October rail exports increase amid a widening Brent/WTI spread
After giving up Williston Basin crude oil export market share to pipelines from May through August, railroads gained back some of that market share for the second consecutive month in October, pulling six percentage points from pipelines. As of the end of October, railroads accounted for 69 percent of Williston Basin crude oil exports.
Concurrent with railroad’s increase in export market share is a widening Brent/WTI spread since July (see chart). That price differential offers Williston Basin operators higher prices for Bakken petroleum system crude oil on coastal markets. Brent generally represents price trends on the coastal markets relative to Great Lakes and Midcontinent markets where crude prices are more representative of WTI prices.
Beginning in April 2011, railroads began a trend of steadily pulling export market share away from pipelines, increasing their market share from 11 percent to 39 percent by April 2012, and on to a peak of 75 percent in April 2013. However, after the Brent/WTI spread began narrowing in February 2013, railroads began losing market share to pipelines in May, a trend that continued through August (see chart). But after the Brent/WTI spread trend shifted again and began widening in July, rail, in turn, began picking up export market share in September.
In a Dec. 13 press conference, North Dakota Pipeline Authority Director Justin Kringstad, who tracks Williston Basin crude oil exports, referred to the increase in rail exports as “a pretty significant shift relative to previous months.” Kringstad noted that over the summer months rail exports were “down a little bit” as the Brent/WTI spread narrowed, “but in October, and as we sit today, the price environment is such that rail is going to continue to attract barrels to that transportation method.” On the day of the press conference, the Brent/WTI spread stood at $12.23 per barrel based on New York Mercantile Exchange settlements with Brent settling at $108.83 per barrel and WTI settling at $96.60.
October rail volumesKringstad estimates total Williston Basin oil production at more than 1 million barrels per day when estimated production from Montana and South Dakota is included with North Dakota’s production (see table in Bakken Stats section). He also estimates that between 717,518 and 747,518 barrels of crude oil leave the Williston Basin on rail cars each day. Assuming 100 tank cars per train and about 650 barrels per tank car, Kringstad said that equates to some 10 unit trains per day leaving the basin and at least that many empty trains coming back each day (see related story on rail car safety issues on page 1).
Other WB crude destinationsCombined, rail and pipelines accounted for 92 percent of Williston Basin crude exports in October, and of the remaining 8 percent, Kringstad estimates that 7 percent went to Tesoro’s refinery at Mandan and 1 percent was trucked across the border and put into Canadian pipelines. Both of those market share percentages have declined over the last two years, with 10 percent of Williston Basin crude oil going to the Tesoro refinery and 6 percent going over the Canadian border in trucks in February 2012, the first year that the Pipeline Authority began posting export data.
However, it’s important to note that market share is reported in percentages, and that in February 2012 North Dakota’s average daily production was 558,558 barrels per day. In October 2013 that production averaged over 941,000 bpd according to preliminary data released by the North Dakota Department of Mineral Resources (see story on page 1).
Although the November Williston Basin export statistics will not be available until January, the Brent/WTI spread widened considerably in November averaging more than $13 for the month, up from the October monthly average of nearly $9 (see chart). Since the spread began widening in August, Brent gained a nearly $10 per barrel advantage over WTI through November.
For the first half of December, the Brent/WTI spread has been holding generally steady, averaging $13.48 through Dec. 16, although the spread has been narrowing somewhat in December with the actual spread at $13.19 on Dec. 17 compared to the $17.63 spread on Dec. 1 based on New York Mercantile Exchange closings.
Southern XL effectAs Petroleum News Bakken reported in the Dec. 8 edition, Enbridge Energy began filling the southern leg of the Keystone pipeline that will run from the Midcontinent crude oil hub at Cushing, Okla., to the Gulf Coast. Kringstad said analysts aren’t sure what affect that could have on crude oil pricing and premium markets.
“Cushing, for the last number of years, has become a severe bottleneck for North American crude oil,” Kringstad said, adding that not only Keystone XL, but other pipelines have been built to try to ease the Cushing bottleneck. “And what that means — that’s what all the analysts are arguing about — is: what does that really mean for the U.S. and North American crude oil? Does it just move the bottleneck down to the Gulf? Some believe that might be the case, where instead of depressed pricing at Cushing, now we may have depressed pricing in the Gulf Coast area.”
If the bottleneck simply moves from Cushing to the coast, Kringstad believes more Bakken crude will be shipped via rail to the other two U.S. coasts. “For us here in North Dakota, if that is the case … the Gulf may not be a target for our rail movements any longer — we may see our rail shipments moving toward the East Coast and the West Coast … to those higher-priced regions if that glut just moves south.”