoline for September delivery rose 0.8 cent, or 0.4 percent, to settle at $1.9612 a gallon on the New York Mercantile Exchange. It was the second consecutive gain after five days of declines.

The Energy Department reported gasoline inventories fell 39,000 barrels last week to 223.3 million, little changed near a 14-week high as the U.S. nears the end of the summer driving season. Stockpiles have expanded 2.7 percent since June 18 and are 6.5 percent above a year earlier.The higher-demand season traditionally ends after the Labor Day holiday, which falls on Sept. 6 this year.

Demand Rises

Demand, measured by what refiners and blenders supplied to wholesalers, rose 2.4 percent to 9.46 million barrels a day. Measured on a four-week average, demand was 3.5 percent above a year earlier.

“Demand improves, but we really didn’t go down in supply,” said Sander Cohan, an analyst with Energy Security Analysis Inc in Wakefield, Massachusetts. “Refiners continue going all-out on gasoline production. We’re one week closer to the end of gasoline season and there still isn’t any indication these stocks are going to go anywhere.” Imports jumped 13 percent to an average 1.08 million barrels a day. Refiners raised rates last week by 1.9 percentage points to 90 percent of capacity.

The premium of gasoline over crude oil, or the crack spread, based on September contracts, widened about 69 cents to $6.95 a barrel.

The transformation of China into a significant exporter of gasoil or diesel has prompted worries among other regional refiners that its rising domestic output will add to an Asian glut. However, China's focus on domestic demand and the quality of its fuel will prevent the country from becoming a major competitor to export-oriented North Asian gasoil refiners in the near term.

"China's intention isn't to capture the market and displace Japan and South Korea," said Vivek Mathur, an analyst at Energy Security Analysis Inc. in Boston. "It's not their stated objective to produce low-sulfur diesel for export." New refining capacity has been a key driver in the growth of China's gasoil exports. Between January and June, China exported 2.62 million metric tons, up 22% from the same period a year earlier, government data show. In contrast, China's imports declined to 764,000 tons this year, down almost 27% from the first half of 2009.

The trend certainly is for higher exports. China's gasoil exports in 2009 totaled 4.5 million tons, up 614% compared with 2008. The exports still pale in comparison with major refiners in countries like South Korea, from where more than 8.23 million tons of gasoil was shipped overseas in the first half of 2010.

Although South Korean and Japanese refiners produce mostly 10-parts-per-million-sulfur gasoil for export to Australia, the U.S. and Europe, China mainly makes lower-quality 0.2%- and 500-ppm-sulfur gasoil for domestic use. This limits the destinations where its gasoil surplus can go, with only Vietnam and Indonesia consuming low- or mid-sulfur gasoil with any consistency.

Those two countries are predictably ranked third and fourth--after Hong Kong and Singapore, a major hub for gasoil blending--as the biggest consumers of Chinese gasoil this year. For now, China's thirst for gasoil will continue to outpace its ability to export the fuel. Chinese refineries have been producing a diesel surplus of about 170,000 barrels a day on average this year, but that amount will shrink to just 90,000 barrels a day in 2011, ESAI's Mathur says.

China's diesel inventories are falling, even as the country raises output at its refineries. China's commercial diesel stocks were down 5.6% in June from a year earlier to 8.9 million tons, according to data from Xinhua News Agency. China produced 13.45 million tons of diesel in July, up 4% compared with a year earlier, government data show.

The profit from making gasoline may slide to the lowest level in 10 months as faltering U.S. consumer growth hurts refiners that have boosted production in anticipation of an economic rebound.

Marins on gasoline, the difference between what producers pay for crude and how much they get for the refined fuel, are poised to drop as much as 75 percent in coming months, according to James Cordier, president of futures brokerage Liberty Trading Group in Tampa, Florida. Margins, or crack spreads, were $10.07 today, down 46 percent from the 15-month high of $18.77 on May 13, based on futures prices on the New York Mercantile Exchange. They reached $2.23 in September 2009.

Refiners have accelerated output by 11 percent since the end of March on forecasts of rising demand, driving stockpiles to a two-month high as of the week ended July 16, according to the EnergyDepartment. Now the profit is being eroded by declining factory production and consumer confidence at the lowest level in a year.

Profit margins and gasoline futures rose to a 2010 high in May while demand climbed to this year’s high in June, encouraging companies such as Exxon Mobil Corp. and Valero Energy Corp. to increase output. Refinery use, after dipping to a 16-month low of 77.7 percent on Jan. 29, reached 91.5 percent last week, the highest level since August 2007, Energy Department data show.

Peak Demand

Consumption peaked for the year on June 25 at 9.46 million barrels a day, according to Energy Department data. Demand, measured as the amount refiners and blenders supply to wholesalers, rose 3.9 percent in the week ended July 16.

Supplies of gasoline increased 1.1 million barrels in the week ended July 16 to 222.2 million, an 11-week high, according to the Energy Department.“Refiners have to go back to low runs or else face collapsing margins,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

Crude oil climbed for the first time in four days as U.S. equities rallied on better-than-forecast earnings and takeover offers.

Oil rose as much as 2.2 percent as the Standard & Poor’s 500 Index rebounded from the biggest drop this month after Halliburton Co. reported profit that beat estimates. Futures fell earlier today when the National Association of Home Builders/Wells Fargo confidence index dropped to 14 this month, the lowest level since April 2009, from 16 in June.

Crude oil for August delivery rose 41 cents, or 0.5 percent, to $76.42 a barrel at 1:02 p.m. on the New York Mercantile Exchange. The August contract expires tomorrow. More- active September futures increased 45 cents, or 0.6 percent, to $76.83 a barrel. Nokia Siemens Networks said it will pay $1.2 billion for wireless network assets from Motorola Inc., while buyout firm Onex Corp. and the Canada Pension Plan Investment Board are considering a 2.9 billion-pound ($4.4 billion) bid for Tomkins Plc.

The S&P 500 gained 0.3 percent to 1,068.51 at 1:06 p.m. The Dow Jones Industrial Average increased 0.4 percent to 10,136.15.

“A higher S&P is an indication that the investor outlook is improved,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Investors are following broader signals to get a handle on the future demand outlook.”