OREANDA-NEWS. June 08, 2015. A new oil commodity with a clunky name began grabbing headlines this spring: Colonial Pipeline shipper history. Here’s the history of this so-called history, and why it’s likely to stick around after this summer’s tan lines are long faded.

The US South and the densely populated urban centers of the East Coast, from Washington DC up to Long Island, New York, receive the bulk of their gasoline supplies from the Colonial Pipeline, a powerhouse compared to other regional gasoline-carrying pipelines.

Capable of delivering the equivalent of three cargo ships or 885,000 b/d of gasoline each day to the Linden, New Jersey — a major East Coast tank hub on the south side of New York Harbor — the Colonial Pipeline is the artery for gasoline deliveries to the Atlantic Coast region.

While the six refineries of the US East Coast pump out hundreds of thousands of barrels of gasoline each day, their supplies to the region do not rival the volumes pumped in on Colonial, which supplies roughly 60% of the gasoline consumed in the Atlantic Coast, according to US Energy Information Administration data.

Maintaining the ability to ship gasoline along the corridor stretching from Pasadena, Texas, up to the tip of northern New Jersey has become so vital to gasoline players that they’re willing to do anything — including pay other traders to move barrels — to maintain their capacity allocation on the line.

Since the Colonial Pipeline has had more requests to ship barrels than it has capacity for about 3.5 years, a line space trade has flourished around trading effective capacity on this line.

Biopsy of a line space trade

Trading of this capacity is not formalized, and in fact trading of actual pipeline capacity is not sanctioned by Colonial Pipeline. Instead, capacity sellers simply agree to exchange a set volume of gasoline they have agreed to transport on the line for identical barrels at the start of the line, creating an instrument known as line space.

On paper, it’s an exchange of barrels located at different tank farms, but in deed a line space transaction is a transfer of pipeline capacity.

Platts began assessing the value of gasoline capacity on Colonial Pipeline’s Lines 1 and 3 in February, and so far line space values have remained relatively muted, reflecting relative strength in the Gulf Coast gasoline market compared to the Atlantic Coast market.

Since February 2, Colonial Pipeline Line 1 space has traded above 5 cents/gal only twice and has averaged 0.30 points/gal, indicating that buyers have not been willing to pay very much in the spot market to secure capacity.

Last week, Line 1 space has traded in the negative for several days, meaning that shippers were willing to pay someone to take barrels off at the end of the line in order to maintain their status as a reliable shipper on the line.

So what is shipper history?

If a shipper regularly sends barrels on Colonial, then that shipper develops history with the pipeline and can be assured that — barring some occasionally hefty downward rounding — Colonial Pipeline will continue to allocate roughly the same amount of capacity each cycle.

And this dependable capacity allocation can really pay off in the hot summer months when soaring demand and subsequently sky-high pump prices make Colonial Pipeline Line 1 space hard sought after.

Line 1 space has traded as high as 12 cents/gal in previous summers, according to one trading source, and it’s these high values that make shipper history a hot commodity.

In the past few years, some companies have developed elaborate corporate structures to manage their shipper histories and capacity on Colonial Pipeline. Shipper history, effectively representing more or less guaranteed capacity on this key supply line, became a commodity in and of itself.

History in this case became a high-dollar asset on oil traders’ books. But unlike other assets, shipper history was often kept off the books, an asset uncounted — at least until sold.

A flourishing but quiet trade developed around shipper history changing hands — that is, until Colonial Pipeline attempted to put the brakes on it.

A flurry of shipper history trades

It is unclear why, but sometime in February Colonial Pipeline proposed a new Colonial Pipeline tariff — in this case, the tariff represented not a fee, but a set of rules forbidding “transfers of shipper history except in limited circumstances involving ‘Regular Shippers.'”

Colonial classified a ‘New Shipper’ as anyone who had shipped less than 18,750 b/d over the previous 12-month period average.

The proposed tariff threatened to prevent the many smaller shipper history holders from trading away or consolidating their histories as they had in the past, and this spurred the market into action.

In the run-up to March 16, which market participants understood to be the last day New Shipper history trading would be allowed, the market saw a flurry of trades.

Some traders took advantage of the looming deadline to sell shipper history and walked away with millions of dollars on their books that were previously unaccounted for.

However, the hard deadline the market expected did not arrive. In response to protests to the proposed tariff changes by Nova Energy and Concept Petroleum Marketing, the US Federal Energy Regulatory Commission issued an order to suspend the proposed tariff.

Nova and Concept in their motions argued that the proposed changes unduly discriminated against New Shippers, who are typically small volume shippers, on Colonial’s system.

Colonial Pipeline said March 20 it planned to meet with customers to further discuss its proposals to limit shipper history trading, but no word on the outcome of the talks has been heard since. At present, it appears this uncomfortable saga might just fade into the background.

But the shipper history trade roars on. Trading volumes have definitely taken a dive since March, according to trading and brokering sources, but history values remain quite high.

Trades for Line 1 history have been heard as high as \\$600/barrel in the weeks since the tariff was suspended. Last week Line 1 history was heard bid at \\$500/barrel and offered at \\$700/barrel.

Until definite guidelines are proposed, trading around Colonial Pipeline proves once again that those in the market are savvy and willing to adapt to meet their needs — and maybe make some money at the same time.