Viewpoint: Colonial line space to rise despite surplus

Demand to ship on the Colonial Pipeline is likely to rise this fall during RVP transition season despite its main gasoline line falling out of allocation for a second consecutive year on shifting seasonal demand.

Colonial's main gasoline Line 1, which runs from Pasadena, Texas, to Linden, New Jersey, has failed to meet allocation at the peak of seasonal driving demand for the second year in a row. Demand to ship on the line fell below capacity for six cycles in June and July, echoing similar events last summer when demand fell off. Prior to 2017, the pipeline was fully allocated for four consecutive years, meaning no excess space was available.

As overall US gasoline inventories have continued to grow year after year, particularly in the US Atlantic coast, inter-regional arbitrage has become more difficult. As a result, demand along the Colonial Pipeline has waned as refiners seek alternative outlets for excess product.

Excess capacity has pressured Colonial gasoline line space values on the spot market. Line space values ranged between -2¢ and -0.75¢/USG during the non-allocated cycles this year, falling to their lowest level in nearly seven months in early July. Line space values have been in negative territory for 12 straight weeks through 25 July.

The arbitrage to ship Gulf coast gasoline on Line 1 to the northeast has been unworkable for months. Since the beginning of the year, spreads between the two regions have averaged between 4.70¢ and 5.12¢/USG, while in the last two months these spreads averaged between 3.21¢ and 4.03¢/USG, below the cost of shipping.

Shippers have continued to pay others to use their allocated space in order to retain shipping history with Colonial. The deeper discounted line space value indicates the confidence for some market participants that arbitrage will again become profitable, making losses in the short term bearable. Last year, the arbitrage became viable in mid-August, although line space values did not turn positive until early November when the Colonial pipeline returned to allocation.

But higher tariffs starting in July could hamper arbitrage economics. Colonial pipeline raised tariffs to 5.49¢/USG in July, up from 5.26¢/USG. In order for arbitrage to be profitable on paper, inter-regional spreads between the US Gulf coast and New York Harbor must exceed the tariff.

Year-to-date, gasoline line space on Line 1 has been negative more than 68.8pc of the time as arbitrage to the US northeast has remained unprofitable on paper. In 2017, line space valueswere negative for 85.6pc of the year, with values averaging -1.307¢/USG. 2017 was the first year in which the average value of line space was negative since Argus began assessing Colonial line space on 22 May, 2014.

Line space trades involve a sale of the commodity at a line segment's origin and a purchase of the same commodity at a destination point, which cancels out the original sale. The difference between the two determines the prices for line space.