Wednesday , 21 February 2024

How Will Sub-$10/barrel Brent-WTI Spread Affect the Crude-by-Rail Boom?

After almost three years of churning bumper profits from the massive price gapoil-well-300x225 between the world’s two most actively traded crude oil contracts, traders, refiners, railways and investors are all asking the same question: Is the Brent-WTI spread game finally coming to a close?

So writes David Sheppard ( in his original article* entitled Analysis: Collapse in Brent-WTI oil spread spooks refiners, railway.

(NOTE: This post is presented by  Lorimer Wilson, editor of and and the free Intelligence Report newsletter (see sample hereregister here). The article may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read.
Submit your own articles & article suggestions here (earn a “Hat Tip” acknowledgement) for posting consideration. Follow the munKNEE” daily posts via Twitter or Facebook. These paragraphs must be included in any article re-posting to avoid copyright infringement.)

Sheppard goes on to say:

“The near $20 premium North Sea Brent held for much of 2012 over U.S. benchmark West Texas Intermediate (WTI) has fallen to less than $8 a barrel, the lowest since the crude-by-rail boom began to gather steam in early 2011.

The collapse in what oil traders call the Brent-WTI spread could now threaten the vast investments made by rail and refining companies to try and move lower priced crudes to higher priced markets, as the key spread trades far below the $10-$15 a barrel level many based their business plans on.

The spread has narrowed as traders bet increased pipeline capacity will help move crude to the Gulf Coast in the second half of this year.

In earning calls over the last three weeks, analysts and investors have hounded refining and rail executives with questions about what a collapse in Brent-WTI could mean for their bottom line. Most executives were unbowed, arguing a “short-term” move in the spread wasn’t going to slow them down, even as oil future prices suggest it could stay below $10 a barrel for the rest of the year.

The issue, they say, is not that the game is over, but that the rules have changed. As the pipeline bottleneck that separated WTI’s delivery point in Cushing, Oklahoma, from the Brent-dominated global marketplace starts to ease, the Brent-WTI spread is no longer a particularly accurate reflection of the cost of moving crude to the coasts.

Instead, the oil industry now has dozens of new rail terminals and thousands of tank rail cars that can carry more than 1 million barrels a day of crude to every corner of the United States. It costs more to ship oil by rail than by pipeline and each rail route has its own costs and potential profits. For traders and investors, however, the opaque nature of the crude-by-rail business makes it difficult to know who is still on the winning side of the trade.

“At the moment, the publicly available prices we can see suggest that sending crude from the Bakken to the East Coast isn’t particularly profitable for refiners,” said David Kennedy, co-founder of Rail Solutions LLC in Jacksonville Beach, Florida, who has advised a number of rail and refining companies on how best to move crude from the Midwest to the coasts.

“What we can’t see, of course, is the kind of long-term supply deals the refiners have in place, which probably ensure that these deals are still more attractive than they first look. Every deal is different.”

Some major oil producers are already ringing alarm bells for the rail companies though. Continental Resources (CLR.N), the biggest oil producer in the Bakken, who ships 80 percent of its crude by rail, said on its first quarter earnings call on Thursday that “we will need to see rail carriers reduce their costs to stay competitive”.

So far, the evidence indicates that the trains will keep running, at least in the medium-term. Rail traffic data from the Association of American railroads show U.S. oil shipments in the week to May 4 were up more than 50 percent on the same time last year.

Energy industry intelligence service Genscape, which monitors almost 90 percent of all rail loadings from North Dakota’s Bakken shale fields, said crude-by-rail shipments from the state increased to near 550,000 barrels per day in the week ended May 3, a 20 percent increase from the previous week.

Part of the reason is that firms have signed up to long-term “take or pay” agreements to get quick access to the rail network, which mean they must continue to pay the transport costs whether they decide to ship the oil or not.

The lighter quality of many U.S. shale crudes also provide further incentives for refiners on the East and West coasts, as basic plants can produce more gasoline and diesel than from imported crudes like Brent.

“Even if the spreads get to some narrow low single-digit numbers, there are still value propositions for crude-by-rail,” said Eric L. Butler, Executive Vice President of Marketing and Sales for Union Pacific Corp (UNP.N) on the firm’s first quarter earnings call in April.

While existing projects may keep running, new proposals for expanding the crude-by-rail infrastructure could now be put on hold, analysts said.

“There’s no panic, but the crude-by-rail build out that we’ve seen is probably in a later stage of its development than many investors realize,” said Bradley Olsen, director of midstream research at Tudor, Pickering, Holt & Co. in Houston.

“You could shut the majority of crude-by-rail projects down tomorrow and they still would have been good investments. They were designed to make their money back in a very short time frame.”

The projects most at risk could be those that will still rely on water-borne barges to ship crude the final few miles into a refinery, adding additional costs of around $2-$3 a barrel.

Hunter Harrison, CEO of Canadian Pacific (CP.TO), Canada’s second largest rail company, said on the firm’s quarterly earnings call at the end of the April that the firm was now proceeding “cautiously” with crude-by-rail infrastructure projects.

