By Jonathan Leff and Nia Williams
NEW YORK/CALGARY, June 14 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
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
"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.