October 14, 2011 / 11:06 AM / 8 years ago

RPT-INSIGHT-Oil convoy blues: trucking game foils crude traders

* Bo Collins, former NYMEX president, latest to try arb
    * Estimates of 1,000-10,000 bpd being trucked south
    * Truckers see new shale plays as more attractive
    * Shortage of tankers, drivers, blocking $25 trade
    By David Sheppard and Bruce Nichols
    NEW YORK/HOUSTON, Oct 14 (Reuters) - On paper, it's the
kind of arbitrage deal that oil traders dream of: buy crude at
$85 a barrel in Oklahoma, truck it 550 miles south, and sell it
to a Gulf coast refiner for $110.
    In practice, the crude trucking trade - a measure of last
resort as pipelines, trains and barges are maxed out -- has
proved tantalizing but elusive. Just ask Robert "Bo" Collins,
the former NYMEX president and hedge fund manager, or the teams
at global energy trading titans Mercuria and Vitol.
    Collins, who presided over the home of the benchmark U.S.
oil futures contract a decade ago, has tried in vain to
organize a fleet of trucks to haul crude out of Cushing,
Oklahoma, down to the U.S. Gulf Coast, where he could sell it
for $25 a barrel more.
    An in-depth investigation by Reuters shows the trucking
arbitrage that has had traders buzzing from London to Houston
remains, for now, just speculation. Talk that 10,000 barrels
per day (bpd) or some 50 trucks are plying the 12-hour route is
unfounded, according to interviews with over a dozen sources.
    While the unprecedented discount of benchmark U.S. crude
prices, delivered into the Cushing storage hub, relative to
European Brent, the prevailing price for U.S. refiners on the
coast, has triggered a surge in river and railway transit, the
trucking option has been a bust.
    The failure of veteran traders to capitalize on a seemingly
glaring opportunity is all about logistics, not economics.
    While the overall trucking sector remains depressed,
there's an acute shortage of the tankers and qualified drivers
needed to haul crude; most that are available have been quickly
locked into remote shale oil fields in Eagle Ford, Texas, and
the Bakken of North Dakota, where the trucks are essential to
get oil from the well-head to nearby pipelines.
    Even so, the active exploration by traders of the long-haul
shipment of crude by tanker truck -- a means of transportation
that hasn't been used extensively in the oil sector in decades
-- demonstrates the extent to which the massive distortion in
the U.S. oil market has upended trading patterns.
    As a glut of crude from Canadian oil sands depresses prices
in the Midwest, producers and trading companies hoping to push
their oil to the premium-priced import hubs on the coast have
already tapped alternatives like rail and river barges this
year due to a lack of southbound pipelines.
    Historically, imported crude moved north from the Gulf
Coast into the Midwest, but the influx of Canadian oil
production has changed the game for the United States.
    Trucking is the most extreme option for would-be
arbitrageurs aiming to reverse that flow.
    "You don't truck if you can rail and you don't rail if you
can pipeline," the CEO of Canadian pipeline firm Enbridge,
Patrick D. Daniel, told Reuters last week.
    But the potential profits are too tempting not to try.
London-based Brent and U.S. crude , often
referred to as WTI (West Texas Intermediate), have normally
traded within a dollar of each other, but this year Brent's
premium has blown out to more than $25 a barrel.
    However, some two dozen trucking firms and traders
contacted by Reuters presented little evidence to suggest that
any company has managed to make it work on a major scale yet.
    Truckers are revving up, but for the shale industry, not
the long-haul game.
    "The Brent-WTI spread arbitrage opportunity may certainly
tempt a few to evaluate investing in trucking oil out of
Cushing," said Collins, who went on to run two unsuccessful
hedge funds after leaving the NYMEX in 2004.
    "But I believe close examination of the operational
challenges would deter any new major activity."
    He said he had shelved the project for now.SHALE THE REAL BOOM FOR TRUCKERS
    Estimates for the normal cost of hiring a tanker truck to
drive the Oklahoma to Gulf roundtrip vary widely from $7 to $19
a barrel, or roughly $1,300 to $3,500 a truck.
    One tanker operator broke down his estimated costs like
this: two drivers at an average salary of $22 an hour each adds
up to more than $1,000 in wages alone; another $700 for diesel
fuel at $3.75 a gallon; a further $500 for the truck lease,
insurance, maintenance and depreciation costs. About $2,300
before a dime of profit.
    But assuming a $25 price spread on 185 barrels, there could
still be money to be made on an arb of $4,600 per trip.
    It's not that the tanker industry wouldn't love the trade.
But it is simply stretched to the gills after a
recession-induced collapse in business was followed by the
biggest surge in demand the industry has ever experienced.
    The tanker business has already rebounded to pre-recession
levels, according to American Trucking Association data, thanks
to the biggest boom in the U.S. oil business since the
deepwater Gulf of Mexico.
    The production of shale or 'tight' oil in the United States
has soared from almost nothing to around 700,000 bpd in just
three years as new drilling techniques and fracking technology
opened up frontier reservoirs. It could hit 2 million bpd
within five years, according to some in the industry.
    Much of it is in previously undeveloped regions like
southwest Texas and North Dakota, far from existing pipelines,
meaning trucks are the best means of getting crude from
sometimes remote wells to market distribution points.
    Deliveries of crude to refineries by truck last year
reached nearly 200,000 bpd, the highest since 1993, according
to Energy Information Administration data. Volumes are up
nearly 50 percent from seven years ago.
    "There is a huge demand for trucks right now. If they could
convert an ice cream truck to haul crude they would," said
George Jordan, the chief operating officer of Central Crude in
Louisiana. The firm is expanding next month from two to 10
trucks in Eagle Ford -- a rich new shale play in southwest
Texas -- and may double that again within 18 months.
    Demand is so high that Central Crude can make between 50 to
100 percent more per truckload of crude they haul in Texas than
they do in Louisiana, with fees as high as $5 a barrel, said
Joe Milazzo, its vice president of crude supply.
    That works out at almost $1,000 for every short-haul truck
journey from wellhead to storage terminals or pipelines, which
they can do several times a day. Eventually a new network of
pipelines being built across Eagle Ford will reduce demand for
the tankers, but that will take at least another two years.
    "There will be pressure on trucking margins in Eagle Ford
as infrastructure improves in the future, but there are so many
small wells being drilled that are too insignificant to be
connected to a pipeline that there will always be demand for
trucks," Milazzo said. "We're in it for the long haul."
    Schneider National, one of the largest trucking firms in
the United States, is hiring 300 more drivers to help meet
booming demand from shale producers alone.
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