Oil, is it? Black gold? Texas tea? I don’t think Jed’s a millionaire any more….unless he took his money from Drysdale’s bank and invested in Cushing cash or super-tanker treasure – but not railcar reward.
CBR/Storage: Waiting for Godot? The San Pedro basin (LA/LB) apparently looks like it did in the ILWU strike of 2002 – ships lined up for miles (also like photos of D-Day +1), So much has been written on the oil storage (price/production) issue with empty rail tank cars as a possible (at least partial) solution – even up to this past weekend (FT: “Oil Traders Turn to Salt Caves and Railcars in Storage Crisis” – although the subtitle noted that they missed their deadline: “Peak Pressure Might be Over”) and Bloomberg/BusinessWeek (“No Room in the Tank”). And even today – WSJ: Heard on the Street: “Oil’s Crash Prompts Push to Store Fuel at Sea”. And on and on….
Gold or Fools’ Gold? So, while others have speculated on putting those parked tank cars to use, creating a possible silver lining to this black plague-filled period, our discussions with top stakeholders – the leasing companies that own the rolling stock; the OEMs; the railroads large and small that move oil (CBR) - or not, as the case is now - and could, maybe, store oil; energy companies (and analyst – thanks particularly to Mark Bononi, oil expert par excellence, and to Dick Kloster the rail-car-guy) and storage businesses, etc – and we have come to the conclusion, always risky in these fluid times, that it is certainly not the solution to the oil storage “crisis” and in fact isn’t really likely to be of niche support. Why? Money, risk, timing – the unusual suspects!
First, some factoids to frame the situation – we know about the Saudis & the Russians, the demand destruction, the contango, super-contango, and negative pricing since a bit recovered….The IEA puts global energy demand at -6% (US -9%) – with “downside risk” (note emissions are estimated down 8%). Oil has become price-inelastic these days. In addition:
- US shale bankruptcies were up 50% - in 2019 (the sector had already fell out of investor favor before this crisis).
- Energy independent? US production ended 2019 at ~15mmbd, 2X the level of 2008 (coal’s peak, by the way) – and could drop to ~10mmbd by September.
- Put in perspective, the world produces ~100mmbd and consumes about that amount – in “normal times.”
- US shale CAPEX (that’s steel in rail cars etc) down by ~30-40%.
- US rigs down ~40%.
- Speaking of missing rail movements, do not forget the collapse of the ethanol market – which may – may – lead to more export/rail share corn if – if – China buys.
- Shell cut its dividend for the first time since 1945 (Lex: “This is a huge deal”) by 2/3 (and it’s not just a temporary fix – it’s a “re-set”); they cut CAPEX by 20%; BP is reviewing their dividend; Exxon and Chevron have cut CAPEX by 30% (the latter the second cut in….two weeks). Meanwhile, ExxonMobil’s stock price is essentially unchanged after 20 years….
- Super-tanker (VLCC) rates have exploded, though they have halved in the past week (one consultant said that costs were ~$15-18K/day, so still at $75K.day, an almost CP-like return.
- Oil “stored” in tankers has gone from ~34mmbl in March to 158mm as of 4/24.
- US storage capacity is 652mmbl (370 US Gulf, ~198 in Cushing OK, ~85mm “elsewhere”); it is ~75% full but the rest is “spoken for.”
- So why not railcars?
So why not railcars?
Clearly some car owners and some (short line) railroads have explored this (and the FT noted rail; car storage in Chicago – but that seems….implausible). But let’s break this down into a few categories:
- Risk (this is hazmat storage).
- The Class Ones (who could provide transportation, switching, and storage) want no part of this, from what I can tell – the liabilities outweigh the rewards. Short lines are nimbler, some may have an interest – but storage space is at a premium already….
- Class One reluctance is a major barrier in the network they control….
- Lease duration is also a risk element – is this bubble already over? Will counterparties accept take or pay provisions and multi-year leases?
- Much of the oil market is controlled by speculators – many leasing companies would not want to take counterparty risk with such entities?
- Space is at a premium already, as noted, given the ~25% drop in volumes (against what we had thought were “easy” comparisons!).
- New space costs ~$1-2mm/mile.
- Although rails have built SIT (storage in transit) yards for plastics shippers, storage hardly fits the PSR philosophy.
- A railcar holds ~700/bl of oil; there are 30K-50K available (all-in) “new” (117) tank cars – if every car was so utilized that would be 35mmb.
- One VLCC can hold 2mmb – that’s equal to 30-32 100-car train-sets – and 34 miles of track!
- The storage would likely be all over the North American rail network.
- Costs – where the steel meets the rail.
- Scrapping still, even today, nets ~$5k/car – no muss, no fuss.
- Haz-mat regulations apply (which costs money and time) – could this be changed in an “emergency”? A short-line operator kindly passed on an excellent FRA summary of the regs required, etc (see attached).
- Corrosion is a factor – although I have been repeatedly told that most cars are stored clean and mostly ready to go, for CBR/S a corrosion coating costing ~$8-12K/car would be necessary.
- Haz-mat storage rates top ~$10/day (non-hazmat is ~$3-7) – but even at $15, meaning $50K/month per 100-car set, versus the liability risk….
- Daily storage rates may be only ~$1/bl – that seems reasonable, on the face of it, – but that excludes transportation & assembly, transloading, etc.
- Add in the switching costs ($350/car for hazmat - $200 for non).
- Plus the costs of assembling the fleets from around the North American network.
- Time, the ruler of us all….
- So I think I get the idea here….if the time were to be extended….maybe the leasing companies could help change the real deal-breaker – 1B! Most observers see this as a short term “opportunity”, which is hard for rails and leasing companies owning long-lived assets scattered across the continent. But not all see it that way. Will the June WTI futures cause a repeat of the May debacle? Watch here: https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
One idea that I and others have had is taking the all outdated (or soon to be) 117 and 1232 cars, move them empty to say, Cushing OK, create permanent (and cheaper) purely storage tracks (think: mobile home parks), removing them from transport regs, from C1 cares and connect them to the big tanks there….most that I have asked were praising the innovative mindset of the questioner but also skeptical of the ability to move them to one place quickly enough to take advantage of what could be – by rail standards – a short-er term opportunity (versus that $5K scrap fee in hand)
Also of relevance:
- Conference call on the Global Oil Crisis held by Columbia University with real intellectual heft in the speaker group - tomorrow, Tuesday (5/5) at 4 pm real-time:
- With some places “re-opening”, have we passed the bottom of the oil demand destruction (click here)?
- The NYT on the fate of the Permian and its people.
- The same NYT on the impact on the expending port of Corpus Christie, TX (click here).
- Will there be a market impact from the volatility of the (retail-owned) performance of the oil ETFs (such as USO)? BBW notes that some have warned of – and this is a great phrase, an “illiquidity doom loop”….