If you’re watching the news today, you’ve likely heard of the gasoline pipeline hack Friday afternoon.
For those who somehow missed it, the largest refined fuel pipeline in the country — the Colonial Pipeline — was the victim of a ransomware cyber attack and remains largely shut down.
The pipeline, which consists of more than 5,500 miles of pipe and can deliver a top capacity of three million barrels per day of refined oil products, stretches from the Texas Gulf Coast all the way up to its termination in Linden, NJ.
And because these are all high-profile, high-population areas where mainstream media outlets are located, it naturally continues to dominate headlines on CNBC and Bloomberg.
As such, the near-term result is shaping up to be a small media-induced panic, and that could cause gasoline futures to rise far further than longer-term supply and demand would otherwise suggest.
But the honest truth is that the U.S. is incredibly well-supplied in terms of gasoline. Inventories have only come off slightly from last year’s pandemic-driven all-time highs, and in fact are still sitting at the fourth highest storage level in recorded history.
That’s a long time.
The government breaks that data down further into five regions, called “Petroleum Administration Defense Districts,” or “PADD”s.
And when we look at the affected areas — mostly in PADD 1 — we can see that current storage levels for the East Coast are also toward the high end of historical levels.
Moreover, along the Gulf Coast in PADD 3 (where most of our gasoline is produced), storage levels are very nearly back to last year’s all-time highs. And should Colonial’s system be offline for any significant length of time, these inventories will explode higher, actually creating a bearish environment for global prices.
So in terms of supply, we have plenty. The only issue here is transportation.
But we have to keep in mind that just because the main pipeline itself is shut down, it doesn’t mean near-term delivery isn’t possible.
After all, we still have other pipelines, trucks and boats.
As a swift first measure, the Federal Motor Carrier Safety Administration issued a temporary “hours of service exemption” for refined products trucking companies delivering to 17 states along the pipeline’s service area.
This will ensure the country’s fleet of tanker trucks will be able to work overtime making product deliveries over the next week or so while Colonial restores its core control systems from backup.
Moreover, per Colonial’s own press release, “while our mainlines (Lines 1, 2, 3 and 4) remain offline, some smaller lateral lines between terminals and delivery points are now operational.”
Those “lateral lines” are basically smaller, last-mile delivery pipeline systems that carry refined products to markets east and west of the main line.
Most of these laterals will be dedicated to move gasoline from storage to the major metropolitan centers to the east — primarily Atlanta, Raleigh, DC, Philadelphia and New York.
That will certainly alleviate short-term supply pressure to those major markets. But we should also point out many of those markets are also served via import terminals on the Atlantic Coast.
And interestingly, there were already around 1.8 million barrels of gasoline loaded on tankers and headed to U.S. markets from Europe and the Middle East before the gasoline pipeline hack — not to mention a whole lot of boats unloading refined products as we write this.
Additionally, any increase in prices will widen an already-open arbitrage window into the U.S., and opportunistic global traders will pounce on any chance to pull gasoline from all-time European storage highs and ship it over here.
So given this backdrop, there are a few high-level conclusions we can make.
Not yet anyway.
If Colonial is down for more than two weeks (equivalent to roughly 25 million barrels of supply) then we can talk.
Until then, kill that idea with fire, because this event is going to increase gasoline supply into the channels mentioned above rather than the opposite.
Secondly, to the extent any short-term supply crunch or media panic does increase gasoline prices, states situated west of the pipeline — West Virginia, Virginia ex-DC, Western Pennsylvania and Tennessee — are going to be more affected than major cities.
And finally, all this available supply means that although we’ve recovered significantly from last year, gasoline demand is still bad.
Most states have reopened retail stores and restaurants by now, American adults are mostly vaccinated, and many are beginning to travel.
But gasoline demand still remains more than 10% below the 2019 peak.
And with the work-from-home option now firmly entrenched in most American businesses, I’d speculate that the rational response to long lines for gasoline wouldn’t be to wait a half hour and pay up.
It would be to turn the car around, go home and fire up the work laptop just like everybody’s been doing for the past 14 months.
Now, we’re probably going to see an increase in gasoline prices anyway — simply because summer driving season is right around the corner, and refiners switch to a more expensive blend during those times.
And if the pipeline hack shuts Colonial down for a very long time (a month or more) then yes, we will start to see some physical problems.
But once the media realizes that supply shortages aren’t going to be quite the issue anyone thought, they’ll move on to other topics like they always do.
And buying pressure will go away.
So despite the near-term hype, the investment opportunity surrounding gasoline — and its raw material, crude oil — may actually be easiest to express on the short side.
And while we wouldn’t make any moves right at this moment, a sustained move in the price of wholesale gasoline prices (RBOB, in industry parlance) above $2.20 per barrel (or crude above $66) would start to raise our eyebrows.
In the meantime, we will monitor the gasoline pipeline hack and its consequencecs over the course of the week.
And if the media panic starts to turn into a Main Street panic… Then we do the opposite.
All the best,