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Surge in US oil-by-rail suffers first slowdown as spreads slim
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.
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 tenth of U.S. production. Weekly AAR data do 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.
Most analysts say it is likely to be a temporary lull. Some pin it on a reduction in Canadian output due to maintenance, and 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 there is no excess pipeline capacity in key areas like North Dakota.
Genscape, which uses cameras and infrared equipment to monitor both train traffic and oil pipelines, has also seen the switch, but believes rail traffic can’t drop much further.
“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.
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
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