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Riding the rails

Idle cars are giving some traders a place to store their oil

Think of American railcars and a freight train snaking across the Prairie or a commuter link into Penn Station will come to mind. These days, many of them are stationary – and they’re holding oil.

“A lot of the conventional land storage tanks are full,” says Dennis Hoskins, managing partner at Energy Midstream, an oil-trading firm. So dumping crude in train cars is an answer. Interest in it is “spiking”, says Hoskins. “We’ve got some quantities stored in a railcar at the moment, which we’re looking to move and sell but it’s definitely something we would look at doing again.” Unable to access conventional storage, some of his firm’s oil is sitting on train lines in Ohio’s Utica region.

But Energy Midstream is part of a broader trend. As US crude inventories have brimmed close to capacity over the past year, traders have grown creative, hunting down whatever liquid container they can find. BP’s chief executive Bob Dudley joked in a recent speech that by mid-2016 “every storage tank and swimming pool in the world will be filled with oil”.

In January, US crude stocks soared to their highest levels since the great depression – and have continued to build since. By March, the total commercial crude stocks were almost 522m barrels, or 74m barrels more than in the same period last year.

The key storage hub at Cushing, Oklahoma, the delivery point for crude trade on Nymex, can now be considered full. For the week ending 4 March it held 66.95m barrels, or 80% of operational capacity.

Seven operators at Cushing have gorged on any available space, according to Genscape, a market intelligence firm. Between them they hold 31.184m barrels of operational capacity there, with less than 5m more available.

The same story holds elsewhere in the US. Gulf Coast crude stocks reached 264.3m barrels at the end of February – their highest level since records began in the early 1990s.

Hence the railcars. Hoskins says an abundance of cars for rent has now emerged to meet the demand, mainly around the US Gulf, the Bakken in North Dakota, Houston and St James in Louisiana. Ironically, it is the slowdown in US production – combined with the addition of new pipelines – that has freed up this capacity. Not as much oil needs to be shipped by rail from the Bakken to the US Gulf these days, leaving thousands of empty cars in places like Idaho and Chicago.

Working on the railroad

It’s not a bad option for some traders craving somewhere to stash their liquid. At the height of the production boom two years ago, leasing a railcar to ship oil cost about $2,500 a month. Hoskins says some owners are now offering cars for just $300.

A typical railcar holds around 700 barrels of crude, so the offer is tempting. A $350 car would equate to storage costs of around $0.50 a barrel per month. That’s about the best rate that could be had in a conventional land tank in the US, though prices go up to as much as $1.30/b per month.

But it’s not quite that simple. Parking the railcars will incur extra charges. Some worry about the safety of the practice too. Rail owners don’t like the liability. “A railcar isn’t designed to store crude for a very long time,” says Hoskins.

Nonetheless, other rail businesses say interest is rising. Khory Ramage is president of Ironhorse Energy Partners, which owns a terminal in the Permian basin where his firm transfers crude, frack sand and other commodities from trucks to railcars. “We’ve seen an uptick in demand to store crude in railcars as US storage demand is growing and some guys already have fixed costs on leases and see it as a way to store crude and take it out at a later date,” he says. “It’s a way for them to use their hedging strategy and have a place where the crude is easily available when they need it.”

Many of the enquiries he gets are for short periods, suggesting the market doesn’t yet see this as a long-term solution to the storage problem. Some potential clients have wanted to store their oil for as little as a month at a time, says Ramage.

The fees for holding the cars is a key factor, says Ernie Barsamian, chief executive of The Tank Tiger, a New Jersey-based crude storage broker. In the Midwest, around 20,000 railcars could be made available. That yields storage capacity of around 10m-15m barrels. But some track owners can charge up to $100 per day to park the cars, Barsamian says.

This fairly limited capacity, along with the ever-changing market conditions, will limit the amount of crude stored in railcars around the US over the longer-term, he says. “What you pay for the railcar is determined by the market. What you pay for storing the car somewhere is the variant,” Barsamian explains. “If someone will give you a good deal on the short-lease storage costs, and the crude you’re buying is deeply discounted, it could work.”

But risk-free it isn’t. The railcars could catch fire, or leak oil crude gases could escape into the air. As much as railcar owners want to make money on their idle units, that risky potion is enough to deter some of them.

For the traders, though, needs must. “It’s one of the last resorts for people – but there is a market in it,” Ramage says. Just not a long-term one. Rail will be the first storage play to disappear when stocks draw down, he says.

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