Diesel markets could be on the verge of a significant upward move when trading kicks off Sunday evening in the U.S. following the closure of the Colonial Pipeline.
The pipeline, which carries diesel, gasoline and jet fuel from the U.S. Gulf Coast area through the Southeast and Mid-Atlantic on their way to a terminus in New York, was closed Friday because of a cyberattack, according to media reports.
A statement released midday Saturday, updating an earlier statement released Friday, said the pipeline had been the “victim of a cybersecurity attack.
“We have since determined that this incident involves ransomware,” the company said in a statement.
Colonial is a pipeline system with four major parts. According to S&P Global Platts, it carries 1.5 million barrels/day of gasoline on line 1 between Pasadena, Texas, outside of Houston, and Greensboro, North Carolina. Line 2 traverses the same route and carries 1.16 million b/d of distillates, including diesel, heating oil and jet fuel. At Greensboro, line 3 is a mixed line that goes up to the New York area and can carry 885,000 b/d of a mixture of products. Line 4 is a mixed line also, and takes the product to terminals in Virginia and Maryland.
Source: Colonial Pipeline
Both gasoline and diesel rose more sharply on the CME commodity exchange on Friday, though the news of the cyberattack and shutdown broke relatively late in the trading day and the upward trends had already been in place. The petroleum products moved up more sharply than crude, which would be expected given the possibility of regional short supplies of gasoline and diesel should the closure persist.
While benchmark U.S. crude West Texas Intermediate was up just 0.18%, and international benchmark crude Brent was up 0.28%, ultra low sulfur diesel was up 2.11% to $2.0106/gallon. RBOB gasoline was up 0.75%.
The strength in diesel relative to crude continues a trend in the market that has been occurring for several weeks. The spread between Brent crude and ULSD stood at about $12.40/barrel on April 20. On Friday, it was up to about $15.45/barrel.
If the pipeline outage goes on for any extended period of time, it could create a situation where diesel markets in the Houston area will plummet as supply backs up. But diesel for the huge swath of the nation’s population that resides along the pipeline will be driven higher. That includes cities such as Atlanta, Washington, Philadelphia and New York.
Closing that arbitrage between the Gulf Coast and other parts of the country without a working Colonial Pipeline can be challenging. The economics of trucking fuel elsewhere can turn negative quickly. Shipment by sea on a Jones Act ship can not happen rapidly, with probably too long a timeline to make any impact, barring an extended shutdown.
The Plantation Pipeline begins in Louisiana and runs a course similar to Colonial, though it does not go north of Washington.
Diesel markets already have been trending higher after a period of stability. After settling at $1.89/g on April 14, ULSD on CME has moved up more than 12 cents to its Friday settlement of $2.0106. When it settled above $2/g two days earlier, it marked the first settlement above that level since January 2020.