North America - Oil Transport By Rail

Rising prices = rising rig counts

Continued improvements in productivity of drilling techniques seem to make it highly unlikely that imported crude will ever be as significant a part of the U.S. energy mix ever again.

Declining consumption and the doubling of average fuel efficiency standards will seriously bend this curve.

It should be no surprise to anyone following petroleum industry affairs, as obviously the participants at this topic do, that The Times and Journal are on editorial "opposite poles" regarding President Obama's cancellation of the Keystone XL pipeline by refusal to enter into a treaty with Canada to allow the project to move forth:

http://www.nytimes.com/2015/11/07/opini ... lanet.html" onclick="window.open(this.href);return false;

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New York Times wrote:Nearly every mainstream climate scientist has said that a big portion of the fossil fuels now in the ground must remain there if the world is to avoid the worst consequences of global warming. That simple fact lay at the heart of President Obama’s decision on Friday to say no to the Keystone XL oil pipeline from Canada.

The decision, which ends seven years of legal and political wrangling, was correct, on moral as well as scientific grounds. The pipeline, when completed, would have carried about 800,000 barrels of oil a day from tar sands in Alberta, Canada, to refineries on the Gulf Coast.

http://www.wsj.com/articles/the-tombsto ... 1446854203" onclick="window.open(this.href);return false;

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Wall Street Journal wrote:President Obama personally killed the Keystone XL pipeline on Friday, dismissing the project as a mere “symbol” that “has occupied what I, frankly, consider an overinflated role in our political discourse.” The irony is that the pipeline’s benefits would be tangible, while the symbolism and overinflation are entirely political.

A President more invested in the real economy would have long ago welcomed Keystone’s contribution to North American energy development. But on Friday Mr. Obama emerged, seven years into both his Presidency and multiple State Department reviews of the pipeline, to declare that Keystone is not in the national interest of the United States.

This position is—to borrow his phrase—well outside the bipartisan political center. Mr. Obama would have been more honest if he’d admitted that he is bowing to the interests of the green-left fringe and the Democratic donors who oppose all forms of carbon energy.

Absent from either The Times environmental or the Journal's political/economic positions is mention of impact upon the railroad industry; I suppose it would be "too much" to ask either paper to consider such. So for the moment until publications such as Railway Age and TRAINS choose to comment, our collective thoughts will have to suffice.

No question whatever, this action will favorably affect the railroad industry as a whole. Canadian National will be the big winner in that they could keep shipments of Albertan oil on their system (they and their US subsidiary, Grand Trunk) all the way to the Gulf. The Canadian Pacific could also benefit with a "friendly" interchange at Kansas City with KCS (merger, anyone?).

While at present North American oil, with its considerably higher extraction costs, is at a disadvantage with Middle East producers that, led by the Saudis, are engaged in a ruinous price war. While they have recaptured some market share it appears hardly enough to equal their losses from their pricing actions, "they ain't dumb over there" and I believe that they will see the error of their ways in time, allowing North American oil to again compete on the even playing field. Lest we forget, their supply is finite, and when its gone...then what.

Reading Mr. Norman's penultimate paragraph, it occurs to me to wonder whether either newspaper has considered the likelihood (certainty?) that if price and demand come together that oil is not going to remain in the ground in Canada. If economic conditions are favorable that oil (hell, it's not even ours) will be shipped somewhere somehow, to be burned by somebody. In that case, cancellation of the pipeline will indeed be only a symbol.

During McLaughlin Group aired in this market Saturday there is discussion of the Keystone and at about 23:00, McLaughlin notes that there are plenty of trains so who needs the pipeline?

Naturally, the two conservative panelists were addressing "the 40000 jobs" while one Libby was addressing environmental issues and the other organized labor's silence.

http://www.mclaughlin.com/" onclick="window.open(this.href);return false;

Today I observed a tanker train traveling Eastward. Instead of the usual UN1267 placard for Crude Oil, this train was placarded UN1987, Ethanol.

There is always the possibility that the train was carrying Ethanol, but one must wonder if Bakken Crude has been reclassified as this more flammable substance.

So, enquiring mind wants to know.

