As U.S. crude prices fall, rail shipments rise

Wed Oct 23, 2013 5:17pm EDT

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By Kristen Hays

HOUSTON, Oct 23 (Reuters) - The volumes of U.S. crude moving by train is on the rise again after a pullback earlier this year when higher oil prices eroded the savings of moving it to markets via rail, analysts and railroad executives say.

Known loadings hit new highs last week, passing the 600,000 barrels per day mark, the financial services firm CIBC said in a note to investors on Wednesday.

Railed volumes of North Dakota Bakken shale oil had dipped through the summer when discounts to London's Brent narrowed so much that imports were more attractive to East Coast refiners.

Imports into the East Coast region fell to about 800,000 bpd last week, down nearly 500,000 bpd from September highs, the bank said.

West Texas Intermediate, the U.S. crude benchmark, traded at a discount of more than $20 a barrel to London's Brent in February as output outran pipeline infrastructure to move it to markets.

Such wide discounts make moving crude by rail profitable, even with per-barrel transportation costs of $10 to $16 - twice as much or more than via pipeline.

However, by mid-summer the discount narrowed to less than $2 a barrel as some pipeline projects came online and refiners undergoing seasonal maintenance took in less crude.

"Our crude oil shipments out of the Bakken region fell dramatically due to commodity spreads that made rail shipments uncompetitive from that region," Dave Ebbrecht, chief operating officer for Kansas City Southern, told analysts last week.

Tom O'Malley, Chairman of independent refiner PBF Energy , told analysts in August that he'd rather take imports over Bakken crude at the company's East Coast refineries with such narrow discounts.

On Wednesday, though, WTI traded at a $10.64 discount to Brent .

Also Bakken crude, which trades cheaper than WTI, narrowed its discount to Brent last summer but has since more than doubled to about $23 a barrel in the last month, CIBC noted.

Railroads say they're seeing Bakken shipments rebound, albeit slowly, as the U.S. crude discount to Brent widened.

"We have seen some modest recovery of Bakken shipments very recently," Ebbrecht said.

Union Pacific, the largest U.S. railroad, saw crude volumes fall by 5 percent compared to a year ago on several factors, from higher U.S. crude prices to startups of more pipeline capacity, primarily in Texas and Oklahoma, Eric Butler, executive vice president of marketing and sales, told analysts last week.

However, he noted that steady demand has kept shipments running to the growing rail and storage hub at St. James, Louisiana, where copious connections to pipelines and refiners maintain its resiliency to volatile oil markets.

"While crude oil volumes will always be subject to the ups and downs of market spreads, we believe the long-term fundamentals of crude by rail remain attractive," Butler said.

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