By Jonathan Leff and Nia Williams
NEW YORK/CALGARY, June 14 (Reuters) - Oil traders are gently tapping the brakes on the thriving business of shipping U.S. and Canadian crude oil by rail, industry data showed this week, the first sign of a slowdown after a two-year boom.
As price spreads for moving sweet North Dakota or Canadian crude to premium markets on the Gulf Coast slump to their lowest since early 2011, companies are shifting more oil back through pipelines rather than using costlier railcars, raising new questions about the longevity of oil-by-rail.
The number of railcars loaded with crude or refined fuel per week in the United States has dropped by about 5 percent since reaching a record 14,500 tank cars during May, according to Reuters calculations based on data from the Association of American Railroads released on Thursday.
At 13,664 cars through June 8, the latest week's loadings are still up 28 percent from a year ago, equivalent to about 1.4 million bpd. With crude oil estimated to make up about half of all such shipments, that's about a 10th of U.S. production. Weekly AAR data does not distinguish between crude and refined fuels.
Still, the annual growth rate is much slower than the 50 percent surge since the start of the year. In the first quarter alone, crude oil shipments jumped by 166 percent to the equivalent of 760,000 bpd, AAR said last month. Since early 2011, traffic has been growing, mostly steadily, every week.
Apart from a brief dip in early 2013, this is the first meaningful slowdown since oil companies began reviving a mode of transport that most had abandoned decades ago, using the rails to help get a gusher of shale oil production in remote areas not served by pipelines to refiners eager for cheaper oil.
In North Dakota, some pipelines have been running below capacity "because the rail economics are so attractive," Justin Kringstad of the North Dakota Pipeline Authority said in a call on Friday. He said about 75 percent of North Dakota's nearly 800,000 bpd of crude production is shipped by rail, with only 17 percent by pipe.
Most analysts say it is likely to be a temporary lull. Some pin it on a reduction in Canadian output due to maintenance, and on refinery work in the U.S. Midwest. They also note that refiners like Phillips 66 have signed long-term deals to receive Bakken crude by rail, and that excess pipeline capacity is slim.
"I think the pipelines have come very close to filling back up, so the incremental barrels have to move by rail," said Brian Busch, Director of Oil Market and Business Development, Genscape, which uses cameras and infrared equipment to monitor both train traffic and oil pipelines.
Yet the slowdown in rail shipments may unnerve some of the energy companies, logistics groups like Sunoco Logistics and tank car manufacturers like Trinity Industries who are investing hundreds of millions of dollars to get in the game, and disappoint operators like Union Pacific Corp and Canadian Pacific Railway for whom oil is a small but growing source of revenues.
"If we see the differentials stay tight like this for more than a few months some companies are definitely going to sit up and take notice," said Martin King, analyst at FirstEnergy Capital in Calgary.
Sandy Fielden, an analyst at consultants RBN Energy, said there are signs that lease rates for tank cars are also ebbing.
It all adds to growing evidence that the U.S. oil market is entering a new phase, leaving behind a time when price spreads and trading opportunities were defined by the lack of transportation infrastructure to get booming shale crude to market. After a wave of new investment, producers now have more options for reaching different markets, boosting prices.
"The past 18 months have brought booming business for the rail industry from crude-by-rail and every boom inevitably has a bust. It remains to be seen if we have reached that point yet," he wrote in a report published on Thursday.
Speculation of a pause after two years of rising oil-by-rail shipments has grown since early April, as the closely watched Brent/WTI price spread fell to less than $10 a barrel. That is the lowest since early 2011, when a rapidly widening spread opened up an arbitrage for using costly railway transport to ship the growing volume of Bakken crude to southern markets.
Yet the downturn in traffic comes just as more and more industry officials and analysts have begun backing the view that moving crude by rail is more than simply a stopgap measure, one that will help keep oil flowing until new pipelines are built.
Increasingly it is being seen as a potentially important longer-term option for producers, refiners and traders who can benefit from the flexibility of easily moving any type of crude to almost any refinery on the continent. With a pipeline, both supply and purchase options are far more limited.
That may be especially true for refiners on the West and East coasts, which lack major pipelines to move crude oil to their regions. Canadian producers may also continue to use rail cars, particularly those with special heating coils to move heavy bitumen that can't be easily shipped by pipeline.
"Until you see some pipeline plans emerge to move Midcontinent crude to the East or West coasts - which you haven't yet - you're going to continue to see rail be viable," said Allen Good, an analyst with Morningstar.
Despite widespread optimism over the long-term outlook, the collapse in crude spreads this spring has caught many traders by surprise. And for the moment, it's getting worse.
The spread between Bakken crude at the pipeline hub of Clearbrook, Minnesota and benchmark Light Louisiana Sweet fell from nearly $30 in early March to a then-record low of around $13 in May. Analysts estimate it costs $12 a barrel for the rail journey, about three times more than via pipelines.
This week the spread has dropped to just $6 a barrel after an outage at a Canada sands production unit.