(Bloomberg) — Crude oil and gasoline rose at the start of the week after a cyberattack put the largest oil-products pipeline in the U.S. out of action.
West Texas Intermediate and Brent both advanced, while gasoline in New York surged as much as 4.2% to the highest since May 2018, before paring gains. Colonial Pipeline Co., a supplier of gasoline, diesel and jet fuel to the eastern U.S., was forced to halt operations on late Friday, and said Sunday that it is still working toward a restart of operations along the key artery.
A rush for replacement fuels could emerge on the East Coast, leading traders to source cargoes from Europe or even Asia. In a reflection of the incident’s gravity, the White House has formed a task force to probe the pipeline breach.
“For now, the market is giving the company the benefit of the doubt that this will be resolved in short order,” said John Kilduff, founding partner at Again Capital LLC. Still, “the pain at the pump will go national, if New York Harbor and other East Coast supply points see supplies dwindle,” he warned.
Oil’s value has gained by a about a third this year as the rapid roll-out of coronavirus vaccines across the U.S. and Europe prompted the lifting of social-distancing measures and travel restrictions. Consumption of fuels including gasoline and jet fuel has been on the mend as millions of people return to work, boosting personal mobility and the use of cars.
The Colonial network is the main source of gasoline, diesel and jet fuel for the East Coast, with capacity of about 2.5 million barrels a day on its system from Houston as far as North Carolina, and another 900,000 barrels to New York. Gasoline stockpiles have hovered near a four-month low since March, while diesel inventories are just above the five-year average for this time of year.
The shutdown is likely to cause fuel pile-ups, as well as shortages, along different parts of the extended supply chain, and there’s concern that some refineries may be forced to reduce processing rates.
“If it is prolonged you would expect that refiners would need to start reducing run rates,” said Warren Patterson, head of commodities strategy at ING Group. “Gasoline stocks on a national level are fairly low, but if you look at the U.S. Gulf Coast, they are above the five-year average.”
Traders and shippers are seeking vessels to deliver gasoline that would have otherwise gone via the Colonial system, according to people familiar with the matter. Others are securing tankers to store gasoline in the Gulf, they said.
Amid the disruption, there could also be calls to suspend Jones Act, according to Again Capital’s Kilduff. The law requires goods shipped between U.S. ports to be moved on vessels built, owned, and operated by the nation’s citizens or permanent residents.
Even before Colonial’s system was forced offline, gasoline had rebounded strongly this year on rising demand from motorists. U.S. refiners were ramping up output for summer demand, with the biggest spike expected at the start of the Memorial Day holiday on May 31, a three-day weekend for most Americans.
The hackers who caused Colonial Pipeline to shut down began their blitz last Thursday, stealing a large amount of data before locking computers with ransomware and demanding payment, people familiar with the matter said. The attack appeared to use a ransomware group called DarkSide, according to Allan Liska, senior threat analyst at cybersecurity firm Recorded Future.
Companies behind pipelines are vulnerable to cyberattacks due to the use of more so-called smart applications. Moving away from manual controls raises the connectedness of networks, but leaves them susceptible to assault.
(by Sharon Cho, Jeffrey Bair and Serene Cheong)