Colonial Pipeline expects to restore most service by end week

The Colonial Pipeline refined products artery should be substantially back online by the end of the week now that a phased-in restart process has begun to restore service one segment at a time after the major fuel pipeline was downed by a cyberattack on May 7.

Colonial said May 10 it began bringing segments of the pipeline back online in consultation with the US Department of Energy, which is leading the federal response.

"While this situation remains fluid and continues to evolve, the Colonial operations team is executing a plan that involves an incremental process that will facilitate a return to service in a phased approach," Colonial said in a statement. "This plan is based on a number of factors with safety and compliance driving our operational decisions, and the goal of substantially restoring operational service by the end of the week."

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Colonial had halted all pipeline operations because of a ransomware attack, restricting the primary artery for gasoline and refined products for much of the South and East Coast from delivering more than 100 million gal/d of fuel and heating oil. Colonial stretches more than 5,500 miles from the Houston refining hub to the New York harbor, supplying about 45% of all the gasoline and diesel fuel consumed on the East Coast.

"We continue to evaluate product inventory in storage tanks at our facilities and others along our system and are working with our shippers to move this product to terminals for local delivery," Colonial added. "Actions taken by the federal government to issue a temporary hours of service exemption for motor carriers and drivers transporting refined products across Colonial's footprint should help alleviate local supply disruptions, and we thank our government partners for their assistance in resolving this matter."

Colonial restarted some of its pipeline laterals on May 9 to connect some terminals and destinations for deliveries, but all of the Colonial mainlines remained down.

The ransomware attack was connected to the DarkSide criminal organization, according to media reports. Although DarkSide has been linked to Russia, the group contends it is apolitical.

Third-party cybersecurity experts and the federal government are leading an investigation into the nature and scope of the attack. Speaking on CBS' "Face the Nation" show, US Commerce Secretary Gina Raimondo called it an "all-hands-on-deck effort."

PRICING IMPACTS

Bringing Colonial substantially back online by the end of the week should prevent anything more than modest pricing disruptions. However, some Texas refineries already were reducing their run rates in response to the major pipeline outage.

US refined product futures fell from an earlier rally May 10 as concerns of supply disruption resulting from the shutdown of the Colonial Pipeline eased amid a flurry of import fixtures.

At 1655 GMT June NYMEX RBOB was 32 points lower at $2.1237/gal and June ULSD was up 9 points at $2.0115/gal.

Oil futures had moved higher overnight amid concerns of short-term supply tightness following disruption of the Colonial Pipeline. But prices turned lower in early US trading as strengthened arbitrages supported a spate of new import fixtures.

At least 7.46 million barrels of gasoline are now expected to discharge into the US Atlantic Coast in the week ended May 14, data from ship tracking service Kpler shows, up from 6.96 million barrels the week prior and the highest level in records dating back to January 2017.

Earlier in the morning, Gulf Coast CBOB was heard to trade at NYMEX June RBOB minus 15 cents/gal, 50 points below the previous assessment. Sources said offers along the weekend came as low as futures minus 17 cents/gal.

The market for space on the gasoline-only Line 1 was heard bid at flat, placing value at a positive number for the first time since Dec. 12, 2020. Shippers often buy more space when the arbitrage up Colonial is viable.

"I guess the anticipation it starts back up soon," a market participant said.

In the Americas clean tanker market, freight jumped on the evening of May 7 as charterers looked to export barrels of clean products originally intended for pipeline shipment out of the USGC. USGC-loading routes for Medium Range tankers had already reached year-to-date highs the week ended May 7 due to tight vessel supply in the Gulf of Mexico, and owners looked keen to take advantage of the sudden volatility as a result of the Colonial Pipeline outage.

STORAGE, FUEL PUMP EFFECTS

The Colonial attack comes just as US fuel demand is quickly growing since bottoming out in January from the ongoing coronavirus pandemic.

Gasoline demand rose 78,000 b/d in February from January, using monthly Department of Energy data. Using weekly DOE data, demand improved further by about 786,000 b/d for March over February, but growth slowed to 294,000 b/d in April, according to S&P Global Platts Analytics.

Patrick De Haan, head of petroleum analysis for GasBuddy, said a relatively short outage will prevent a "nightmare" scenario of a prolonged outage just ahead of the start of the busy summer driving season.

"The situation is growing more intense each day that passes without the pipeline restarting, and motorists are advised to show extreme restraint or exacerbate and prolong the challenges," DeHaan said. "If the pipeline returns to service in the next day or two, the challenges will be minimal."

Ernie Barsamian, CEO of The Tank Tiger terminal storage clearinghouse, said most terminals should have 10 to 15 days of fuel supplies, so the impacts should not be as severe as feared.

"They are well prepared as an organization to handle shutdowns of their mainline as this has happened previously during natural disasters," Barsamian said.