Gasoline prices surge after Colonial pipeline explosion

An pipeline explosion in Alabama has shut down two pipelines linking the US Gulf Coast and the US East Coast on 31 October 2016, taking an estimated 2.5mb/d of petroleum product transportation capacity offline. If both of these pipelines are fully impaired, that could be as much as half the petroleum product pipeline utilisation in the US. December-delivery gasoline prices surged as much as 14%. Prices are likely to remain elevated if pipeline flow is not restored soon.

The explosion comes on the heels of a gasoline leak reported on September 9th which led to a temporary shutdown of the 1.3mb/d Line 1 pipeline. On 29th September, the Colonial Pipeline Company (who operate the pipeline), created a temporary bypass to return services as quickly as possible but said that “Between late October and mid-November, Colonial will be performing system integrity work to remove the temporary bypass in Alabama and restore Line 1 to service.” It is not clear if the explosion yesterday was related to this restoration effort.

The blast which has killed one person and hospitalised five others is likely to heighten regulatory scrutiny, potentially leading to a lengthy disruption. The NYMEX Reformulated Regular Gasoline Blendstock (RBOB) contract is likely to continue to trade at elevated levels if the outage is prolonged.

Due to the difficulty in getting gasoline to the East Coast by pipeline, demand for refined products from Canada and Europe is likely to rise. Shipping gasoline from the US Gulf Coast to the US East Coast is limited by the Jones Act which prohibits any foreign built or foreign flagged vessel from engaging in “coastwise” trade within the United States. Therefore, to meet demand more refined product is likely to be shipped in directly from Canada and Europe to the East Coast.

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Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).