Crude-by-rail profits fall as WTI-Brent narrows
Comment of the Day

July 12 2013

Commentary by Eoin Treacy

Crude-by-rail profits fall as WTI-Brent narrows

Thanks to a subscriber for this interesting article from Bloomberg but posted in the Financial Post which may be of interest to subscribers. Here is a section
Refineries in the eastern U.S. and Canada that traditionally buy more-costly foreign crudes have benefited from burgeoning output from North Dakota, where prices have been as much as $48 a barrel cheaper than oil priced off North Sea Brent, more than enough to cover the cost of rail shipments.

The gap between West Texas Intermediate at the U.S. storage hub in Cushing, Oklahoma, and Brent has shrunk by 59% this month, making it more profitable to move oil to the central U.S. on pipelines than to the coasts via railroad. Concern that rail shipments are less safe than pipeline intensified after a train carrying Bakken crude to a refinery in eastern Canada derailed and exploded July 6, killing at least 15 people.

“Because WTI and Brent spreads are narrowing, the economic attractiveness of sending barrels of crude by rail to various trading points has narrowed significantly,” said Graham Brisben, chief executive of PLG Consulting, a Chicago logistics consulting company. “Once that spread is consumed by the additional cost of rail,” shippers are more likely to use pipelines, he said.

Eoin Treacy's view The Quebec accident has refocused attention on the oil by rail sector. However, as the above article points out, the relative attractiveness of the sector for oil shippers will be more influenced by the internal dynamics of the oil market. The contracting spread between Brent and WTI crudes is notable but the backwardation in both contracts also highlights near-term demand for these commodities.

The Dow Jones Transports Average experienced a powerful breakout between January and mid March when it lost momentum. The Average found support three weeks ago in the region of the 200-day MA, and the psychological 6000, and a sustained move below that level would be the minimum required to question potential for continued higher to lateral ranging.

The pace of Union Pacific's advance picked up from April before pausing near $160 over the last six weeks. It posted a new high today and while somewhat overbought, a sustained move below the 200-day MA would be required to question medium-term upside potential.

Canadian National Railway, Canadian Pacific Railway, Kansas City Southern and Genesee & Wyo Inc have all been ranging since April but bounced from the region of their respective 200-day MAs over the last three weeks.

CSX Corp and Norfolk Southern have been mostly rangebound since 2011. They both pulled back from their respective upper boundaries but found support three weeks ago in the region of their 200-day MAs.

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