“We’re not going to go out and spend capital and build infrastructure that’s going to last 40 or 45 years, when we’re not so sure about the markets for five or six,” Harrison said.


While many refining executives say they expect to continue to have access to cheap crude, oil future prices stretching all the way to next summer suggest a sub-$10 a barrel Brent-WTI spread could be here to stay. On Thursday afternoon in New York, the spread for May 2014 was near $8 a barrel, having traded above $14 a barrel as recently as February.

If WTI prices continue to move back toward Brent as pipelines come onstream, other inland crudes that remain reliant on rail to get to market will increasing trade at a discount to WTI, traders and analysts said.

Already Bakken crude prices at Clearbrook, Minnesota, which aren’t traded on an exchange, have slipped to about $90 a barrel or around $5.50 below WTI and $13 below Brent, and could have further to fall. At the start of May Bakken crude was just $1 below WTI.

“Bakken crudes should start to price at bigger differentials to make crude-by-rail to the coasts economically viable, said Sandy Fielden, an analyst at RBN Energy in Austin, Texas.

“Ultimately, the competition is occurring at the refinery gate. Refiners will push the price of Bakken lower if taking it isn’t worth their while.”

(Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

HAT TIP to Mary L


Related Articles:

1. The U.S. NEEDS the Keystone XL (Oil Sands) Pipeline – Here’s Why

Canadian oil sands production is set to double by 2020, and new markets must be found for this oil….Below is an infographic presenting a crash course in the need for, problems with, and benefits of, building the Keystone XL pipeline from Alberta through the American midwest to the refineries in Texas. Read More »

2. This Map Shows Where Each US Region Gets Its Oil Imports

The United States imported about 40 percent of its oil in 2012. So where are we getting it from? It depends a lot on where you live. [This article presents a map showing U.S. crude oil imports by country of origin for 2012 with commentary on regional particulars.] Read More »

3. U.S. Is NOT Going to Become Energy Independent – Period! Here are 3 Reasons Why

The United States is not going to become energy independent because of tight oil. Period. Reports to the contrary are an illusion of U.S. energy independence based on unrealistic assumptions and projections about the long-term potential of oil production from tight formations like the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas. There are several compelling reasons for this [as outlined below]. Words: 575

4. Brent vs. West Texas Intermediate Crude Oil: What’s the Diff?

We use crude oil for everything from running our cars to making plastic. The need for oil causes conflicts and gives power to those countries that have an abundance of it. Taking all this into account, not too many of us actually know how it’s priced. A lot of us hear how much it costs per barrel or get mad when prices go up at the pump but what’s the method behind the madness? Hopefully, I can shed a little light on the process. Words: 790

5. Canada’s Oil Sands to Have $520 Billion Impact on U.S. Economy: Here Are the Facts, State by State

Canada is the largest supplier of oil to the U.S. When the U.S. imports oil from Canada, the spin-off economic benefits are substantial. The interactive map of the U.S. below will let you calculate the economic impact generated in each U.S. state from new oil sands projects in Alberta, Canada. Words: 592

6. A Look at the Canadian Oil Sands: the U.S.’s #1 Source of Supply

The third largest source of oil in the world is the Canadian oil sands and the United States already imports more of it from there than from anywhere else. With oil prices on the rise, the controversial oil sands are likely to become even more economically viable, despite experts’ warnings about environmental risks [and the political and environmental gamesmanship to block the Keystone pipeline project from there to refining facilities in the U.S.]. Below are 12 incredible facts about the oil sands. Words: 408

7. Canadian Oil Sands: World’s Single Largest Petroleum Resource and…

The Canadian oil sands are the world’s single largest petroleum resource at 1.7 trillion barrels. With conventional oil supply decreasing, heavy oil projects such as the oil sands become more attractive economically to meet the needs of growing demand. While environmental concerns about the oil sands remain, the options for plentiful, cost efficient, and clean oil sources are limited.

8. The Oil Sands are NOT the “Tar” Sands and 9 More Interesting Facts

The oil sands in northern Alberta are crucially important to the Canadian economy. People from all over the country are traveling there to find work. The news is filled with controversy over proposed pipelines (the Keystone XL and the Northern Gateway) to carry the oil to export markets. Here are 10 things everyone should know about the oil sands. Words: 878

9. These 10 Charts Should Put Your Mind at Ease Regarding Canada’s Oil Sands

The following charts come straight from the Canadian Association of Petroleum Producers in an attempt to put the benefits and impact of Alberta, Canada’s oil sands into proper perspective from their point of view. Take a look and I think you will be favourably impressed. Words: 540

10. Crude Oil Supply, Demand and Price Projections are Flawed – Here’s Why

When it comes to the future of oil, there is much speculation, but little hard analysis. You have the official line from the IEA that has oil prices stopping their abrupt rise and creeping up at a comfortable pace for the next 25 years. You have peak oilers shouting that we’ve run out of oil and the end is near. [Let’s take an indepth] look at the various models and forecasts [and determine] what is logical, what is wild speculation, and what you should expect for oil prices in the coming years. Words: 1410