November 8, 2013 / 6:56 PM / in 4 years

U.S. crude discount to Brent deepens $1 on oil train derailment

NEW YORK, Nov 8 (Reuters) - The discount for U.S. crude oil futures versus European Brent deepened by more than $1 a barrel on Friday after a train carrying crude oil derailed and exploded in Alabama, spurring worries of tougher regulation and higher costs.

The 90-car train carrying North Dakota crude to Walnut Hill, Florida, derailed in rural Alabama, with nearly a dozen cars bursting into flames reaching hundreds of feet high. There were no injuries, and the cars were left to burn, officials said.

The incident, the latest in a series involving oil trains, threatens to step up calls for more regulation such as retrofitting older tank cars or increased quality controls, adding to the cost of shipping crude oil by rail.

Rising transport costs could drive down prices for inland domestic crudes, which would need to fall in order to compete with imports on the coast, analysts said. Rail trade has become crucial in delivering burgeoning North Dakota shale and Canadian crude to refineries along the East and Gulf coasts.

“What will happen is that it will lead to regulations and every time you add new regulations, it will increase the cost, and that will increase the gap between Brent and WTI,” said Bill O‘Grady, chief market strategist at Confluence Investment Management in St. Louis.

“When you have these train accidents, you’re not going to stop training crude, the cost will just go up and the cost has to be expected in the spread.”

Brent’s premium over U.S. oil benchmark, West Texas Intermediate (WTI) widened by more than $1 to a session high of $10.39 per barrel. The spread reached a record $28 last year amid a pent-up glut of crude in the U.S. Midwest, but has traded at less than $12 for most of this year.

Brent oil rose by as much as $1.50 close to $105 per barrel, while U.S. prices were flat.


Railing crude has risen in tandem with a boom in shale oil production in the United States and Canada, as pipeline infrastructure is still insufficient to deliver oil to refineries and oil products to markets.

As such traffic rose in recent years, so has the focus on periodic derailments, including the derailment that killed 47 people in Lac-Megantic, Quebec, in July, putting pressure on regulators to toughen up regulations.

In March, a train derailed in west-central Minnesota, spilling around 20,000 gallons of oil. Last month, a train headed from the Canadian province of Alberta to Vancouver derailed, carrying crude oil and liquefied petroleum gas.

Shipping crude oil by pipeline or water is cheaper than rail, but the wide price spreads between surging inland production and coastal imports has driven traders, producers and refiners to ship more and more oil by train.

In the third quarter, crude-by-rail shipments rose 44 percent from a year ago to 93,312 carloads, equivalent to about 740,000 barrels per day (bpd) or almost one tenth of U.S. production, according to data from the Association of American Railroads.

That was down 14 percent from the second quarter as narrower oil spreads that made costlier rail shipments less economic.

Without trains or adequate pipeline infrastructure, the only alternative would be the most costly of all -- trucks.

“If they’re making it harder to ship by rail, then that means switching to a different method and that would widen the spread much more,” said Michael Lynch, oil analyst and president of consultancy Strategic Energy & Economic Research Inc in Winchester, Massachusetts.

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