Pardon me, boys, is that the Chattanooga choo choo?
Analysis: Oil returns to U.S rails to avoid mammoth Midwest glut
By Joshua Schneyer
NEW YORK | Fri Feb 4, 2011 4:20pm GMT
NEW YORK (Reuters) - Trains once revolutionized the U.S. oil trade by getting barrels to market faster than horse and buggy. Some 150 years later, crude is hopping the rails again as today's oil barons look to cash in on the biggest domestic price gap in decades.
Shipments of oil in rail tankers, though still small, may have already doubled from a year ago, industry estimates show. They could soon surge further as producers, railways and storage firms build up to a dozen crude-by-rail terminals, allowing oil from an oversupplied U.S. Midwest to flow to destinations where it's priced much higher, including on the Gulf Coast.
The incentive is clear: Light oil sold for around $81 a barrel at wells in the Bakken shale of North Dakota this week. After a 1,600-mile rail journey south, which can cost as little as $7 a barrel, the same oil could fetch $104 in Louisiana.
The historic price spread is a result of growing Canadian and North Dakota oil supplies backing up in and around Cushing, Oklahoma, the landlocked oil pricing hub where several big southbound pipelines end in a cul-de-sac.
Cushing tanks held a record 38 million barrels last week, a glut that means crude in Oklahoma and further north is trading at huge discounts to oil at the Gulf Coast refining hub, or across the Atlantic in Europe.
Avoiding Cushing offers major rewards for shippers and oil traders, turning thousands of miles of flexible U.S. rail routes into a lucrative oil transport option for the first time in decades.
"If you can get Bakken crude to Louisiana, you get LLS (Light Louisiana Sweet) prices for it," said Bill Swann of U.S. Development Group, whose new St. James, Louisiana rail terminal is handling 60,000 barrels per day (bpd) of crude from Bakken.
"Rail shipments are just starting to take off, and have lots of room to grow."
Railroad operators wouldn't discuss market freight rates. But four shipping sources said it costs as little as $7 a barrel to send crude from Bakken to St. James. The price is for batches of 60,000 barrels or more on unit trains of 100 cars. Smaller loads on manifest cars cost $11 a barrel.
Handling and gathering can add another $5 a barrel, but the economics remain compelling due to huge oil price spreads.
Its the kind of arbitrage that big traders such as BP (BP.L) and Vitol VITOLV.UL live to exploit, but there's little evidence so far that they've been able to secure the necessary rail cars, line access or terminal space now controlled by a handful of transport and logistics companies.
Whether by rail, pipe, barge, tanker ship or truck, southbound shipments should eventually narrow the gap between U.S. WTI futures for Cushing delivery -- the world's most-traded oil contract -- and Europe's Brent.
The London-traded crude is at its biggest sustained premium against WTI, an advantage that peaked at $12.50 a barrel in January and has remained around $10 this week, compared with last year's average premium of 63 cents.
"A Brent premium will probably be the norm at least through 2011. But if you ship enough oil by rail and add a new pipeline south, WTI could eventually get back to parity or a premium," said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London.
"The pipeline will take time, giving rail a chance to expand."
uk.reuters.com |
