Houston Chronicle Sunday

Over­flow­ing oil tankers are caus­ing traders to eye rail cars

- By Sheela Tobben and Robert Tut­tle

Oil com­pa­nies are turn­ing to rail cars to stash the crude they can’t sell as the world runs out of places to store a grow­ing glut of cheap bar­rels.

North Amer­i­can pro­duc­ers, re­fin­ers and traders are now look­ing to store ex­cess oil in rail yards in Texas, Saskatchew­an and Man­i­toba amid the crude mar­ket’s his­toric plunge and col­laps­ing de­mand, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter.

With oil for May de­liv­ery trad­ing at a steep dis­count to fu­ture months — a struc­ture known as con­tango — more firms are hoard­ing bar­rels rather than sell at a loss. But crude tanks and su­per­tankers are fill­ing up fast, with the world pro­jected to run out of stor­age space by the mid­dle of the year, ac­cord­ing to the con­sult­ing and re­search firm IHS Markit.

In Canada, tank tops could be breached within two to three weeks, Gold­man Sachs Group said, while U.S. stock­piles last week rose for the 10th week, in­creas­ing by the most in three years.

“Rail cer­tainly is an eco­nomic op­tion to store crude while the con­tango is at his­toric lev­els,” said Sandy Fielden, direc­tor of re­search for Morn­ingstar, a fi­nan­cial re­search firm. “A trader has to mit­i­gate risks as­so­ci­ated with qual­ity and lo­ca­tion be­cause rail yards may not be lo­cated in ma­jor oil trad­ing hubs.”

A decade ago, trans­port­ing crude by rail was rare, while stow­ing oil in a tank car was vir­tu­ally un­heard of. But as the shale boom un­leashed record vol­umes of crude, over­whelm­ing pipe­line ca­pac­ity, pro­duc­ers have in­creas­ingly come to rely on rail to move bar­rels from one point to an­other. Now, crude-byrail ser­vice providers and ter­mi­nal op­er­a­tors are field­ing in­quiries about leas­ing cars for stor­age.

The sit­u­a­tion is par­tic­u­larly dire in the land­locked Cana­dian province of Al­berta, where lo­cal heavy crude is trad­ing at less than $10 a bar­rel, ac­cord­ing to NE2 Group. In some parts of the U.S., prices for phys­i­cal bar­rels have gone neg­a­tive.

Al­though no con­tracts are fi­nal­ized, some com­pa­nies have in­quired about us­ing the cars for 3 months to a year, said the peo­ple, who asked to re­main anony­mous be­cause the talks are pri­vate.

The last time rail cars were used to store crude was dur­ing the 2016 price rout when the mar­ket struc­ture was sim­i­larly bear­ish, ac­cord­ing to Ernie Barsamian, chief ex­ec­u­tive of­fi­cer of The Tank Tiger, a ter­mi­nal stor­age clear­ing­house.

Leas­ing costs have de­clined from around $1,200 a few months ago to less than $700 now, as de­mand for ship­ping crude has dwin­dled amid the price rout, the peo­ple said.

Stor­ing a loaded rail car would cost $300 to $450 a month, putting the to­tal bill at around $1.50 a bar­rel per month, Barsamian said.

But crude-laden tank cars can’t be stored just any­where. In the U.S., they can only be stashed on pri­vate tracks due to Fed­eral Rail­road Ad­min­is­tra­tion rules gov­ern­ing haz­ardous ma­te­ri­als. Rail yards must also be equipped with ad­di­tional se­cu­rity and ad­e­quate fire pro­tec­tion equip­ment, said one per­son.

Un­der proper con­di­tions, rail cars are a safe al­ter­na­tive to more con­ven­tional modes of stor­age. But get­ting large vol­umes of oil to rail yards raises con­cerns about leaks and spills, ac­cord­ing Jared Mar­go­lis, a se­nior at­tor­ney at the Cen­ter for Bi­o­log­i­cal Di­ver­sity.

“That’s the big risk,” he said. “Mov­ing it around in or­der to store it.”

 ?? Bob Owen / San An­to­nio Ex­press-News ?? The oil glut has traders turn­ing to rail cars to store crude.
Bob Owen / San An­to­nio Ex­press-News The oil glut has traders turn­ing to rail cars to store crude.

Newspapers in English

Newspapers from USA