Additional oil pipeline capacity in the Bakken and Gulf regions are making crude transport on railways less of an attractive option in the short term, according to an analysis by Jason Seidl of Cowen and Co.
“The couple of years when a significant arbitrage existed unveiled to shippers the many benefits of using the railroads to move crude. The result is that many shippers now appear convinced that rail should continue to be an important transportation option regardless of the arbitrage or the lack thereof,” he wrote in a report. “That said, the narrow price differentials are putting a damper on spot crude shipments on rail in the near term.”
He noted the limited pipeline options along the U.S. East and West coasts make rail transportation a better option in those areas.
In the long term, however, Seidl thinks rail will continue to play an important role in crude transportation, as production outpaces pipeline capacity.
“While sufficient pipeline capacity is expected to come online by 2016, we think rail volumes will continue to grow moderately over the next few years despite pipelines taking back some market share, mostly Gulf Coast destinations,” he said. “We note the all-in cost of rail remains competitive with pipeline options, without having to make long-term volumes commitments, a positive for oil producers.” - Jon Ross