Average weekly crude loadings at North Dakota rail terminals fell to about 215,000 bpd last week, the lowest level since crude-by-rail volumes ramped up in the state along with Bakken shale production several years ago, according to Genscape.
Rail volumes are poised to fall further, sources said.
Loadings were 511,107 bpd during the same week last year and have declined since after the startup of additional takeaway crude pipelines from North Dakota and sustained unfavorable crude-by-rail economics, according to Genscape.
More recently, North Dakota road closures due to heavy rains have affected truck deliveries of crude to many rail terminals, a source said.
For the week ending April 22, 2016, average North Dakota crude-by-rail volumes declined for the fourth straight week, down 36,823 bpd from the week prior. There were fewer loadings at five of the 13 monitored terminals, while four of the terminals loaded no trains.
Going forward, the utilization of the North Dakota crude-by-rail capacity will depend on crude price arbitrage opportunities for refiners, according to Justin Kringstad, director of the North Dakota Pipeline Authority.
“I have had many discussions about the long-term future for rail in North Dakota. They all come back to market conditions and pipeline and water access to East and West coast markets,” he said. “If the [Benchmark Brent-WTI crude price] spread is low, pipeline space is available, and the barrel is not committed somewhere, it will likely take the pipeline option.”
If the spread widens, it is “tough to say” if Bakken crude shippers would chose rail over pipeline, he said.
The Brent-WTI spread, which is the leading indicator of moving crude on rail from North Dakota to coastal markets, has narrowed from close to $8/bbl during the week ending April 24, 2015 to about $2/bbl on Thursday.
In addition, lower North Dakota production has tapered rail volumes. Trade sources have said that the declining production is having an effect in the Bakken price market, as crude supplies on offer in the market dry up.
“I think June [trading] is going to get very tight, and I want some length to sell extra from what we produce,” one source said, noting that the company’s supply was dwindling.
The weight of low crude prices is expected to result in lower production in North Dakota, according to Genscape’s Spring Rock. The state’s crude output is expected to tumble to 915,000 bpd by May 2017. In February, production was 1.118mn bpd, according to the most recent North Dakota Minerals Resources Department data. That production was down from 1.179mn bpd in February 2015. Meanwhile, pipeline and local refinery capacity increased to 848,000 bpd during that that timeframe, including with the construction of Kinder Morgan’s 100,000 bpd Double H pipeline.
In addition to fewer barrels available to producers, additional pipeline takeaway capacity is also expected to take a bigger bite of crude-by-rail volumes. Energy Transfer Partners’ 450,000 bpd Dakota Access crude pipeline is slated to be online by end 2016.
“[Rail volumes] will be steady right up until [Dakota Access comes online],” a source said. “After that, I don’t see much of a need [for rail] – there might be a market, but not a need.”
The shift to sending North Dakota crude on pipelines instead of rail came as after global crude prices plummeted and the WTI-Brent spread narrowed. Many coastal refiners began to seek more foreign waterborne.
In February 2016, 51 percent of crude exported from North Dakota did so via pipeline, while 41 percent was shipped by rail, according to the latest data available from the North Dakota Pipeline Authority. In February 2015, 53 percent of crude moved by rail and 40 percent on pipeline. At its peak, 75 percent of North Dakota production moved by rail, in April 2013.
As crude production in North Dakota expanded rapidly, pipeline infrastructure initially struggled to keep up, leaving a window of opportunity for rail terminals to send barrels. When Bakken production crossed the 1.2mn bpd mark in September 2014, takeaway pipeline and local refinery capacity could consume only about 693,000 bpd of the output, according to Genscape.
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