Railroads say crude oil by rail to keep on chugging

While many have warned the economic viability of moving crude by rail is threatened by the narrowing of the benchmark Brent-West Texas Intermediate spread, a group of railroads are still singing its praises, vowing that the shipping phenomenon has staying power.

At the same time, big upstream operator Newfield Exploration last week called CBR–a growing abbreviation for that mode of transportation–more of a “logistics” move to ship crude from the Utah’s Uinta Basin, instead of a way to gain price advantages.

So, how can there be so many differing opinions on the transportation method that has rapidly taken the crude logistics industry by storm?

They may all be correct.

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CBR movements have increased in recent years in North America because of a lag in pipeline capacity for shipping rising low-cost shale-oil production to market, notably from the Bakken Shale in North Dakota.

A wide Brent/WTI spread allowed healthy netbacks for the shipments. That spread has tightened quickly, from levels above $20/b, to near $2.67/b on Monday.

Interest in railing the crude has dried up recently on less-competitive netbacks, traders and analysts have said.

But the railroad companies demonstrated that CBR is here to stay with ongoing infrastructure investments. Customers and the railroads are still shelling out big bucks to build terminals, and signing long-term contracts, even in the face of the narrow margins on a shrunken Brent/WTI spread.

US railroad United Pacific in its quarterly earnings call this month said that customer enthusiasm for the shipping method has not diminished. Canadian Pacific made similar comments last week, noting that rail will be a “permanent part” of sending crude around North America.

A CP official admitted during the call that the once super-wide netbacks for shipping crude-by-rail have shrunk, causing spot trades to take a hit, but term shippers have been relatively unaffected by the narrowing benchmark spread.

In addition, during the next 18 months, CP competitor Canadian National expects an increase of crude-by-rail volumes on its system, an official said recently, adding that demand will come from increased loading stations and activities.

But other crude industry players have painted a different picture, one with shippers eying pipelines and crude-carrying trains coming to a standstill.

Spot CBR profits are definitely in a squeeze, and imported crudes are looking attractive again. For example, one day last week the price of Bakken Shale crude from North Dakota delivered to the East Coast on rail was $114.34/b, compared to $109.10/b for delivered Canadian Hibernia, and $110.83/b for delivered Nigerian Bonny Light.

Even still, the Brent/WTI spread has not deterred interest in delivering oil by rail to US East Coast refineries, a CSX official said. Customers have noted there’s no significant need to change to pipelines, the company said.

During Q2, Newfield railed more than 250,000 barrels of crude to East Coast refineries from Utah.

But North Dakota state data suggests a downward trend for Bakken crude-by-rail loadings.

In May, 69% of the crude produced in the Bakken Shale was shipped on a rail car, with 23% on pipeline, according to the most recent information released this month by the North Dakota Pipeline Authority. In April, 75% moved on rail and 17% on pipelines.

Rail loadings in the Bakken on average will be near 470,794 b/d this month, down from near 497,733 b/d on average during May, according to Genscape data released July 18.

In contrast, however, unloadings at crude-by-rail terminals in Saint James, Louisiana, have been relatively flat during May and June at just over 225,000 b/d, the data provider said. One analyst said the volumes at St. James are likely contract volumes that shippers are committed to.

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