Gasoline price pinch could get worse before gets better

A driver returns the gas nozzle after filling his van at a station in Raleigh, N.C.
Jim Bounds | Bloomberg | Getty Images
A driver returns the gas nozzle after filling his van at a station in Raleigh, N.C.

Gasoline prices, spiking 20 cents or more this weekend in some southeastern states, could continue rising even after the outage of a major gasoline pipeline artery is over.

Colonial Pipeline is working to build a bypass for its gasoline pipeline, which went down Sept. 9 after a leak was discovered in Alabama. The pipeline runs from Texas, across the South and then north to New Jersey.

"This has not crested yet," said Tom Kloza, global head of energy analysis at Oil Price Information Service. The most impacted states are North Carolina, South Carolina, Tennessee and Georgia, where the average price of unleaded rose 18 cents per gallon over the weekend. In South Carolina, prices jumped 11 cents to $2.04 per gallon between Friday and Monday, according to AAA data.

"There's a huge difference if you get that bypass line going tomorrow or if it stretches into next week," said Kloza. Colonial's gasoline pipeline, Line 1, handles 1.4 million barrels of gasoline per day. "Everyday you're talking about, is a lot of gasoline that's not being shipped up to the Northeast."

Colonial has diverted gasoline to a second line that it normally uses for distillates, like diesel and jet fuel. The company said gasoline is en route or has been delivered to terminal locations in Alabama, Georgia, Tennessee, South Carolina and North Carolina. Tanker trucks and ships are also moving fuel to the affected areas.

"It is very much a logistical crisis downstream with limited impact on the greater commodity sector which I believe is in for some challenges in the next few months," said Kloza. "For the moment, people might be hearing about $43 crude oil, and they'll be paying $2.15 for gasoline in a market where they paid $1.80 last week."

Some shortages were reported over the weekend. According to AAA, the national average of a gallon of unleaded gasoline rose to $2.20 per gallon Monday, from $2.18 on Friday.

Analysts say if Colonial does resolve the 10-day-old issue soon, price hikes should fade and gasoline could resume its decline. Analysts have expected drivers will see the lowest autumn prices in any year since 2008, due to gluts in both gasoline and crude oil.

While the pipeline is affecting the Southeast and Mid-Atlantic, is it also resulting in a growing glut of gasoline in the refining region of Texas and Louisiana. Gasoline prices at the pump fell a penny overnight in Texas to $1.95 per gallon.

"What's happening is it's backing up in the Gulf Coast, in Louisiana, Texas. They'll start shipping this aggressively ... it'll ultimately balance out. You just look at the balance sheet and see we're just terrifically oversupplied at multiyear levels," said John Kilduff of Again Capital.

Kloza said the impact at the pump in the Colonial service area has been anywhere from a few cents to 30 cents per gallon so far. "I think in the impacted areas, it's going to be uneven. Some people will see it going up 20 to 25 cents," he said.

The Colonial gasoline pipeline had been expected to come back online quickly, but on Thursday the company delayed the restart until this week. That sent spot prices spiking, with a jump in New York Harbor spot prices of about 12 cents in two days.

New York spot prices were at $1.445 per barrel Monday, after rising sharply at the end of last week to $1.47 per gallon, according to Kilduff. RBOB gasoline futures for October were trading lower at $1.44 per gallon, a more than 1 percent drop, after a roughly 7 percent gain last week.

"It will eventually go away. The question is how long will it take to repair but it's been down 10 days already," said Andrew Lipow, president of Lipow Oil Associates. "Judging from the Nymex action right now, it doesn't look like the market thinks it's going to be fixed today or tomorrow."

Even if the bypass line is in place this week, Lipow said it will not be an instantaneous drop in prices for the affected regions, where some gasoline stations also faced shortages.

"Inventories will have pulled down. It will take quite a while to replenish those inventories," he said. "But it will happen and the consumers will get their gasoline."

Kloza estimates it could take until mid-October for the current outage to work through the distribution network. He said an order could take two weeks to move through the system from Texas up to Linden, New Jersey, but that time frame would be shorter based on location.

"You might have an unusual situation where people could pay more at the pump, and they'll be watching gasoline futures dropping off," he said. "It's very much station by station."