Oil Plummets, Pipeline Explosion To Drive Gas Prices Higher

Colonial Pipeline Explosion

Oil prices plummet as OPEC bickers and the dollar rallies, but yesterday the story that grabbed attention was an explosion in the Colonial pipeline that will lead to higher gas prices and possible spot shortages along the East Coast. The explosion was on the same pipeline that was shut down a couple of months ago due to a pipeline leak.

Apparently, while work continued on the pipeline in Alabama, it exploded, killing one worker and injuring many others. The colonial pipeline is the major line that runs from Houston to New York and according to Triple A provides gas for at least 50,000 people. The plagued piling may be down for days.

We are already seeing price spikes in futures and cash markets as wholesalers will be scrambling for product and Colonial pipeline will be making steps to try to ship in gasoline supply from other places.

Of course that is not helping oil. The market is pricing in no deal regardless of the fact that OPEC says a deal is still going to happen. Bloomberg news reported that OPEC's General Mohammed Barkindo said that despite the bickering, other major oil producers are “on course” to deliver a deal later this month that will temper the global oversupply. Iraq also says that they will adhere to the Algiers deal despite being a major reason that the deal has not yet been done.

Weakness in oil and warm temperatures killed natural gas. With cooling degree days almost 48% below normal and weak oil gas got crushed. Does that mean gas is doomed to live in a bear market?

Not if the weather changes. Reuters' John Kemp said it best: “natural gas prices are caught in the crossfire between warmer-than-normal weather and a structurally tightening supply-and-demand balance.” And with reports that it may get cold in a few weeks we should use the weakness to put on bullish option strategies.

Egypt is now buying oil from Iraq instead of Saudi Arabia. The Saudis cut off Egypt after they backed Russia's position in Syria over the Saudis'. A lot of background tension building in the cartel. Nevertheless, we believe a deal to cut output will still get done.