Colonial line space moves positive amid allocation

The value of gasoline line space on the Colonial Pipeline's main gasoline-bearing Line 1 rose into positive territory today for the first time in five-months as the operator announced allocation for the first time in over a year.

Valuations for prompt line space rose early in the day from flat to +0.75¢/USG, with deals being done at both levels. This was its highest since 14 May.

Demand to ship along the line improved this week as US Atlantic coast gasoline stocks decreased during the week ended 8 October amid lower imports and refinery runs.

Participants' current willingness to pay a premium for space to ship material along the line remains a supply issue, with market economics holding on the precipice of unprofitability because of strong backwardation in the New York Harbor.

Shippers who are allocated space on the Colonial pipeline must use it or risk losing allocation later, even during periods of lower demand. To prevent this potential loss of space on the line, traders will effectively sell their allocated space to others. This involves selling a commodity at a line segment's origin and purchasing the same commodity at a destination point, which cancels out the original sale. The difference between the two determines the prices for line space.

The pipeline tariff into Linden, New Jersey, from Pasadena, Texas, is 5.98¢/USG, and market participants have pegged the true cost of shipping — accounting for taxes, fees and line loss — closer to 6.25¢/USG.

Even so, arbitrage between the Gulf and Atlantic coasts has been open on paper for months, with inter-regional spreads holding well above this cost.

Line space however, has held at negative levels since 17 May, as demand to ship along the line remained below capacity.

Prior to 2017, Line 01 of the Colonial Pipeline's system had been fully allocated for a period of several years, meaning demand to ship along the line exceeded capacity. Since 2017 however, demand to ship along the line has been less consistent, with the last fully allocated cycle occurring in late August of 2020.

By Paul Dahlgren