OIL DROP HITS RAILROADS
Slowdown bigger than anticipated
The slowdown that North American railroad companies had been bracing for in crude oil shipments has turned into a rout, with volumes falling faster than executives had predicted.
With energy companies scaling back drilling after prices for the commodity fell about 50 per cent since July, industry executives and analysts anticipated that demand for hauling crude and extraction materials such as frac sand and pipes would slow after a four-year surge. They didn’t expect it to slow this much this fast.
“The impact is occurring more quickly than the rails originally projected to investors,” said Matt Troy, an analyst with Nomura Securities International Inc. in New York. “The consensus view was that very high double-digit growth would moderate to low double digits, and as we have seen in recent weeks we’ve broken that floor and in some cases gone negative.”
Rail stocks and tank-car leasing are reflecting the dwindling traffic. The Standard & Poor’s 500 Railroads Index is on course for the biggest weekly decline since September 2012 and lessors’ rates for oil cars have fallen by about a third in the last six months, Cowen & Co. said in a report on Friday.
“We would not be surprised if the downward trend continues as long as oil prices remain depressed,” Jason Seidl, a New-York-based Cowen analyst, said in the report.
As recently as January, companies including CSX Corp. and Ca- nadian Pacific Railway Ltd., were forecasting that even with prices below $50 US a barrel, oil projects already underway would buoy production and keep trains hauling even more crude than last year. Instead carloads of U.S. petroleum products fell 2.8 per cent in the last four weeks after growing 13 per cent last year.
Martin Cej, a spokesman for Canadian Pacific, said in an e-mail his railroad hasn’t changed its forecast of 140,000 crude carloads in 2015. Canadian Pacific posted a 9.1 per cent increase in petroleum product carloads in the last four weeks. That’s down from 16 per cent last year and a third of the railroad’s forecast for a 27 per cent gain in crude only carloads this year.
BNSF Railway Co., the railroad owned by Warren Buffett’s Berkshire Hathaway Inc., posted a 4.5 per cent drop in petroleum products in the last four weeks after a gain of 12.4 per cent last year. BNSF’s network runs through North Dakota, making it the largest hauler of Bakken oil production. Union Pacific Corp., which serves Texas oilfields, saw its carloads plummet 25 per cent in the four-week period.
Demand for Bakken crude from U.S. East Coast refineries may decline as the price premium for imported Brent crude narrows. It costs about $2 to $3 a barrel to ship Brent by boat while hauling Bakken crude by train adds as much as $14 a barrel, PLG’s Robinson said. About 70 per cent of Bakken crude now goes to East Coast refineries, he said.
“My suspicion is that the East Coast is going to get hit with more imports,” Robinson said.