Largest East Coast Pipeline Reveals Demand For Gasoline Is Crashing

There's a reason this week's EIA survey showing gasoline and oil supplies declining has failed to stop RBOB prices from collapsing to 7-month lows: The start of the summer has done nothing to revive sluggish demand. That's because despite what the EIA survey said, little has been done to reduce record fuel inventories.

The squeeze has gotten so bad, Northeast Colonial Pipeline Co., the operator of the biggest US fuel pipeline system, said that demand to transport gasoline to the country's populous northeast is the weakest in six years, the latest symptom of a global oil market grappling with oversupply. It’s notable that this peak has arrived despite the advent of the summer driving season, which has seen gasoline demand pull back from last year's record highs, according to Reuters.

Because of the oversupply in the northeast, “line space”… the cost of renting “space” on the pipeline to assure one’s ability to get supplies of gasoline when necessary… has gone negative, according to Reuters. What can be more exemplary of excess inventories and of reduced demand for gasoline than this?

Refiners are in part to blame for the problem - they have continued to pump motor fuel at record levels for the second year in a row, worsening the oversupply problem, for fear of losing access to pipeline capacity. 

More broadly, attempts by large producers to reduce global supplies have failed to meaningfully raise the price of oil.  And with good reason: Traders have been skeptical of an agreement between OPEC and non-OPEC producers, including Russia, to extend last year's supply cut, and already they're concerns are being validated: Iraq has said it plans to increase production later this year despite the agreement.

The existence of negative capacity is a reversal of the typical dynamic, where refiners are forced to supplement their deliveries with tanker shipments or imports.

"The only reason [the pipelines] wouldn't be full is clearly that inventory levels are high enough that there is no incentive to move product to New York," said Sandy Fielder, director of oil and products research, Morningstar in Austin, Texas.

 

"The situation is quite unusual," he said.

Even when high inventories make it unprofitable to do so, refiners typically keep pumping full volumes just to ensure they keep their rights to the line space, said Fielden.

But it appears as if refiners have finally reached the point where the financial pain outweighs the necessity of keepig their lease on some pipeline space - after all, Colonial has capacity to spare right now.

"It's purely economic - why ship into a negative arb(itrage) for that long," one trader said.

Colonial connects Gulf Coast refineries with markets across the southern and eastern United States through more than 5,500 miles (8,850 km) of pipelines, delivering gasoline, diesel, jet fuel and other refined products. Colonial indicated it did not expect demand to exceed capacity for the next five-day cycle through the line, and informed shippers it would therefore not follow the typical process for rationing space.

Oil traders who insist on staying long can hold out hope that production shutdowns related to Tropical Storm Cindy could lift the price of oil for a short period. It's also worth noting that  Dennis Gartman, who recently said oil wouldn't rise above $44 a barrel again in his lifetime, just turned bullish folllowing a wave of downgrades from energy analyst. That could be good news...or maybe not.

While the cause of the supply is obvious, whatever has caused demand to fall off is less clear. Barclays has suggested that President Donald Trump's immigrant crackdown has made millions of illegal immigrants living in the US afraid to get behind the wheel for fear of being detained and deported. If this is true, that means Trump is to thank for gasoline prices falling to their lowest levels since February, despite the start of the summer driving season?

Comments

Thought Processor Jim Sampson (not verified) Fri, 06/23/2017 - 14:32 Permalink

  Correct.  And 'Peak Oil' was theorized to have some very weird effects on the price of oil itself.  Some of which have been detailed in ZeroHedge articles.   The gist of it is that as things get sqeezed and energy becomes harder to produce, the economy itself slows over time.  This is deflationary not inflationary.  As a result prices decline and or become increasingly volitile. Peak Oil was about peak production not prices.  Another way to explain it- when the production of a barrel of oil requires more than a barrel of oil in net energy cost then the returns on producing oil have fully diminished.  Prices may ramp short term but over the long term high energy prices slow the economy, resulting in less energy demand and downward pricing pressure.   Again, the whole economy runs on energy much of it based on the price of oil, and if the oil input slows and energy prices rise short term then the economy slows as well, thereby putting longer term downward pressure on energy prices due to less demand.  It has some strange supply demand effects to be sure, as it effects the economy on many different levels over time.

In reply to by Jim Sampson (not verified)

OpTwoMistic Manthong Sat, 06/24/2017 - 12:15 Permalink

RBOB is 1.45 a gallon.  They can export excess for twice that.By the way, I was in the landfall of the last storm.   40 mph and 4 inches rain. The lights never flickered.  BS to any claims of lost production.People without jobs do not need gasoline.  The world is drowning in oil and they are humping our ass at these prices.

