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Viewpoint: Colonial history value comes into question

27 Dec 2017 12:00 GMT
Viewpoint: Colonial history value comes into question

Houston, 27 December (Argus) — Weakening demand to ship gasoline from the US Gulf coast into the New York Harbor market has market participants questioning the value of their shipper history along the Colonial Pipeline connecting the two regions.

Shippers who regularly use the pipeline have built history with Colonial, leading to preferential treatment in relation to the distribution of space on the pipeline every cycle. Historically, these shippers have paid premiums of roughly +2¢/USG to maintain their history during times in which arbitrage is unprofitable.

Over the past year, however, negative line space values led many market participants to question the value of this history. Year-to-date, gasoline line space has been negative for more than 91pc of 2017, meaning shippers who were allocated space on the pipeline paid other shippers to use it.

Line space trades involve the sale of a commodity at a line segment's origin — typically Pasadena, Texas — and the purchase of the same commodity at a destination point — typically Linden, New Jersey — which cancels out the original sale. The difference between the two determines the price of line space.

Earlier this year, growing US gasoline inventories left the Gulf coast region replete with product. Coupled with a major Mexican refinery outage in June, there was decreased demand for shipping on Colonial's main gasoline-bearing line, Line 1.

As a result, Line 1 failed to meet allocation for the first time in over five years, meaning there was a surplus of space on the pipeline. This was a signal to shippers that the landscape of the Colonial Pipeline line space market has shifted.

If demand to ship on the pipeline continues to decrease — whether because of seasonality or cycle-to-cycle demand shifts — market participants could eventually be unwilling to cover the cost of their shipper history.

The cost of shipping material from Pasadena into Linden is 5.26¢/USG. The difference in value between those two regions must exceed that figure for a transaction to be profitable for shippers. When the price spread surpasses 5.26¢/USG, it is referred to as an open arbitrage.

Arbitrage opportunities were mostly closed, or unprofitable, in 2017. During this time, line space values averaged -1.421¢/USG, the first time in which the average gasoline line space value for the year was negative.

Over the past three-and-a-half years, gasoline line space values have fluctuated wildly. Prices reached their highest levels on record on 29 December 2014 at +28.5¢/USG when Atlantic coast barrels carried a 33.75¢/USG premium to comparable material in the Gulf coast.

Argus began assessing the value of gasoline line space on 22 May 2014. Line 1 line space values have been negative for 47pc of that time.