Bad news — accidents, war, extreme weather — is generally good news for commodity shipping. Case in point: Product tanker stocks, rates and futures jumped Monday in the wake of the cyberattack that shut down the Colonial Pipeline.

The pipeline, which has the capacity to carry 2.5 million barrels per day of refined products from the U.S. Gulf to the East Coast, was shut by a ransomware attack on Friday.

The best-case scenario for product tankers is an extended outage. A lengthy shutdown would force more gasoline and refined product imports from Europe and other sources, a plus for spot rates of medium-range (MR) product tankers.

As Evercore ISI analyst Jon Chappell wrote early Monday, this “could be a big event … or a nonevent.”

A few hours after he wrote that, the Colonial Pipeline operator announced “the goal of substantially restoring operational service by the end of the week.” If the system is indeed restored in a matter of days, product-tanker upside could fizzle out fast.

Immediate rise in stocks and rates

Shares of Norway-listed Hafnia Tankers closed up 6% on Monday. U.S.-listed shares had longer to react to the news of the possible pipeline reopening later this week. Scorpio Tankers (NYSE: STNG) was up 8% in early trading but closed up 2%. Ardmore Shipping (NYSE: ASC) was up as much as 10% in early trading and closed up 6%.

Rate assessments for eco MRs on the Rotterdam-New York route jumped 61%, from $9,530 per day on Friday to $15,365 per day on Monday. Non-eco MRs on that route rose even faster, nearly doubling, from $6,390 to $12,219 per day. 

June forward freight assessments for the trans-Atlantic route rose 12% from Friday to Monday, to $7,223 per day. To put these numbers in perspective, the all-in cash breakeven rate for an MR is around $13,000-$14,000 per day, double the June forward assessment.

Some tanker charterers are already reacting to the pipeline shutdown.

Reuters, citing data from Refinitiv Eikon, said that at least six product tankers were provisionally booked to transport gasoline from Europe to the East Coast following the pipeline outage. Vortexa reported that 46,700-DWT Tavrichesky Bridge, carrying gasoline, had changed its destination from New York to Yorktown, Virginia, in the aftermath of the pipeline hack.

Inventories and inbound cargoes

According to Energy Information Administration (EIA) data, combined East Coast gasoline and distillate stocks totaled 102.6 million barrels as of April (64.6 million barrels gasoline, 39 million barrels distillate). Vortexa estimated that East Coast gasoline stocks are sufficient to cover 20-25 days of forward demand.

(Chart data: Energy Information Administration)

Current East Coast gasoline and distillate stocks are down 26% from the pandemic-inflated peak of 139 million barrels last June, but are still up 3% from pre-COVID levels in April 2019.

Furthermore, significant product tanker volumes were already en route to the East Coast before the Colonial Pipeline cyberattack.

Argus Media reported that gasoline loadings from Europe to the U.S. at the end of April hit the highest level since summer 2019, with those cargoes expected to arrive in New York by the middle of this month. It said that those trans-Atlantic shipments were induced by a decline in flows to the East Coast on the Colonial Pipeline prior to the cyberattack, as sellers made more money exporting refined products from the Gulf to Latin America.

Argus, citing Votexa data, also pointed to record volumes of Middle East gasoline loaded prior to the pipeline outage, which are due to arrive in New York this month.

There have also been significant recent deliveries to Caribbean storage hubs, noted Vortexa. If necessary, replacement supplies could be sourced from those hubs with delivery times of just two to six days.

This has happened before

This isn’t the first time the Colonial Pipeline has shut down. When it happened before, product tanker rates rapidly spiked, then came back down just as quickly.

On Sept. 12, 2016, a leak and spill in Alabama caused a partial shutdown of the pipeline for 12 days. Trans-Atlantic MR rates doubled from $10,000 per day to $20,000 per day, then reversed after operations were restored and sank below $10,000.

Soon after, on Oct. 31, 2016, an explosion and fire in Alabama, in which one person was killed, shut the pipeline down for a week, until Nov. 6. At the time of that accident, trans-Atlantic MR rates had fallen to around $7,000 per day. They jumped to $25,000 per day after the explosion. When the pipeline reopened, they quickly fell back to $10,000.

As Robert Perri, then an analyst at AXIA Capital Markets, wrote at the time: “Just like that, the Colonial pipeline rally is no more. It has ceased to be. It is expired. It is now an ex-rally.”

What if?

If the outage turns out to be short-lived and a material number of additional product-tanker cargoes are booked anyway, the net result could be negative (although this is less likely after Monday’s reopening timeline announcement).

According to Chappell, “In the two 2016 shutdowns, the immediate sourcing … by product tankers and modes of surface transportation meant that inventories were bloated by the time the pipeline returned to operation.” If that happens this time, he said, “the short-term boost to rates could be more than offset by elevated inventories that ultimately further delay a true fundamental recovery.”

But what if the operators are being overly optimistic, the outage doesn’t get fixed later this week and the outage does extend for a longer period?

In the case of a medium-duration outage, Chappell said that product tanker rates could rise, then reset lower yet at a higher base. In the case of a longer-duration outage, he believes “tanker rates could accelerate meaningfully,” which could serve “as a bridge to a more sustainable fundamental recovery widely expected for H2 2021.”

Click for more articles by Greg Miller 

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