Dakota Access Pipeline Shut: Fuel Price Implications

Oil markets are rising gently this morning after yesterday brought no change in price direction. This week the market will be sharply focused on July 4 demand data. Each year, millions of consumers hit the roads to see family and friends and gather for fireworks; this year, many of those plans were cancelled. The EIA’s demand data tomorrow will be an important indicator of just how resilient the recovery in gasoline demand is.

Yesterday a federal judge made headlines by shutting down the 570 kbpd Dakota Access Pipeline, which transports crude from the Bakken crude basin in North Dakota down to the Chicago market for refining. After having been operational for three years, the pipeline will be shut until 2021 while environmental reviews are conducted.

Energy Transfer Partners, the owner of the pipeline, argues the shutdown will cost them over a billion dollars in lost revenue and strand up to a third of North Dakota’s crude oil until the pipeline reopens. Environmentalists argue that given existing production slowdowns, the economic impact will be minor. The judge ruled that an environmental impact is urgently needed, and the risk of a spill outweighs the economic implications.

In the short-term, opponents of the pipeline are probably correct. Demand is down throughout the US, reducing the urgency of having all channels of distribution available. As demand picks up, however, the pipeline’s shutdown will force more crude-by-rail deliveries, which are more expensive and dangerous environmentally. It may also cause Chicago basis prices to rise as feedstocks become more expensive. Because Chicago fuel is a low-cost leader that often finds its way into surrounding areas like the Northeast and Midwest, expect a small lift in fuel prices in various nearby markets. Of course, given the pandemic, it’s possible that rising prices will be lost amid broader volatility.

It’s a relatively quiet day for oil markets as traders await weekly data from the API and EIA. Crude oil is trading at $40.76 this morning, trading slightly higher by 13 cents.

Fuel prices are also moving higher, with gasoline leading the way. Gasoline prices are trading at $1.2619, up 2.1 cents (+1.7%). Diesel prices are currently trading at $1.2463, up 0.5 cents.