Possibly an ethanol train? If it's placarded as an ethanol car/train, I'd bet my paycheck that's what it is carrying. You don't just arbitrarily select another category of hazmat that you think more closely matches the hazards of your material. And more importantly, crude oil can be classified as a PG I material (the highest hazard rating for a particular material within Class 3), while ethanol is "only" a PG II.

I would concur with Cowford. It's the packing group that was contested. The UN classification remains the same. That classification is specific to the actual molecule/material not merely to its hazardous characteristics.

Bakken Crude has exceptionally high levels of naptha (precusor to gasoline) and also gas condensates (natural gas and propane precursors). This is what makes it so unusually flammable when compared to other crudes. This is often described as "light" crude. Heavy crudes have far lower concentrations of these "lighter" hydrocarbons and are consequently less flammable.

If a reader of this Wall Street Journal Opinion piece appearing today puts his "railroad hat" on, there should be an "ode to joy"; if a consumer, then "joy at the pump" will not be forever:

http://www.wsj.com/articles/after-the-c ... 1453162664" onclick="window.open(this.href);return false;

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Here’s the big question, the one that makes this cycle different: What happens to shale oil? The jobs and revenues from America’s newest industry literally kept the country out of recession during the years of tepid growth that have characterized the current administration.

The bad news is that there will be more pain to come. Low prices will continue to drive out companies that are overleveraged or poor performers. Stronger firms might suffer collateral damage. In the end, though, most companies will survive. Many will emerge well positioned for the next cycle, having acquired new assets (at distressed costs) that can be deployed as demand rises.

Even with China’s economy slowing, global oil use will still rise by 1.3 million barrels a day this year—equal to the peak daily output of the entire Bakken Shale field. Middle-class automobile ownership in Asia is rising steadily, from today’s average of 60 to 80 cars per 1,000 residents toward the West’s 600 to 800 cars. All the fundamentals point to growing demand for oil.

When prices rise again, even modestly, as they eventually will, shale producers will be ready—and this is what worries OPEC, Russia and Iran. Many foreign producers need oil above $80 a barrel to balance their national budgets. Yet industry experts at RBN Energy foresee vast swaths of American shale profitable at just north of $40 a barrel. And it can come online extremely quickly

disclaimers: author holds long positions CSX UNP; author drove 6270 miles during 2015 in an auto that gets 23.37mpg

Jamie Dimon, CEO of JP Morgan Chase was on CNBC this morning and said that the oil markets have been fundamentally altered by American shale. A comment that I have heard repeated elsewhere in the media. In short a return to the "market based" price has occurred and the OPEC cartel has been broken, more like shattered.

The combined pressures of stable or declining consumption in North America, energy efficiency improvements and new sources of domestic production are indeed an extraordinary story which lead me to believe that we are on the cusp of a great era of economic expansion, fueled as usual by cheap or cheaper energy, this time around in much cleaner forms.

I strongly agree that the picture for railroads is not at all bleak however I think for individual roads its a very mixed bag. Norfolk Southern in particular, with their heritage of N&W coal branches is exceptionally vulnerable to the shift away from coal. CSX may not be far behind but I think overall they are less dependent on coal. The western roads also have significant exposure to coal traffic drops but their intermodal business lines generally seem stronger.

I think this does leave shale oil and its railroad transporters in an interesting position. With the return of Iranian production to the markets in very substantial volumes I think we are going to continue to see downward pressure on oil prices per barrel for some time to come. At this point the downward pressures are so significant that I think oil below $10/barrel is not at all inconceivable. This points to an extended hibernation ("winter is coming") for shale oil producers in North America, but when the time does come I agree that they will indeed be prepared to come roaring back and this is what is going to hurt the Middle Eastern producers so much.

In the meantime as the benefits of cheap energy trickle down through the economy I would expect some fantastic numbers on intermodal shipments.

Just remember that a low fuel price level is a two-edged sword. Given its relative fuel efficiency, rail has greater market leverage vs trucks in times of higher, not lower fuel prices. And the savings that consumers are gaining at the pump don't appear to be fully trickling down into consumer spending.

I noticed the New York Times (?) article about savings not trickling down. Somewhat surprising.

Some discussion in that article about whether or not those savings could be expected to convert into consumer spending as people grow more confident over time that low gas prices are here to stay (as appears to potentially be the case).

