As coal shipments dry up and oil prices are falling to their lowest levels in months – and even flirting with fresh six-year lows – the rail industry is getting slammed.
Oil-by-rail shipments were down 13 percent in July from a year ago as oil prices have crashed. And the ongoing transition to natural gas and renewable energy for electricity generation caused coal shipments on the railways to fall by 12.5 percent over the same period.
As far as oil-by-rail goes, there are a few reasons for the downturn in activity. First, a series of derailments and explosions on the railways has heightened scrutiny. Related: The Saudi Oil Price War Is Backfiring
But more importantly, oil pipelines continue to come online, obviating the need for rail. Building pipelines takes many years due not only to construction, but siting and permitting as well. The surge in drilling in places like North Dakota resulted in inadequate pipeline capacity, thus the skyrocketing crude-by-rail shipments.
However, in February a new 84,000-barrel-per-day pipeline came into operation in North Dakota, slashing the need for rail. Also, a North Dakota refinery started operating in June, sucking up some crude oil in the state.
And then there is the glut of oil and the collapse of prices, which has led to a massive reduction in the number of active rigs in North Dakota. As a result, the state’s oil production has flat lined.
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There are also indirect effects of the fall in drilling activity. For example, a slowdown in drilling has cut into shipments of related commodities like frac sand – as drilling scales back, there is less of a need for sand.
This is all bad news for rail companies like Norfolk Southern Corp. (NYSE: NSC), CSX Corp. (NYSE: CSX), and Union Pacific Corp. (NYSE: UNP), which have all seen revenues slump because of the decline in oil and coal shipments. Related: Could North America Pull Off Its Own Oil Cartel?
In fact, oil-by-rail shipments peaked almost a year ago just as oil prices started their downturn.
Today, about half of the oil shipped from North Dakota travels by rail, which is down from about 75 percent two years ago.
By Charles Kennedy Of Oilprice.com
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