Materials Risk explains: How do pipeline shutdowns affect energy markets?

On the morning of 9th September a leak was discovered on a pipeline carrying gasoline in Alabama. The Colonial Pipeline carries 1.3 million barrels per day of gasoline from refineries in Houston to be distributed across the South East and eastern seaboard, all in all accounting for up to 40% of the regions gasoline supply. The authorities first concern is the potential environmental impact – on the local water supply and wildlife. Markets of course react immediately to facts and speculation as to the potential impact on supply as well as demand.

This short piece considers some of the things you should consider when thinking about the impact of a pipeline closure on energy markets.

    • Nigeria is often a flash point when it comes to pipelines. Rebel groups often try intentionally to blow crude pipelines up, and often unintentionally too (some groups try to siphon off crude for resell on the black market). Pipeline shutdowns result in crude not being able to move to export terminals, and once storage is full it may then result in oil production being shutdown.
    • Russia has frequently tightened the spigots on its gas pipelines flowing into Europe, sometimes at the height of winter in order to put financial and of course political pressure on Ukraine and other Eastern European countries. An alternative source such as Liquid Natural Gas (LNG) in the case of the European gas market can also act as a buffer. If prices for natural gas rise in Western Europe following a pipeline shutdown this provides a signal to LNG carriers in the Middle East to send shipments to Europe, to hopefully take advantage of any price differential between the two regions.
    • Product pipeline closures can be bearish for crude prices. The shutdown of a pipeline that carries products from refineries will mean that the facility will have no outlet for its product, causing it to reduce or halt its operation. Although this will result in higher product prices as supplies to the end consumer are cut, it will indirectly result in lower crude prices as demand is cut during the pipeline outage.

  • Plenty of crude and product (e.g. gasoline) in stock helps to mitigate the impact of any disruption to supply. But this can only go so far. If a pipeline can’t carry products to where it is needed then, assuming that there are no alternative routes, prices for the end consumer (the price at the pump) will rise.
  • The cause of a shutdown can sometimes be a mitigating factor. For example, if the pipeline shutdown is the result of weather related factors (e.g. a hurricane or flooding affecting a wide area) then the negative impact on demand may serve to dampen the adverse supply impact.

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