The threat of a US railroad strike begins to rattle commodity markets

(Bloomberg) – A potentially catastrophic strike by railroad workers across the United States is beginning to scare energy and commodity markets, driving up prices for everything from natural gas to corn being loaded onto barges for delivery.

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Natural gas futures jumped 10% on Wednesday, in part on fears that a prolonged strike could curb deliveries of coal – which generates around 22% of electricity in the United States – and force the electricity producers to become more dependent on an already limited gas supply. The premium for barge-loaded corn to be delivered to the Gulf Coast jumped nearly 5% on speculation that more would move by ship if railcars stopped.

It could get worse. A U.S. railroad strike, the first in more than 30 years, would deal a major blow to commodity markets, further disrupting supplies already ravaged over the past two years by crop losses, production cuts and, more recently, the war in Ukraine. . Goods represent half of all rail freight traffic.

“It’s just one-off risk that is slowly building up in the market,” Eli Rubin, senior energy analyst at EBW AnalyticsGroup, said in an interview.

According to Anton Posner, CEO of Mercury Group, a logistics service provider, a lack of rail transport would further strain the grain barge system, which has already had an “extremely busy” season due to increased exports. in the middle of the war in Ukraine.

“There just aren’t enough barges out there,” Posner said in an interview. “There is too little at the moment to even cope with the current volume, even without a railway strike.”

A shutdown of rail service also threatens to drive up gasoline prices, according to American Fuel & Petrochemical Manufacturers, a trade association. Although the group said some sensitive regional markets could end up with insufficient fuel, individual refiners did not report similar concerns.

Phillips 66, one of the largest U.S. fuel makers, is “monitoring the situation and has contingency plans in place to mitigate the potential impact” at its sites, a spokesperson said by email in answer to questions.

Almost all finished gasoline in the United States is blended with ethanol, which relies heavily on rail transportation. Ethanol in Chicago was little changed a day after prices jumped 5.6% in the biggest gain since December. The price of so-called RINS credits, which refiners must buy to comply with the US renewable fuels mandate when they don’t blend enough biofuel into gasoline, has hit its highest level in nearly a month , reaching a record high.

Meanwhile, a slump in diesel prices may have been partly influenced by the dismantling of fuel hedges by major railroads ahead of an expected decline in their actual consumption, analysts at wholesale fuel distributor TACenergy wrote in a report. note to customers.

Duke Energy Corp., which has utilities in the Carolinas, Florida, Ohio, Kentucky and Indiana, has enough coal stored to handle “limited disruption” and also has contingency plans for limit the impact of a rail strike, according to John Verderame, the company’s vice president of fuels and systems optimization. Its facilities could burn more natural gas or fuel oil and could also transport coal using trucks instead of trains – although it would take around 450 trucks to transport as much coal as a single train.

“A prolonged outage would have reliability implications,” Verderame said in an interview Wednesday.

While the likelihood of a work stoppage is potentially high, the risk of a prolonged strike of more than two days is very low, with Congress needing to act to avoid further impacts, said Morgan Stanley analysts, including Pamela Kaufman, in a note to clients.

Talks between freight rail companies and unions continued on Wednesday under the leadership of Labor Secretary Marty Walsh as the deadline to avert a strike approaches. About 125,000 workers could leave their jobs if a deal is not reached by Friday’s deadline, with talks between the rail companies and unions showing no signs of progress.

“Secretary Walsh continues to lead discussions at the Department of Labor between the railroads and the unions,” a department spokesperson said. “The parties are negotiating in good faith and are committed to staying at the table today.”

(Updates with Duke’s comment in 11th and 12th paragraphs)

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