Colonial Pipeline shutdown puts the squeeze on US

Commodities

The Colonial Pipeline cyberattack grabs the headlines, causing headaches and supply blocks in the US.

Oil trading

Oil’s main event this week has been the shutting of the US’ Colonial Pipeline thanks to a ransomware attack by cyber-terrorist group DarkSide.

A vital artery in supplying petroleum products, the pipeline came under cyberattack at the tail end of last week, shutting off 2.5m Bpd of US East Coast oil supplies.

Oil prices initially made gains after the pipeline’s closure. At the start of the week, WTI was trading above $65 while Brent was above $68.50 and closing in on $69. At the time of writing, however, both blends had retreated to $63 and $66 respectively – a reversal anticipated by traders thanks to refinery supply bottlenecks.

While the cyberattack has reportedly been resolved, the aftershocks are still reverberating. It will still take a few days to get the pipeline pumping again. Congress has passed an emergency waiver to transport oil products via road, but this is unlikely to satiate the East Coast’s commercial and industrial oil appetite.

The short term consequences are:

  • Lower fuel stocks
  • Higher fuel prices – an initial 2-3% rise could get higher
  • Less crude throughput at refineries dropping output

It will be interesting to see if the attack has any long term effect on petroleum deliveries. According to the EIA storage report for the week ending April 30th, total products supplied over the last four-week period averaged 19.8 million barrels a day, up by 34.2% from the same period last year. Motor gasoline deliveries were 56.2% higher than a year ago.

US commercial crude oil inventories fell by 8.0 million barrels from the previous week. At 485.1 million barrels, U.S. crude oil inventories are about 2% below the five year average for this time of year.

In more positive news, UK fuel sales have soared with lockdown easing. As of the week ended March 7th, they were at the highest level since March 2020. Vaccine rollout has been massively successful in the UK. The nation’s economy is set to rebound significantly across 2021 while navigating out of lockdown. Increased freedom of movement is proving positive for fuel demand.

OPEC+ output jumped in April too. The cartel’s crude oil production is estimated to have increased to a three-month high of 24.96 million barrels per day (bpd) last month. A major leap in Iran’s output, according to an Argus survey, was behind the increase.

The cartel is expected to begin improving monthly output from May onwards in response to improved market conditions.

Natural gas trading

Short term weather patterns suggesting a cooling off in the Midwest, Plains and Northwest regions, possibly leading to higher natural gas demand for heating and commercial use there. Cooler temperatures may swing into the south and Texas too, which could help support prices.

The EIA’s latest natural gas inventories report for the week ending April 30th shows that domestic supplies of natural gas rose by 60 Bcf. Total stocks now stand at 1.958 trillion cubic feet – down 345 Bcf from a year ago and 61 Bcf below the five-year average.

LNG demand is also a key driver of natural gas price movement. Rising demand from Europe, Asia and Mexico is great news for US gas suppliers, which should play into heightened feed gas volumes at Texan infrastructure.

Current higher LNG feed gas levels in Texas can be attributed to exports, but the February big freeze could also be playing a part. During that time, when the majority of production and liquefaction facilities were under ice, causing the largest monthly drop in monthly output on record.

US natural gas production in February 2021—measured by gross withdrawals—averaged 104.8 Bcf/d. This was 8.1 Bcf/d, or a 7% month-on-month decline.