With fears that the world is so overflowing with crude oil that markets will literally run out of places to put it, attention has turned to another option to hold it: railcars.
But it doesn’t look like it’s going to happen, so those who need to be sure those railcars are available for other uses can breathe a sigh of relief.
The reality is that while the economics of storing crude now are so incredibly good — kind of along the lines of “any idiot can make money doing this” — it only works if you’re putting oil into a storage tank or a tanker. It doesn’t work for railcars, according to people familiar with the economics.
Storage is sought not only because the world is producing far more oil than it needs as a result of the collapse in demand — a drop so steep that consumption is declining to levels not seen since 1997, according to the International Energy Agency. Depending on how much oil is actually removed from the market as a result of the recent OPEC/non-OPEC deal, along with declines from companies just shutting in output, the supply excess to demand could be at least 10 million barrels per day (b/d) and likely a lot more.
But storage is also sought because of the math of prices going out into the future. The price of WTI crude Wednesday for May 2020 barrels was $20.15 per barrel. For barrels sold in May 2021, the price was $35.47 per barrel, for a spread of a little more than $15 a barrel.
Storage had been running about 50 cents per barrel per month. Even if it rises to 75 cents a barrel, you’re still looking at storage costs of $9 for the year. Compare that to the spread of $15 per barrel and the economics are clear: Buy May oil, store it for a year for $9 a barrel, sell it forward at the same time it is bought into the May 2021 contract at a spread of more than $15 a barrel, and collect the difference.
But as Ernie Barsamian, the king of storage economics at his storage brokerage firm The Tank Tiger, said, the biggest problem now is finding places to put the oil.
The idea of railcars as a source of storage got a boost in the past few weeks by a Bloomberg story that raised the prospect. So far this year, rails have moved on average 12,632 carloads of petroleum per week, an increase of about 1% from the corresponding figure of 2019. But that’s moving the oil, not putting it on the side.
To take a tank car, fill it with crude, stick it on a side track and let it sit for a year while it waits to be delivered to somebody in a year is not the same as putting it into an above-ground storage tank.
According to both Barsamian and John Schmitter, who heads the rail consulting firm KEP LLC, the cost to store oil in a railcar is about $1.50 per barrel per month, far above the 50-75 cents for a storage tank. (Schmitter estimated the cost of leasing a 700-barrel rail tanker is $1,000 per month, which is about $1.43 per barrel per month. So it’s in the $1.50-per-month ballpark.)
That’s $18 for 12-month storage, more than the $15 12-month spread for WTI between May 2020 and May 2021.
As Barsamian notes, it isn’t that simple. There are other crude grades trading at extremely low levels that can be purchased and stored in railcars. For example, Western Canada Select, the benchmark Canadian grade, is trading about $5 a barrel less than WTI. Storing that on railcars and selling it forward would be more complex but the economics would be closer to a workable trade.
But Schmitter said that isn’t all. While the $1,000 per month would be for a “full service lease that includes maintenance on the operating components,” Schmitter added that the lessee is responsible for work needed on valves, other appliances on the car and the tank itself.
“There are also regulatory inspections and certifications required for tank cars,” Schmitter wrote in an email to FreightWaves. “It’s tough to put a dollar cost on these and they do increase as the car gets older. But maybe $50 to $100 per month on average.”
Given all that, it’s not surprising that Barsamian, in an email to FreightWaves, said The Tank Tiger is getting inquiries about rail storage, “but they are very spotty.”
If there is further discussion, it isn’t with the Class 1 railroads, he said. “We don’t really work with the railroads,” he said. “Private track owners are much more prevalent and more fun to talk to.”
Schmitter indicated that wasn’t surprising. “Class 1 railroads want no part of storing loaded shipments of crude, or empty cars for that matter,” he wrote. “They are not in the business of storing railcars. They have no common carrier obligation to do so.”
With railcars then not likely to be a place to stick excess crude oil, and most of the standard storage full or getting there quickly, what are the opportunities?
They’re tougher to find, but they’re there, Barsamian said. “It’s time for the little guys to come out and make a profit,” he wrote. “Truck gathering systems and what not. There are still plenty of small tanks that would be profitable to use that are too much trouble for the big boys.”