The movement of crude by rail (CBR) within the United States, including intra-Petroleum Administration for Defense Districts (PADD) movements, reached 928,000 barrels per day (b/d) in October 2014, with most of the shipments originating in the Midwest (PADD 2) and going to the East Coast (PADD 1), West Coast (PADD 5), and Gulf Coast (PADD 3).
Since October 2015, CBR volumes have declined as production has slowed, crude oil price spreads have narrowed, and pipelines have come online.
The economics of CBR flows depend largely on significant domestic crude discounts compared with international crudes. As domestic crudes that price in the Midwest, such as West Texas Intermediate (WTI) and Bakken, are no longer at large discount to waterborne crudes such as North Sea Brent, there is less of a cost advantage for costal refineries to run the domestic crudes.
The Bakken crude oil spot price discount to Brent averaged $8 per barrel (b) in August 2015. It narrowed to average only $2/b in November 2015, and by January 2016 averaged $1.69/b (Figure 1). The narrower the spread between domestic and imported international crude, the more likely costal refineries will choose to run imported crudes rather than domestic supplies shipped via rail.
Crude supplies carried by rail from the Midwest to the East Coast (PADD 2 to PADD 1) continue to be the largest rail movement, accounting for 50% of total CBR moved within the United States in December 2015, the latest month for which data are available. However, this flow has been trending downward since reaching 465,000 b/d in April of last year.
With a narrowing price spread between domestic and imported crude oil, PADD 1 rolling four-week average crude oil imports increased to 973,000 b/d for the week ending February 19 compared with 797,000 b/d five weeks earlier.
This is consistent with trade press reports of increased imports of West African crudes by East Coast refiners in recent months. Increased runs of imported crude in PADD 1 have reduced the need for CBR shipments to that region.
The next largest CBR movement is from PADD 2 to PADD 5, which typically goes to refineries in the Pacific Northwest. While movements from the Midwest to the West Coast fell in the early part of 2015 during planned and unplanned refinery outages, deliveries resumed when refineries restarted in late spring. The West Coast received an average of 139,000 b/d of crude oil by rail from the Midwest in 2015, roughly comparable with 2014 levels.
Despite narrowing domestic and imported crude price spreads, CBR flows to PADD 5 continued as refinery outages and supply tightness, specifically in California, increased gasoline crack spreads last summer, prompting increased refinery runs.
The increased runs allowed PADD 5 crude oil imports and CBR flows to increase simultaneously, as PADD 5 imports increased to 1.2 million b/d in September 2015, including 38,000 b/d by rail from Canada, while crude supply from PADD 2 via rail set a new high of 182,000 b/d.
CBR from the Midwest to the Gulf Coast (PADD 2 to PADD 3) formed the largest inter-PADD rail movement from 2011 to 2013. Midwest-to-Gulf Coast rail movements started to decline in the second half of 2013 as new and expanded pipeline capacity came online, beginning with the Enterprise Product Partners Seaway Pipeline reversal. As additional pipeline capacity was added throughout 2013-15, CBR movements to the Gulf Coast from the Midwest continued to decline, dropping to 38,000 b/d in December 2015, 75,000 b/d less than in the previous year.
Other crude producing regions, such as the Niobrara crude from PADD 4 (Rocky Mountains) and Permian Basin crude from PADD 3 (Texas and New Mexico) also experienced growth in pipeline takeaway capacity to the Gulf Coast refining centers, reducing the need for railed crude supply from PADD 2 (Figure 2).
Continued pipeline takeaway expansions and interconnections with existing pipelines in crude-producing regions such as the Bakken and the Gulf Coast will further reduce the need for intra-PADD rail flows within the Midwest and the Gulf Coast, as well as inter-PADD rail flows from the Midwest to the Gulf Coast. However, no crude oil pipeline infrastructure currently exists to move crude to the East and West coasts from the Midwest.
Therefore, future CBR flows to the coasts will depend on the price dynamic between domestic and international crudes, as well as any long-term contractual volume commitments made by refiners.