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US crude by rail shipments tumble as oil-price spread narrows

Prices, pipelines and declining production will push volumes even lower

US shipments of crude by rail have almost halved this year due to the narrowing spread between domestic and international crude prices, new pipelines and declining oil production in the Midwest and Gulf Coast.

Between January and May average daily movements of oil by rail tumbled by 45%, compared to the same period in 2015, down to just 443,000 b/d.

On a monthly basis average shipments of crude by rail within the US plunged by 11.86m barrels - over 42% - from the same period a year earlier, down to around 16.2m barrels, according to Energy Information Administration data.

In April US crude shipments by rail fell to a four-year low of 14.57m barrels (around 471,000 barrels a day). That's around half of the 28.35m barrels (0.945 b/d) in the same month last year.

Shipments increased by around 424,000 barrels in May but remain at just half levels seen a year earlier.

Transporting crude by rail has become less appealing for refiners based on the east and west coasts as production from North Dakota's Bakken region has fallen.

Output from the Bakken was almost 250,000 b/d lower in May than a year earlier, at 1.05m b/d.

The drop in domestic output has helped to bolster US crude prices, narrowing the price differential with the international benchmark, Brent. While Brent prices are still at a premium to WTI futures, the spread is just one third of its level a year ago.

In mid- August front-month Brent futures were trading just under $47/b with a $2.50/b premium to the US benchmark WTI. That's down from a Brent-WTI premium of around $6.50/b in September last year when Brent was trading around $57/b.

This narrowing spread has made it cheaper for US refiners based on the country's coastlines to use imported oil rather than to ship volumes of domestically produced crude by rail.

Despite the US lifting its 40-year oil export ban in January, the country's crude imports have surged this year. In May the US imported around 315.7m barrels of crude (10.2m b/d). That's around 24.7m barrels (0.8m b/d) higher than a year earlier.

Ongoing pipeline expansions and improved interconnections with existing pipelines in crude-producing regions such as the Bakken and the Gulf Coast have also caused crude shipments by rail to tumble.

Between 2011 and 2013 shipments sent from the Midwest to the Gulf Coast dominated crude by rail shipments but volumes started to fall in the second half of 2013 as more pipeline capacity was added.

By December 2015 crude-by-rail movements between the two regions had fallen to just 38,000 b/d. That's 75,000 b/d below levels a year earlier.

When the Dakota Access Pipeline Project (DAPP) opens in Q4 this year shipments by rail will plummet further.

When operational the 1,172-mile pipeline will connect western North Dakota to the Energy Transfer Crude Oil Pipeline Project in Patoka, Illinois.

DAPP will then connect to the Nederland and Port Arthur area in Texas where some of the country's largest refiners operate. This will provide US Gulf refiners with an additional source of supply.

DAPP will initially transport around 470,000 b/d of crude but it could ramp up to its full capacity of 0.57m b/d - around half of Bakken crude production.

Earlier this year idle railcars were being used to store US crude as conventional storage facilities neared tank tops.

In January US crude stocks soared to their highest levels since the great depression in January and have continued to climb since.

Commercial crude inventories stood at almost 524m barrels at the beginning of August - around 70m barrels higher than a year earlier.

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