In reply to by Manthong

JuliaS Iconoclast421 Fri, 06/23/2017 - 15:19 Permalink

Fuel is always a means to get to some goal. Fuel expenditure is an investment with a return proposition, be that financial or emotional (going on a road trip). When value of return diminishes, the need for fuel goes down also.Considering how wasteful transportation is in general (with most fuel going towards movement of the mechanical machine as oppose to its contents, there's definitely room to cut.Not a bad thing, in my opinion. What is bad is the underlying reason behind reduction - everyone's broke.Internet, I'm sure, is also responsible for some of this. It allows people to perform tasks remotely without having to transport themselves or the product from A to B.

In reply to by Iconoclast421

Lukacko Fri, 06/23/2017 - 12:28 Permalink

-Most people are broke, unemployed, and can just sit around watching the View, whilst eating toaster strudels and sucking down pepsi paid for by Snap.  All day. - People with jobs are working from home in record numbers.

Ban KKiller Lukacko Fri, 06/23/2017 - 13:21 Permalink

Son, 40, works in same building he and his family live in. Daughter, 25, lives (her own home) two miles from work downtown. Other son, 29, works from home. His wife, accountant, uses Uber to get back and forth when husband can't drive her. Two of us work out of our home and drive a lot less. 

In reply to by Lukacko

Last of the Mi… Fri, 06/23/2017 - 12:29 Permalink

YOu've got it all wrong again!!! It's massive unexpected inventory build, soon to be draw down. Never talk slack demand in a grossly overtaxed economy. You just will not get reelected or your Obamacare plan congressionally renewed!! Damn

Thought Processor Fri, 06/23/2017 - 12:31 Permalink

  Ok, so the economy is still great right?  I mean all the other manipulated data says everything is skittle shitting unicorns.   So why can't they just tweak these numbers so that everyone stays on message?  How did this slip through? Someone needs to get fired over this.  

wisehiney Fri, 06/23/2017 - 12:33 Permalink

Nobody on the road,Nobody on the beach.I feel it in the air,The summer's out of reach.Empty lake, empty streets,The sun goes down alone.I'm driving by your houseDon't know you're not home. Henley

assistedliving (not verified) Fri, 06/23/2017 - 12:32 Permalink

"The situation is quite unusual," he said.Unusual?  its a friggin shitstorm 

Winston Churchill Fri, 06/23/2017 - 12:34 Permalink

Something is up with my richest clients as well, cutting back spending to bare essentials.Had to argue with one,worth tens of billions,cause my bill was $30 more than normal.Less affluent ones are cancelling contracts and losing their deposits.Haven't seen it like this since 08/09.Just my $0.02, how are other self employed ZHers finding biz ?

swmnguy Winston Churchill Fri, 06/23/2017 - 12:47 Permalink

I'm insanely busy.  Busier than I've been in 14 years of self-employment.I coordinate corporate meetings.  I make sure the staging, video, audio and lighting get set up, programmed and cued for higher-end meetings.  Usually in hotel ballrooms, convention centers, etc.  My clients include a lot of Fortune 500 companies that you've heard of.2007-2008 was my previous high-water mark.  Everything stopped cold in late October, 2008.  2009 was a desert; about a 70% decline and I and my peers were worried about losing our homes.  I realized that the big, lavish corporate meeting had become politically indefensible, but they'd still have to talk to their people and do training; even more urgently as people were fearing for their jobs too.  I started working more on training sessions to get through.Things started picking up again gradually in 2010, but since late 2015 there has never been so much work in my industry.  I've recently added as a client a company that produces events for a number of end-user companies, including a fair amount of pharmacuticals.  Holy Moly, are they spending money.My marketing plan is to mess around the house until my phone rings with somebody wanting to hire me.  For the past year or so I've turned down probably twice as much work as I've taken, just because of existing calendar conflicts.  I only have one me and I can only do so much work before I get over-committed and start making mistakes.  I've raised my rates and that hasn't scared people off.  I've gotten all the fundraisers and non-profits off my calendar, along with the small companies who nickel-and-dime me.I get penny-pinched on some things, but it's usually a charade.  They think nothing of spending $50,000 to have an LED video wall, but challenge the need for 12 $35 lights, when maybe I could get by with 10.  Or they won't provide my crew lunch in the ballroom while we're working, so we take an hour break and bill back our receipts and that they don't mind.  Seems like the bean-counters understand a slight amount of what they're buying, but if they don't understand it and an executive wants it, it's going to happen.My sense is that there is no real economic growth.  It's all cannibalism of one kind or another; either mergers and consolidations, or internal cutting, to make earnings look better for the next quarter.  They're spending a lot of money to keep up appearances, for sure.

In reply to by Winston Churchill