Hess Corp's decision to close its U.S. East Coast refinery, the latest plant to fall victim to weak profits in the Atlantic Basin, could threaten painful gasoline price spikes for regional drivers as local fuel supplies dwindle further.

Hess will shut the 70,000-barrels-per-day Port Reading, New Jersey plant in late February, as part of a larger restructuring, the company said in a statement on Monday.

U.S. RBOB gasoline futures, already near a record high for this time of year, jumped more than 2 percent after the announcement, as the supply outlook for the Mid-Atlantic and New England markets suddenly looked tighter for the summer driving season.

A tighter East Coast gasoline market could mean national gasoline prices hit $4 a gallon by the spring if international oil prices remain above $110 a barrel, threatening to create additional drag on the struggling economy.

While the plant is relatively small, the timing of the shutdown comes at a tough time for the gasoline market. February is toward the end of the heating oil season, and refiners begin to build inventories of gasoline over the spring to meet peak summer demand. Refiners shut units for planned maintenance in the spring, which cuts into inventories.

Stocks of gasoline on the East Coast are already trailing last year's levels by 10 percent, due to a spate of refinery closures that cut capacity in the region as well as the Caribbean and Europe - major exporters to New York Harbor - as well as supply problems caused by Hurricane Sandy.

"The market is pricing in concern about the supply of gasoline this summer and the news about Hess is supporting this," said Stephen Schork, founder and editor of The Schork Report in Philadelphia.

Analysts say the Northeast will have to bring in more crude from other regions to make up for the loss of Port Reading, especially if the remaining refineries are hit by unexpected outages that are common throughout the industry.

In recent years, the East Coast has imported more than a third of its supplies, forcing regional prices to remain high enough to attract shipments from as far away as Europe.

U.S. Gulf Coast refineries have surplus gasoline, but a lack of space on the Colonial Pipeline and a shortage of domestic tankers that comply with U.S. shipping legislation mean they cannot cheaply ship it to customers in the Northeast.

A 40,000-barrels-per-day expansion of the Colonial system into New Jersey is due to be completed this summer, but the closure of Port Reading will likely offset much of the increase in Gulf Coast supply.

Built in 1958, Port Reading refines residual fuel oil and vacuum gas oil into higher-value products such as gasoline and heating oil for the giant East Coast market.

Hess said it was also selling 28 million barrels of East Coast oil storage terminals, part of the logistics network built up to store fuel from the company's giant St. Croix Hovensa joint-venture refinery, which was shuttered in 2012 due to poor margins.

ENVIRONMENTAL, MARGIN PRESSURE

Many refineries along the Atlantic Coast have seen margins erode due to the rising cost of importing high-quality crude from the North Sea and West Africa, which had served as the plants' main source of feedstock for years.

Some plants threatened with closure last year survived by looking to niche markets. Delta Air Lines bought the Trainer, Pennsylvania refinery last year in order to ramp up production of jet fuel to help lower the carrier's fuel costs.

Other East Coast refiners have sought to ship more crude from Texas and North Dakota, where booming production has brought down prices.

Hess said the Port Reading refinery came under pressure due to costs associated with complying with environmental regulations for low-sulfur heating oil as well as weak refining margins.

The plant, shut for three weeks late last year after power was cut by Hurricane Sandy, incurred losses in two of the last three years, Hess said.

"By closing the Port Reading refinery and selling our terminal network, Hess will complete its transformation from an integrated oil and gas company to one that is predominantly an exploration and production company," Hess Chairman and Chief Executive John Hess said in a statement.

Hess said it would continue to supply its retail arm, being able to supply its marketing businesses through third-party sellers. A company spokesman said HETCO, the independent trading arm of Hess, would not be affected.

Goldman Sachs is advising on the sale of the company's terminal network.

PRICE SPIKE

Front-month RBOB gasoline futures traded up more than 2 percent to $2.94 a barrel on Monday after news of Port Reading's impending closure, the highest level for this time of year since the contract began trading in 2005.

Prices of fuel on the East Coast have a large impact on the wider U.S. market, as it is home to New York Harbor, location of the delivery point for the New York Mercantile Exchange's RBOB gasoline and heating oil complex.

"This is a plant that is located near the harbor, and people can be wrong-footed by removing it," said Jan Stuart, Credit Suisse oil analyst.

Stuart and other analysts noted gasoline demand growth could prove a surprise this year as the economy improves and provide the backbone of a tighter market.

While the refinery supplies only a fraction of the East Coast's roughly 3 million bpd of gasoline demand, the market is heading into the summer looking tight. Nationally, stockpiles are above year-ago levels, but inventories of the fuel in the East Coast are now just under 54 million barrels, compared with about 60 million barrels this time last year.

Gasoline futures hit a 2012 high over $3.44 a gallon in late March, before average U.S. pump prices climbed to near $4 a gallon. Prices broke even higher in some regions, nearing $5 a gallon, spurring talk the U.S. government could tap its Strategic Petroleum Reserve or waive domestic shipping requirements to help drive down prices for motorists.

Nationally, pump prices are averaging $3.349 a gallon, down from $3.419 a year ago, according to motorist group AAA.

Additional supplies from the major U.S. Gulf Coast refining center as well as the Midwest - where margins have been strong - could also be limited by a heavy load of maintenance in the coming months as plants take down units.

That means the East Coast will likely have to turn to foreign shipments to make up for any shortfalls, so prices in the region will have to rise enough to draw sufficient imports from other areas with supply.

"We're losing capacity in a deficit market by shutting that refinery. We're going to have to attract the barrels out from another source since I don't see any more coming from the Gulf Coast," said one products trader in New York Harbor, who declined to be identified.

(Reporting by Matthew Robinson, Selam Gebrekidan and Cezary Podkul in New York and Thyagaraju Adinarayan in Bangalore; Editing by John Wallace and Dale Hudson)