Oil prices have ticked up a bit over the last week on several pieces of bullish news. Crude inventories in Cushing dipped a bit, as did total U.S. oil production. Rig counts are still falling, but at a much slower rate than in recent weeks. Saudi Arabia increased its price for oil it is exporting to Asia, an indication that rising demand could provide a lift to global prices as 2015 continues to unfold. On April 7, oil prices were up again after taking a bit of a breather. The day before marked extraordinary price gains for both WTI and Brent. WTI is now solidly above the psychological threshold of $50 per barrel, trading at $53. Brent, jumping up above $58 per barrel, is closing in on the next threshold of $60 per barrel.
Despite the price gains, things are not looking good for the crude-by-rail industry. A series of oil train derailments and explosions struck the rail industry earlier this year. But now fresh data from the Association of American Railroads strikes another blow: the fall in oil prices is starting to cut into the volume of shipments on the railways. As drilling activity falls in places like North Dakota, which accounts for the lion’s share of oil train shipments, fewer and fewer trains are making their trips across the country. Rail shipments fell by 7% in March from a year earlier. Related: Energy Stocks May Be A Safe Haven For U.S. Investors
Piling on the pressure, the National Transportation Safety Board published the results of an investigation into train derailments on April 6. The NTSB issued four recommendations to upgrade rail safety including a swift transition towards reinforced railcars. “We can’t wait a decade for safer rail cars,” NTSB Chairman Christopher A. Hart said in a statement. “Crude oil rail traffic is increasing exponentially.” He called on the industry to move quicker. Crucially he also singled out the CPC-1232 design as flawed, which was previously thought to be an upgrade over the flimsier DOT-111. The NTSB called for upgrades to take place over a five-year period, an “aggressive schedule,” as the agency put it.
It is possible that crude oil by train has reached a peak, at least for the foreseeable future. Moving oil on trains adds a $6 to $12 premium to the cost of a barrel of oil, according to a Wall Street Journal analysis. Refiners can stomach that cost when WTI trades at a discount to Brent, but the spread is narrowing. Forthcoming regulations could increase costs on the rail industry further. At the same time, oil prices have fallen to low levels, and if they stay low, production in North Dakota will be shut in. Meanwhile, pipeline infrastructure could slowly but surely begin to catch up, obviating the need for the army of oil trains. Shipments could easily rebound if prices rise and the spread between WTI and Brent widens again, but for now, oil-by-rail is entering a down period.
Russia is also continuing to show signs of pain from low oil prices. Reuters confirmed that Russian President Vladimir Putin’s signature natural gas pipeline to China will be delayed. The news agency reported several weeks ago that a Russian official close to the matter hinted that Gazprom’s “Power of Siberia” project could be delayed as Russia focuses on a western project called Altai. Altai is set to be completed by 2019, sending 30 billion cubic feet (bcm) of natural gas to western China. However, the much grander “Power of Siberia” project that will connect gas fields in eastern Russia to eastern China will now be delayed by three years, pushing its completion date back to 2022, a Gazprom spokesperson confirmed. Related: Oilfield Services Facing Years Of Decline
Separately, state-owned oil firm Rosneft is delaying another massive project. The combination of sanctions and low prices for liquefied natural gas (LNG) has upended the economics of the Sakhalin LNG expansion. Sakhalin, an island off the Pacific Coast of Russia, is the site of a large LNG facility that Rosneft was developing in conjunction with ExxonMobil (NYSE: XOM). The project, which consists of 5 million-toe-per-year liquefaction capacity, was originally set to come online in 2018, but will now be delayed by at least two years at least, or more likely it will “be postponed for three to five years because of lack of funds and low fuel prices,” a Rosneft source told Reuters. Officially, Rosneft insists that nothing is delayed. But with a major Arctic oil project already delayed, and now with the natural gas pipeline to China and Sakhalin also facing significant delays, it appears that sanctions and low oil prices are inflicting serious damage on Russia’s long-term energy picture.
The oil markets reacted immediately and a bit rashly when it sold off crude due to the framework deal that the West and Iran arrived at last week. But energy analysts and market watchers chimed in and reiterated that there are many months before the 1.5 million barrels per day that Iran wants to add to market will actually be able to leave Iranian ports. In all likelihood, that means that even if a deal can be reached, Iranian oil will only begin flowing at some point in 2016 at the earliest. Related: Putin May Have Last Laugh Over Western Sanctions
Meanwhile, although the U.S. and Iran are beginning to thaw relations, Iran’s relationship with Saudi Arabia is descending to a point of crisis. Already rivals in the Middle East, the conflict in Yemen is pushing the two sides into outright hostilities. Iran and Saudi Arabia are fighting a proxy war over control of Yemen, but now Iran is stepping up the pressure. The Iranian media is calling for an international boycott of Saudi oil due to the Arab kingdom’s attack on Houthi rebels in Yemen. As the world’s most important oil producer, there is little chance that any country other than Iran pursues such a course of action, but the call highlights how bad things have become between the two OPEC members.
In Libya, which has received less attention in recent weeks despite simmering violence and political instability, the elected Libyan government is seeking to open an international bank account to control the flow of oil revenues. The move would avoid the Islamist government in Tripoli. The international account will be opened in the United Arab Emirates. With access to funds outside of Islamist control, the recognized Libyan government can avoid a cash crunch. Nevertheless, the critical point of control occurs at the oil field and the export terminal, and some of Libya’s most important assets and pieces of infrastructure are still being fought over.
By Evan Kelly of Oilprice.com
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