Low crude prices and narrowing price spreads have persisted to cause the once-burgeoning U.S. crude-by-rail industry to slow considerably, but the unfavorable rail economics have led to the growth of a new market: loaded and unloaded crude tank-car storage.
Declining demand for shale crude shipped on rail recently left some companies with a surplus of tank-cars, which have been stored due to a lack of leasing or buying interest, tank-car sources said.
“For a lot of people, it just makes more sense to park (the tank-cars) and write them off as a non-used asset,” one source said.
Storage rates for unloaded hazardous tank-cars vary by region and length of time, but currently the majority are priced in the $5 to $9 per car per day range, the source said. A standard timeframe for a storage lease agreement is three to six months, he said. The in and out switch fees also differ by region, but typically run from $100 to $350 per car.
Rates are more expensive to store tank-cars loaded with crude due to the higher risk involved in storing loaded tank-cars and extra measures required, such as increased security at the rail-yard.
Storing crude in tank-cars is a recent play that some market participants are using to try to take advantage of the current contango price structure of the NYMEX light sweet crude contract of about $3/bbl between the April and June contracts. This is also advantageous as crude stock tanks fill across the country because off ample supplies.
“People are looking to store (tank-cars) wherever they can put them,” a source said. “Companies looking for loaded storage will go anywhere since not many offer it, and it can get expensive.”
Loaded storage is currently being offered in Snowflake, AZ, at $11/day per car, $7/day per car in Tennessee and as pricey as $52/day per car in Cedar Rapids, IA.
Taking into account several factors, including 725 bbls in a rail-car, it would cost roughly $1.49/bbl to store a car with crude in Snowflake during the month of April. The monthly storage fee would be close to $0.45/bbl, the monthly tank-car leasing rate would be about $0.48/bbl and the price also includes an In/Out charge, or the cost to park the tank-car and remove it from the storage yard, of about $400.
The total storage cost per barrel during May would be close to $0.93/bbl with the absence of the in/out fee. The total two-month storage price would equate to close to $2.42/bbl. The rail-car storage fees does not include the cost to rail the crude to or from a storage yard.
If that same car was taken out of storage in June, it stands to reason that the crude that was held in the tank would increase in value by about $3/bbl, due to the contango market of West Texas intermediate crudes, which most other crudes use as a pricing basis. This means the storage play would be about $0.50/bbl profitable.
Instead of storing crude in a rail-car, another option is to send it on rail to coastal refineries. But, narrow price spreads and competing foreign imports have made that option less profitable. For example, railing crude to the U.S. East Coast from North Dakota would be uneconomic, considering the freight for a unit train costs on average about $10.50/bbl without fees, according to Genscape.
Crude-by-rail loadings decrease
Almost as quickly as the crude-by-rail phenomenon grew in recent years – leading to a backlog of crude tank-car orders as refiners on the coasts sought to rail in as much shale crude as possible – overproduction globally caused crude prices to plummet and arbitrage spreads to crash.
Higher global crude production – with the shale revolution in the United States contributing – caused crude prices to tumble, as domestic benchmark West Texas Intermediate fell from over $100/bbl in early 2014 to the mid-$20s/bbl range in February.
The collapse in crude prices resulted in narrower key pricing spreads that refiners on the coasts utilized in order to decide whether it was more advantageous to rail-in domestic shale barrels or look for foreign waterborne sources for their crude.
The spread between the Cushing, OK-based NYMEX crude contract and the international ICE Brent crude contracts narrowed from nearly $15/bbl at the beginning of January 2014 – a disparity which encouraged refiners to rail Bakken across the country – to under $1/bbl in early March. The spread flipped to a WTI premium over Brent in mid-January for a brief time before reverting back.
As the NYMEX crude/ICE Brent spread has narrowed, crude-by-rail has slowed as the spot market for rail-delivered crude dissipated and crude tank-car loadings tumbled. Most of the crude currently being shipped from North Dakota are a result of contract deals done when economics were more favorable, sources said.
During February 2016, crude loadings at the 12 Genscape-monitored rail terminals in North Dakota averaged about 347,000 bpd, down from 551,000 bpd in January 2014.
With little demand for railed crude, demand for crude tank-cars fell, as well, causing short-term leasing rates to decline to their lowest in years, according to sources.
Genscape assessed unheated 30,000-gallon and 31,800-gallon rail-cars on March 8, 2016, at $300/month and $350/month, respectively, for six- to 12-month leases. The heated coiled and insulated 29,000-gallon cars were assessed at $375/month.
In October 2014, the going markets for all three tank-cars were over $2000/month, according to Genscape’s assessments.
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