US spot fuel markets shrug off Colonial outage

The extended shutdown of a major US fuels pipeline did not trigger the sharp spot market reactions seen in previous outages, in part because of global oversupply and recent changes to the US Atlantic coast refined products market.

A ransomware attack last week led the Colonial Pipeline to shut its 5,500-mile system transporting gasoline, diesel and jet fuel from the US Gulf coast to the Atlantic coast. A phased restart began after six days, on 12 May, while a more complete restart began yesterday.

Unlike a 2016 incident, where Colonial's gasoline line was shut down for six days because of a leak, spot prices did not catapult to multi-month highs in New York Harbor, nor did they plummet in the US Gulf coast following this month's incident.

Instead, Buckeye pipeline CBOB prices in New York Harbor rose by less than 3¢/USG before dropping by more than 7¢/USG upon the pipeline's restart. And in the Gulf coast, conventional gasoline prices saw relatively small daily movements that were mostly within the five-day moving average since the outage. Prices even rose in the days following the outage, as gains in Nymex futures more than offset the drop in regional physical differentials.

The absence of substantial spot price movements in the US also meant a lack of significant changes in global trade flows in the aftermath of the pipeline outage. There was a rise in transatlantic freight rates from Europe immediately after the outage was reported, but it was an extension of already-high volumes. A rise in export loadings out of the US Gulf coast has also yet to reach pre-pandemic levels.

The muted market response may be explained by the changing supply structure along the US east coast and a chronic surplus of global refining capacity, exacerbated by the Covid-19 pandemic.

East coast structural change

The New York Harbor market saw its refining capacity shrink in the past two years, with the 2019 shutdown of the 330,000 b/d Philadelphia Energy Solutions refinery, and in 2020 the idling of 85,000 b/d capacity at PBF's 180,000 b/d Paulsboro, New Jersey, refinery because of low margins.

This drop off in supply has been readily plugged by refiners in Europe, who have come to increasingly rely on transatlantic exports to sustain regional production.

Starting in 2019 the Colonial pipeline also saw shipping demand begin to fall below capacity. Most products shipped on the line are now absorbed into the southeastern markets before they reach New York Harbor, where imports have taken a larger market share.

The Covid-19 pandemic further reduced demand to ship fuel on the Colonial pipeline, even to the southeastern markets. Its main lines running to Greensboro, North Carolina, have been operating below capacity for most cycles since last spring despite multiple tariff incentives.

Fuel shortages during the most recent shutdown are most acute in the southeast markets, with little impact seen in New York Harbor spot prices. The immediate impact on the New York Harbor market is not so much a shortage of fuel from the Colonial pipeline, but an increase in gasoline leaving the region on barges to the Carolinas and Georgia at a premium to local deliveries.

Gulf coast options

Mounting stockpiles as a result of the pipeline outage is something Gulf coast refiners are all too familiar with from last spring, when the height of Covid-19 movement restrictions in the US led to an surplus. Their reactions to the circumstances this time have been swift, and spot prices have held strong as a result.

Some refiners began cutting rates soon after the initial shutdown. Even though refining margins have been higher, the high cost in renewable volume obligations (RVO) for compliance with the federal renewable fuel standard (RFS) program kept Gulf coast refiners from bringing crude throughput to pre-pandemic levels.

Some refiners sought floating storage in the first days following the Colonial shutdown in another echo to early pandemic months, while others pushed an increasing amount of fuel to the midcontinent market.

Gasoline and diesel export loadings out of the US Gulf coast rose to 1.56mn b/d during 1-14 May, according to Vortexa shipping data, up from 1.31mn b/d in April and marking the highest level since April 2020. About a third of these loadings are heading to Mexico, where importers were ready to take in more products from the US Gulf coast, but not without storage and arbitrage constraints.

By Chunzi Xu