It’s not often that hackers manage to hit such crucial oil infrastructure such as Colonial’s pipelines in the US, but such an event and the associated fear of prolonged outages has taken over the psyche of traders, and oil prices are on the rise.
The malware hit the heart of the US downstream network and prices of refined products are increasing amid the disruption, causing a bullish rollover effect on crude benchmarks, with both WTI and Brent boosted in early trading.
The pipeline, which usually transports more than 2.5 million bpd of refined products from the US Gulf Coast to the Northeast, has so far pushed up prices of gasoline and diesel, as the expectation is that both will be in short supply as long as the pipeline is sidelined.
Similar to the February freeze crisis, the impacts will be localized. While northeastern and southeastern states may see increased prices at the pump, other regions with more robust products inventories, such as the US Gulf Coast, may not see the same price surge.
The other obvious upside is for European refiners, which may be able to step in and increase refined product exports to the US, though the arbitrage opportunity will likely be met by cargoes already at sea, as the two-week journey over the Atlantic at this point is still a gamble if the pipeline is swiftly restored.
The pipeline closure could also mean that US crude exports, which surged to 4.1 million bpd last week, are kept onshore and fed into domestic refineries to replenish inventories.
Storage in the northeast and southeast regions of the US are poised to be heavily tapped in the coming days as the pipeline remains offline.
The bullish developments in the US are hiding a worrying Covid-19 trend in Asia. While some oil demand destruction in India is being registered and priced in, the pandemic is also hitting other southern and southeast Asian countries, where infections are on an alarming upward spiral.
Before the US pipeline hack, the worsening Covid-19 situation in Asia was set to have a bearish effect on prices and dominate the week, but now it is limiting the bullish effect of the US pipeline hack instead.
If the pipelines come back online quickly this week, the market may be in for a price correction that will make the impact of the pandemic’s spread in Asia more visible.
Nevertheless, the US pipeline outage is set to offer a helping hand in relieving the country’s inventories further, a bullish gift that will stay with traders for some time.
The full effect of the pipeline outage on inventories will be visible in next week’s official data release, and any hints on how much the decline will be will determine the oil price direction in the coming days.