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Cyberattack effect on oil prices
The pipeline carries gasoline and other fuel between Texas and Northeastern states, delivering, according to Colonial Pipeline, around 45% of the fuel used on the East Coast. Reported as the worst assault to date against US critical infrastructure, the attack underscores serious vulnerabilities within US infrastructure.
Why do oil prices vary?
Oil prices vary from day to day, but when an unexpected event occurs that causes disruption in the supply chain, drastic variations can be the result. We’ve mostly recently witnessed this with the Covid-19 outbreak, where oil prices plummeted because of decreasing demand, only to become more stable when supply was reduced.
With demand returning to normal, as the majority of the world comes out of lockdown, the closure of the pipeline has the reverse effect, resulting in the oil price to increase.
Mike Johnson, general manager, Portland Fuel said:
“The cyberattack saw WTI oil futures (North America’s primary crude benchmark) spike to $65.50/bbl, close to a two-month high, after the pipeline was shut down to contain the impact of the attack, causing concerns over security of supply.
“The majority of US refining capacity is located on the Gulf Coast, meaning the East Coast is heavily reliant on transportation via the pipeline, which carries 2.5-3mbpd of refined product from Houston to New York (around 45% of the East Coast’s refined product supply). Any prolonged period of downtime would therefore cause significant issues around the availability of refined product in the region – associated concerns saw domestic gasoline prices increase by around 2% as a result.
“As a domestic distribution network of refined product, opposed to crude, the wider impact on global oil prices was lessened, for example Brent crude prices increased slightly by c. $0.75/bbl to a high of $69.00/bbl on Friday before dropping back to trade around $68.00/bbl by close of business. However, the attack does highlight the relationship between oil prices and disruption in supply.”
Ian Moore, OMJ also comments on the effects of the supply ‘dislocation’:
“The outage of the Colonial Pipeline linking the US oil production and refinery region in the US Gulf Coast with the US demand region of the US East Coast is a supply dislocation rather than supply outage. This is because the oil which is normally pumped into the pipeline is still being produced and shipped and stored elsewhere. For example, the major producers in the US Gulf Coast are reported as having hired tankers to store oil they cannot pump. In addition, traders can ship additional product from Europe to the US East Coast. This is not a new phenomenon and shipping gasoline from Europe to the US is well established.
“During the 1970s-1990s, the oil market was largely focused on Middle East tensions. However, with the rise in US shale production, Middle East supply is of lesser importance. In addition, the move to a low carbon economy will further reduce the impact of oil outages.”
Commenting further on the relationship between oil prices and supply disruption, Portland Analytics highlighted that this was recently demonstrated during the week-long blockage of the Suez Canal by the MV Ever Given container ship, which saw Brent crude prices rise c. $5.00/bbl across the week of the grounding. Further back, geopolitical instability around the Strait of Hormuz, a key Middle Eastern oil shipping route, saw a prolonged period of volatile crude prices in the Summer of 2019 after the seizure of UK and Iranian oil tankers in the region.
In short, disruption in global crude/refined product transportation can affect oil prices due to the impact on the balance of supply and demand; if supply is limited and cannot meet demand as a result, prices generally rise. Although both crude indexes swiftly returned to their previous levels after it became evident the outage would not be sustained, the attack represents a short-lived example of the impact a lapse in security of supply can have on oil markets.
Looking forward, Ian comments on the potential future effects on oil prices:
“The most worrying geopolitical event might not be the occasional pipeline attack caused by a bomb blast or computer virus but rather a conflict in the South China Sea between the US and China over Taiwan or some other nation in the region which depends on the US for its security.”