US oil railcar market collapses as foreign crude makes comeback

Reuters | February 2, 2014 | Column by Jarrett Renshaw

A years-long bidding war for trains to haul crude oil across North America has abruptly ended, with more than a dozen mile-long unit trains now parked in Midwest stockyards and tank car lease rates halving from last summer's peaks.

While overall oil-train traffic remains near record highs, the shadowy industry that deals in the specialized 87-tonne crude carriers is getting the taste of the wild swings that define the global oil market.

The sudden slump in the tank car market has more to do with narrowing crude oil spreads and ample tank car supply from manufacturers such as Greenbrier and American Railcar Industries than with more than 50 percent dive in U.S. crude prices over the past seven months.

But it may be an early warning for rail companies such as CSX, BNSF and Union Pacific, which have been resolutely upbeat despite growing expectations that booming U.S. oil production will begin to slow as soon as this summer.

Monthly lease rates for the most common of oil rail cars fell to $1,300 late last month from a high of $2,450 about year earlier, according to data obtained by Reuters from energy industry intelligence service Genscape.

The rates for cars, used to transport more than half of North Dakota's crude, are at their lowest in about three years, said Tom Williamson, owner of Transportation Consultants.

"It wasn't that long ago that you couldn't find a car to lease, now I'm getting calls from brokers offering the cars," he said, adding that he has received offers for 1,500 cars since late October.

Amid a shale-drilling boom that has overwhelmed the nation's pipeline network, oil by train traffic has surged at least 42-fold since 2009 to about one million barrels per day. But rail deliveries of petroleum products, including crude and gasoline, grew by less than 1 percent in the week to Jan. 22, among the worst weeks for growth since August of 2011, according to the American Association of Railroads.

Most of the crude on rails comes from North Dakota and heads to the East Coast, where refiners such as Philadelphia Energy Solutions and PBF Energy have spent millions to build new unloading terminals to cash in on the wide discount that the U.S. benchmark, WTI, offered against Brent, the global benchmark.

IMPORTS COMEBACK

Tumbling world crude prices, however, made it harder for shale producers to offer big discounts and the spread between the two benchmarks, which was as wide as $28 in 2011, has narrowed to less than $5 last Friday.

"At $90, they could discount their crude and remain profitable," said Taylor Robinson, president of PLG Consulting, a Chicago-based firm that advises rail carriers on crude logistics. "That won't work now."

Shrinking margins made importing crude via sea an attractive alternative again to shipping domestic oil by rail, given lower costs of sea transport.

The Philadelphia harbor is brimming with crude imports these days, including deliveries from African producers such as Cameroon and Algeria that were crowded out by U.S.crude, and increased shipments from Canada, according to the U.S. Energy Information Administration and customs data reviewed by Reuters and available via Thomson Reuters Eikon's Crude Oil Flows system.

The latest weekly Genscape data shows crude rail deliveries to East Coast refineries were down significantly.

As a result, the spot market for rail cars has all but dried up, prompting their owners to park about 15 unit trains in a Midwest facility until demand picks up, according to several industry insiders. The actual number of trains sidelined or converted for other uses is much higher, especially if Canada is included, sources said.

One trader said brokers were offering cars at spot rates of as little as $500 a month compared with $4,000 a year ago.

The slump comes while manufacturers are still working through orders for new cars that were placed during the surge in traffic. At the end of December, the backlog stood at 142,837 units, according to the Railway Supply Institute data, released Thursday.

New freight-car orders, however, fell percent to 37,431 in the fourth quarter, down 13 percent from last year's highs, the data showed. Macquarie estimates that new orders for tank cars will drop by 70 percent this year.

Greenbrier Companies Chief Executive William Furman told analysts last month that a small company inquired about cancelling an order, but he said orders were "not cancelable."

"There's going to be people out there with new cars but nowhere to ship them," Williamson said. (Reporting By Jarrett Renshaw; Editing by Jessica Resnick-Ault and Tomasz Janowski)

http://uk.reuters.com/article/2015/02/02/oil-railway-tankcars-idUKL1N0V92A320150202

Do you like this post?

Showing 2 reactions


@PAUSEnergy tweeted this page. 2015-02-02 23:22:25 -0500
PAUSE, People of Albany United for Safe Energy posted about US oil railcar market collapses as foreign crude makes comeback on PAUSE, People of Albany United for Safe Energy's Facebook page 2015-02-02 23:22:25 -0500
US oil railcar market collapses as foreign crude makes comeback
PAUSE, People of Albany United for Safe Energy
PAUSE works to promote safe, sustainable energy and environmental justice.  We aim to engage the greater public to stop the fossil fuel industry's assault on the people of Albany and our environment.