Threat of US Rail Strike Starts to Shake Up Commodity Markets

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(Bloomberg) — A potentially catastrophic strike of railroad workers across the US is starting to spook energy and commodities markets, raising the prices of everything from natural gas to corn loaded onto barges for delivery.

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Natural gas futures surged as much as 6.8% on Wednesday, partially driven by fears that an extended strike will curb deliveries of coal and force power generators to rely more heavily on already tight gas supplies. The premium for corn loaded by barge to be delivered to the Gulf Coast jumped almost 5% on speculation that more will move by boat should rail cars come to a standstill. 

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It could get worse. A US railroad strike, the first in more than 30 years, would deal a major blow to raw-materials markets, further disrupting supplies already ravaged over the past couple of years by crop losses, production cuts and, more recently, the war in Ukraine. Commodities account for half of all freight rail traffic. 

“That’s just an outstanding risk that is slowly coming into market focus,” Eli Rubin, a senior energy analyst at EBW AnalyticsGroup, said in an interview. 

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A shutdown in rail service also threatens to boost gasoline prices, according to American Fuel & Petrochemical Manufacturers, a trade association. Widespread production curtailments and some potential refinery shutdowns could be seen as early as this weekend, possibly leaving some sensitive regional markets with insufficient fuel, the group said. Nearly all finished gasoline in the US is blended with ethanol, which relies heavily on rail transportation. 

Meanwhile, a slump in diesel prices may have been partially influenced by major railroads unwinding fuel hedges ahead of an expected drop in their actual consumption, analysts at wholesale-fuel distributor TACenergy wrote in a note to clients.

Duke Energy Corp., which owns utilities in the Carolinas, Florida, Ohio, Kentucky and Indiana, said it has contingency plans in place to limit the impact of coal-supply interruptions if there’s a strike. The company said it has sufficient coal inventories to withstand a limited disruption and can use alternate fuels, such as natural gas and fuel oil, to generate power. 

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