From Marriott Biscayne Bay Miami

How true you note, Mr. Cowford.

While "the consumer", i.e. the family that cannot, or does not, know what the word invest means, is benefitting nice from this "cheap gas", how about the investor, whose portfolio is all to much in oil, rails, and for that matter in equities, it is a different story.

But yippie, on this auto trip down, Auto Train return, I have yet to pay more than $30 for a fill-up.

I just saw The Times article noted by Mr. O'Keefe; I picked up The Times at a fuel stop in Boca and just saw it. Here is a link:

http://www.nytimes.com/2016/01/22/busin ... onomy.html" onclick="window.open(this.href);return false;

From Thursday's New York Times:

http://nytimes.com/2016/01/28/business/ ... risks.html" onclick="window.open(this.href);return false;

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But so far, Saudi Arabia is essentially betting that it can win an oil-price war of attrition — not only against its OPEC rivals like Iran, Iraq and Venezuela, but also against non-OPEC rivals like Russia and the many shale-oil producers in the United States that have contributed to the global glut.

As much insight into what the Saudis are up to and why as I have seen from any media source.

That article was pretty good but I would add my own perspective, some of which I have shared before:

1. The NYT underemphasized what I consider to be the real story here which is not merely writing about the reaction of the Saudis to oil market pricing but more importantly the action of the Iraqis to develop their fields in the south of the country, which is not only peaceful but relatively prosperous. The truly big story here in all of this is that the Iraqis are pumping and developing their cheap surface oil assets as fast as they possibly can and they are doing so with very capable technical assistance from international oil firms. This change has forced a strategic shift by Saudi Arabia which had consolidated a position of leverage in the world markets while Iraqi oil investment stagnated during the sanctions era under Saddam. Without the additional Iraqi oil coming online the Saudis would potentially still be in the same position they have been since the Gulf War in 1990/1991 as the global producer with the most leverage on world oil markets.

2. There are of course many other players and pressure from the U.S. certainly changed the course of events, but the bigger story here at home could just as easily be stagnant or even falling demand for oil as it could be new production coming online.

3. I think the royal family in Saudi Arabia has decided that their domestic social welfare policies have gone too far and have created a culture of loafers and ne'er-do-wells by destroying the societal benefits to those who innovate or work professionally. I believe that part of this shift in the point of view may have been related to generational perspectives within the royal family, many of whom remembered Saudi Arabia's struggle with poverty prior to the discovery of oil in 1938. This internal shift in viewpoints could be the basis for a strategic decision by the Kingdom to change their market policies now in order to save themselves a national catastrophe later.

What are the implications for the United States of these changes?

1. I think above all else cheap energy will drive a new period of major economic expansion. This will be led by consumers who will be in a much stronger position to accumulate wealth as the effects of cheap energy trickle down into the consumer economy. The short term outcome is that inflation will remain very low (due to deflationary pressures from cheap energy) while economic growth will be strong and the workforce will continue to grow.

2. The result of the likely increase in consumer wealth and spending will be very large increases in intermodal traffic on the railroads. Some of this will be in traditional corridors between the West Coast and the East Coast, and some of it will likely be in newer regional corridors recently improved upon and built by the railroads. Intermodal loads in these regional corridors could become quite heavy indeed as trucking capacity continues to stagnate due to driver shortages and increased regulation.

3. Oil by rail will continue to be a significant source of traffic for the railroads, as oil prices inevitably find a way to recover oil trains will once again roll from shale oil fields to refineries close to population centers. The intermittent nature of this traffic and unpredictable demand will make pipeline contracts unattractive to most shale oil field producers. In my opinion this means the tank cars are here to stay and we will see them cycling in and out of storage on a regular basis for decades to come.

In general I think this is a very complex picture for the Class I national railroads to manage. They are potentially facing a very inconsistent series of traffic patterns which at the point of balance between supply and demand for oil could lead to overwhelming traffic loads of intermodal shipments and crude oil cargoes almost simultaneously.

The result of the likely increase in consumer wealth and spending will be very large increases in intermodal traffic on the railroads.

What do you consider "very large" annual intermodal growth? 1%? 5%? 10%? 20%? HIgher?