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Published: Nov 1, 2016 2:52 p.m. ET

Colonial announces progress in repairs, futures prices pare rally

Marvin Gentry/Reuters
Colonial Pipeline’s gas line explosion on Oct. 31, 2016 in western Shelby County, Alabama.

Drivers in the U.S. braced for a spike in gasoline prices at the pump Tuesday after a deadly explosion along a major pipeline, although quick progress on repairs helped to ease some of the concerns over a supply shortage.

Colonial Pipeline Co. announced Monday that an explosion along Line 1 of its gasoline pipeline caused one fatality and injured five other individuals. It shutdown its two main lines—referred to as Line 1 and Line 2—as a result.

But on Tuesday, Colonial said it has restarted Line 2, which transports diesel, jet fuel and other distillates. Line 1, which transports about 1.3 million barrels a day of gasoline from refiners on the Gulf Coast to delivery locations along the eastern seaboard, will remain shut for the rest of the week.

The news is a “game-changer,” causing the market to backtrack from earlier gains as the market had been expecting the shutdown to last at least a week, Patrick DeHaan, senior petroleum analyst at GasBuddy.com, told MarketWatch.

He said Colonial used “an interesting choice of language,” in its update on the repair progress. It didn’t mention the word “restart” for Line 1, and instead said “we anticipate Line 1 remaining down for the remainder of this week.”

DeHaan he still expects to see prices affected in Georgia, North Carolina and South Carolina and Tennessee.

Gasoline futures pared a sharp jump. Reformulated gasoline RBZ6, -1.29%  had been reacting the prospect of a regional fuel shortage, with the contract for December delivery jumping to as high as $1.635 a gallon, which would have been the highest settlement since early July. After trimming gains, futures settled at $1.484 a gallon, up 6.5 cents, or 4.6%, from Monday’s finish.

Traders who were “buying gasoline on the premise that Colonial line segments would be down for at least 7-10 days are getting spanked by futures and spot markets,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service, in an update to clients.

At the retail level, a gallon of regular gasoline averaged $2.204 by late Tuesday morning, according to GasBuddy.com. That’s a slight tick lower from Monday’s $2.206 average and down from last week’s average of about $2.225.

GasBuddy.com

 

But the gasoline market is “still not completely out of the woods, however,” said Jeff Mower, editorial director of Americas oil news and analysis at S&P Global Platts.

The traders who “short gasoline will likely not feel secure until the line does in fact return, which will likely keep some upward pressure on gasoline prices in the Northeast,” he said.

Brian Milne, energy editor and product manager at Schneider Electric, said that while Colonial has said Line 1 looks to remain shut at least through this week, that estimate “might be optimistic.”

Traders, for now, are taking a “wait-and-see approach,” he said.

Before the latest pipeline update, Milne had pointed out that “a massive amount of gasoline moves through Line 1, which is a 40-inch pipe with a 1.272 million [barrel-per-day] flow rate that has been oversubscribed for at least four years and running.”

“So, when there is a mishap, it can have a very large impact,” he said.

In a note Tuesday, analysts at Barclays noted that there are few alternatives to replace lost volumes on the Colonial system, citing information from Energy Information Administration.

“Replacement supplies can be delivered by ship to Atlantic coast ports and trucked inland or railed directly from the Gulf Coast, but the infrastructure in place to do so is very limited and the magnitude of consumption in the Southeast market—approximately 1.6 million [barrels per day]—makes full replacement nearly unfeasible,” the Barclays analysts said.

Second shutdown in two months

The pipeline shutdown is the second big setback in as many months for Colonial Pipeline Co., which transports refined petroleum products through a network of 5,500 miles of underground pipes.

In early September, Colonial shut down Line 1 due to a leak.

That main gasoline line was shut completely or on restricted service from Sept. 9 to Sept. 21, according to Milne. “The price impact in states along the Atlantic Ocean north of the Southeast was less pronounced because of a supply glut for the region, which was drawn down heavily in September.”

Provided by: DTN ProphetX, with data from EIA

 

The chart Milne provided (see above) showed that gasoline stocks for the East Coast, known as PADD 1 which runs from Maine to Florida, fell from late July at more than 72 billion barrels—”the highest regional stocks in at least 26 years”—to under 63 million barrels by late October.

The Colonial Pipeline ends in Linden, N.J., which is part of New York Harbor—the delivery location for Nymex RBOB futures, said Milne. “States in the mid-Atlantic and lower Northeast need supply from the Gulf Coast…to balance against demand, so the price reverberation can carry through the Eastern Seaboard.”

That’s why the biggest impact of the pipeline shutdown, so far, has been seen in the Nymex futures market. The Northeast depends “heavily on gasoline shipped on the Colonial Pipeline,” said S&P Global Platts’ Mower.

“The rise in New York area gasoline prices is opening an arbitrage to bring in imported gasoline,” he said. “The region already imports gasoline regularly, primarily from Europe. This price spike should lead to even more barrels getting imported to make up for the loss of Colonial barrels.”

 

http://www.marketwatch.com/story/drivers-brace-for-gasoline-price-jump-after-colonial-pipeline-explosion-2016-11-01/print