With lower volumes of crude oil being shipped from the Midwest to the East Coast, the major consuming region has seen an uptick in imports. The decline in shipments out of the Midwest, primarily from the Bakken fields in North Dakota and Montana, has stemmed from two key factors—tighter spreads between U.S. crudes and international prices, and lower domestic production. There has also been a fall in crude by rail to the Gulf Coast, which is in large part due to increased pipeline capacity to move supply from the Midwest to the country’s prime refining center.
With lower volumes of crude oil being shipped from the Midwest to the East Coast, the major consuming region has seen an uptick in imports.
Shipments of crude by rail from the Midwest to the East Coast reached a peak in the second quarter of 2015 at just above .45 million barrels per day (mbd), but have fallen since then. In November, volumes dropped to just .26 mbd, the lowest level in more than two years, before rebounding slightly in December, according to the Energy Information Administration (EIA).
In fact, the total amount of crude on railroads in the U.S. reached 1.13 mbd in January of last year, but sank to .72 mbd by the end of 2015. With price differentials remaining tight, shale output falling, and increased pipeline capacity from the Midwest to the Gulf Coast, expect the amount shipped by tank cars to fall even more—and to be accompanied by increases in oil imports.
While Bakken output declined last year, the fall was relatively modest at 86,000 b/d, meaning rail economics have played a bigger factor than lost production in cutting back on crude by rail shipments.
While Bakken output declined last year, the fall was relatively modest at 86,000 b/d, meaning rail economics have played a bigger factor than lost production in cutting back on crude by rail shipments. The discount for Midwest crudes like those produced in the Bakken need to trade at a substantial discount to European marker Brent to make it economic to ship by rail for East Coast refiners. From 2011 through 2014, U.S. benchmark West Texas Intermediate (which tends to trade at a higher price than Bakken) sold at a large discount to Brent. That discount, sometimes at more than $20 per barrel, incentivized shipping by rail. But last year, the spread narrowed considerably, and at times WTI was above Brent, significantly undermining the economics of rail. Right now, the Brent May contract is only about 80 cents above the same month for WTI. On the Gulf Coast, Light Louisiana Sweet, a waterborne crude, is trading about $1 above Brent, making imports competitive with domestic crudes.
Bump in crude imports
With crude by rail to the East Coast falling throughout last year, imports picked up. For the fourth quarter, U.S. crude oil imports to the East Coast averaged .70 mbd, up from .61 mbd for the same time the previous year, and higher than the .57 mbd in Q4 2013. Imported volumes have increased even more in 2016. In January and February, based on preliminary data from the EIA, imports averaged .83 mbd and .92 mbd, respectively.
For all of 2015, imports to the East Coast were .65 mbd, flat with the previous year, leveling off after declining for nine straight years. The 2015 average is nowhere near the peak of 1.60 mbd in 2005, but recent data show that energy security gains have stalled, and could reverse course.
The biggest suppliers to the East Coast, benefitting from the shifting economics of U.S. rail, have been Canada, Nigeria, Colombia, and Saudi Arabia, while Angola has remained a steady supplier.
Future of crude by rail
Despite the decline of volumes on the tracks and controversies surrounding safety, crude shipped via rail is here to stay, given there isn’t currently pipeline capacity to move supplies from the prolific Bakken plays to the coasts.
While the decline in crude by rail is worrisome since it has led to an increase in imports, it does have some benefits. For instance, the massive uptick in crude tankers had brought about railroad congestion. Furthermore, there has been a string of crude-by-rail accidents, with derailments leading to explosions and spills. In Lac-Mégantic, Quebec, a crude-by-rail accident in July 2013 led to the death of 47 people. Local governments have seen opposition to rail going through their towns. Last year, the Department of Transportation (DOT) implemented stricter safety standards for America’s crude-oil railcars, but concerns have persisted that the new regulations don’t go far enough.
Despite the decline of volumes on the tracks and controversies surrounding safety, crude shipped via rail is here to stay, given there isn’t currently pipeline capacity to move supplies from the prolific Bakken to the coasts. The amount of crude sent by rail will likely be as volatile as the oil price itself. “Future crude-by-rail flows from the Midwest to the coasts will depend on the price dynamic between domestic and international crudes, as well as any long-term contractual volume commitments made by refiners,” said the EIA.