The old saying goes that if you like my offer that is too good to be true, I’ve got a piece of the Brooklyn Bridge I can sell you, too.
Hey, at least that offer is for something you can touch.
A recently established trade in the US gasoline markets has market players spending thousands on something they cannot smell, taste, put their hands on or really even see.
It’s space on the Colonial Pipeline, churning 24-7 to bring gasoline from the Gulf Coast refineries to the East Coast.
The line’s two largest segments–one for gasoline, one for distillates, both linking Pasadena, Texas, and Greensboro, North Carolina–have been full for the last three years.
Demand for access to the line is such that East Coast fuel suppliers are willing to pay a premium that this month has reached as high as 14 cents/gal for gasoline just to have a ticket to the party.
That’s a little change in the pocket for those with a history with Colonial as a strong customer. That includes both trading houses such as Noble and refiners such as Marathon Petroleum, which picked up BP’s line space history when it bought the Galveston Bay refinery near Houston. Brokers also get a big chunk of this business.
“It’s a beautiful trade,” said a longtime Gulf Coast products trader.
Here’s how it might work. Company Zed has a commitment to move up batches of up to 25,000 barrels of blendstock on gasoline-only Line 1. But Zed doesn’t need that space for whatever reason. Maybe gasoline is weak, and maybe it wants to sit on its product. Doesn’t matter. It faces a penalty of 1 cent/gal assessed by Colonial if it does not use its space.
Company Zeta supplies gasoline to hundreds of fuel-thirsty convenience stores where the coffee is hot and the jerky is spicy. You know the type: Sheetz, Cumberland Farms, RaceWay, QuikTrip, WaWa. Zeta needs to move those barrels, but Zeta doesn’t have Zed’s cred. It goes into the line space market and puts up a flag. Let the trade begin.
Space on the 1.37 million b/d Line 1 was heard to trade at 8 to 9.5 cents/gal early Tuesday. Platts’ Joshua Mann tells me space on distillates Line 2 was heard bid Tuesday as high as 1.75 cents/gal. More on why those are diverging later.
You might ask, “How is this any different from ticket scalping?” (Below, some enterprising football fans in Wisconsin revel in the joy of capitalism. Note the narrator says this is legal, as long as the tickets are not sold for a profit.)
The line space trade is like ticket scalping in that both are secondary markets. The scalper is making money on the back of the concert promoter and in some cases the artist for access to physical space. The seller of gasoline space is turning a no-risk profit from his history as a major shipper for access to physical space.
Blog post continues below…
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But there’s one really big way this is not like ticket scalping. It’s really not even accurate to call it a “line space” trade, actually, though that is the name the markets have adopted. It’s an exchange of physical product with an added cost. Here is how the deals go down: Zed already owns the gasoline that is on the line. It gives the gasoline to Zeta at the point where it comes off the line, usually somewhere between Texas and North Carolina but sometimes as far north as the East Coast products hub in Linden, New Jersey.
Zeta then gives the same amount of gasoline to Zed for storage back in Texas. Zeta pays Zed the premium–that’s the 8 cents to 9.5 cents that traded Tuesday–and reimburses Zed for Colonial’s tariffs and fees, up to another 5 cents for gallon. This way, Zed has the versatility to put product on the pipeline and make a line space trade while the fuel is in transit.
What does it all mean for you, the consumer? That there’s a secondary trade probably affecting pump prices behind the other secondary trade that is the cash products markets. Gasoline line space trades every day; distillates space, not so much, reflecting less volatility in that line space market. It likely will pick up this winter as heating oil moves north, especially if the season is a bone chiller.
As for the market, many traders and brokers have been asking for more transparency on line space. Some market-reporting companies already are assessing it. Platts does not. As for Colonial, its statements suggest that it is aware of the trade but doesn’t know details. Kind of like a college football program whose fans are scalping tickets just a few hundred feet from the turnstiles.
Notwithstanding what the brokers say, as an energy lawyer practicing before FERC for more than 20 years and a Law Professor teaching the Regulation of Energy, my considered view is that this practice of brokering capacity on an oil pipeline at prices that are large multiples of the filed tariff rate is not lawful under the governing statute. There is now a proceeding at FERC where this issue may be tested.
~ Elisabeth Myers, Founding Principal, Myers Energy International
Ellie. We think the line space trade has been going on for the past two to three years. It ramped up when CPL lines 1 and 2 began to fill up and be allocated every cycle. On distillates, our reporters tell me there’s already an active line space trade, perhaps with one or two deals per week instead of the one or two per day we hear on gasoline.
Anonymous — Thanks for the input.
You should dig deeper. There are LLC’s out there bankrolled by banks/trading houses putting their name in the CPL linespace lottery hat. If they get the space in the lottery, they turn around and sell for 15cpg and the bank/trading house gets a piece of that action for their bankroll and no other real effort. CPL is naive to this scheme going on with 50 new “shippers” coming into the space in recent years, a majority of them being LLC’s with a false front or even out of someone’s house! If the public really could understand the kind of practices going on around CPL linespace and how it could affect the pump prices downstream, there would be outrage and FERC would be more attentive.
I totally agree. The public interest requires digging deeper and remedying the abuse.
This *is* an awesome article! Two questions to ask, in order to gauge opportunity and impact.
1. Is there precedent for this? Current activity is on the Colonial Pipeline. Simon Jacques asked about other pipelines. I wonder too, now or in the past, and if in the past, what was the denouement?
2. This sort of secondary market exists in gasoline line space now. Do you expect the same in distillates once winter arrives? Is that legal too?
Thanks for the input, Simon. I have heard not only of a Plantation line space trade but also a combined Colonial and Plantation line space trade. Also of note: After this blog was posted yesterday, I heard something interesting. CPL line space was trading at 9 cents for Line 1 only and at 7.5 cents for a combination of Line 1 and Line 3 (the northern segment), That suggests weakness on the segment of CPL that runs from North Carolina to New Jersey.
This article is awesome Mr. Bair and you did many others.
Possible to sell the line premium traded without having to make any sales when traders don’t agree with NYHarbor basis,
This over-the-counter or Scalping Space market helps Gasoline Marketers to manage their risks.
I am not sure about how does it affect retail prices however.
Have you hear of a similar space trade on the Plantation Pipe Line ?
Simon Jacques