Colonial Pipeline Outage: What To Watch For In Diesel Markets Monday

As the oil markets enter day three of the shutdown of the Colonial Pipeline following a cyberattack, here's a Monday morning catch-up primer on what is going on.

— The price of ultra-low sulfur diesel (ULSD) on the CME commodity exchange is higher Monday morning, but not by a large amount. At approximately 7:45 a.m. Eastern time, it was up 2.56 cents per gallon, or 1.27%, to $203.62/g. It had been as high as $2.0776/g since trading kicked off Sunday evening U.S. time.

–The Federal Motor Carrier Safety Administration has granted an Hours of Service waiver in conjunction with the shutdown. 

— But the important thing to remember is that the trading in the ULSD contract on CME is for barrels delivered into New York Harbor in June. The shutdown of the Colonial Pipeline is for an uncertain duration and it is possible that even if the shutdown lasts just a few days, markets will continue to be tight into June as a result. A reaction in the CME price makes sense given that possibility. But that will have little effect on wholesale prices in the next few days, and they in turn will impact the retail diesel prices that people will pay this week.

— The prices that matter for wholesale and retail markets are not as transparent as just going online and looking at the tick-by-tick prices of ULSD on CME. They are cash market prices, traded over the counter, with the value published at the end of the trading day by such price reporting agencies as S&P Global Platts and OPIS. For example, the daily assessment of barge prices in New York Harbor published by Platts are for delivery three to seven days forward. For Monday, the farthest date out would be May 17. Contrast that with the delivery window for the CME ULSD price, which can be no earlier than June 1. That's why the PRA assessments will reflect the current Colonial shutdown and the CME price will reflect the lingering impacts of it more than two weeks from now. It's the cash market number that matters to anybody filling up in the next few days. 

— The cash market assessment is used by petroleum marketers to set their wholesale price at the distribution point known as the "rack." Rack price setting starts by looking at the key spot market that supplies wholesalers; for example, the Detroit rack would look to Chicago. A rack in Connecticut would key off New York Harbor. And the Southeast takes its pricing cues from the Gulf Coast.

— But that's where this gets tricky. The Gulf Coast market is going to be facing the problem of having lost a key outlet for millions of barrels per day of gasoline, diesel and other petroleum products. But markets that look to it for pricing — Atlanta is the most prominent — will be dealing with tight supplies. Pricing off a market that is suffering from a shutdown-related glut means that pricing will disconnect to some degree.

— Another thing that occurs during shortages: Wholesalers supply their own. A marketer like Exxon will sell at the rack both branded fuels that must be purchased by retailers flying the Exxon brand (the stations are almost all owned by individuals or companies, not by the name of the brand outside) and unbranded fuels. A retailer flying a brand that does not have refineries can buy unbranded fuel from Valero on Monday, from Shell on Tuesday and from BP on Wednesday, depending on the most favorable price. Major convenience store chains like Wawa or Casey's buy unbranded fuel. But when supplies get tight, the wholesalers often cut off or reduce their supplies to unbranded customers, meaning those retailers are likely to be the first with supply shortages.

— As for when the pipeline might restart, Colonial said late Sunday afternoon that some lateral lines off the main line had been restored. But those lines are fed by the main line so they will ultimately feel the squeeze as well. Colonial said it will "bring our full system back online only when we believe it is safe to do so and in full compliance with the approval of all federal regulations." Colonial said it is working with the Department of Energy, and there are other reports that the federal government has set up a task force to work closely with the pipeline on solving the cybersecurity attack that led to the shutdown.

— Monday is the day that the Department of Energy's Information Administration releases its weekly average weekly retail price, used as the basis for trucking fuel surcharges. It is possible that some retailers will already have raised prices, anticipating what is to come, and that although the attack only took place on Friday, it may seep into today's market survey that produces the price.

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