Not Enough Pipelines, Railcars, or Trucks for U.S. Crude

West Texas Intermediate (WTI) crude is trading at a more than $25 discount to Brent Crude. Brent prices are used as the benchmark for two-thirds of the international crude trade. WTI is used as the U.S. benchmark. More than $25 per barrel is an amazing spread when you consider WTI is priced in Cushing Oklahoma and the U.S. accounts for almost 25% of worldwide oil demand. How can oil be cheapest where demand is the highest? When you have a moment, look at Bakken and Eagle Ford drilling levels.

Shale Plays Adding Production Outside of the Gulf Coast

Shale plays like the Bakken and growing plays in West Texas along with an influx of Canadian oilsands production in the midwest have pushed a surplus of oil all the way to Oklahoma. In a perfect market, we could move oil quickly and easily to take advantage of the arbitrage or "free money". Oil needs to penetrate the Gulf Coast refining market to recognize higher prices. Sounds simple.

Pipelines, Railroads, and Trucks are Stressed

We need more pipelines delivering crude in the Gulf Coast. We don't have capacity, so oil marketers resort to railroad agreements. When rail terminals and railcars run at capacity, trucking becomes the last option. For you guys with a truck and trailer, there's a margin waiting to be made between Cushing, OK, and the Gulf Coast.

The idea of trucking crude sounds great, but no one is doing it because they are already working in the shale plays. Trucks are making as much as $5 a barrel to move crude from tanks to pipelines or storage facilities and those are short hauls. If you can make $5 a barrel three to four times in a day ($3,000-4,000 per day) , there is no incentive to make long hauls that would only pay $7.50-10.00 per barrel ($1,500-2,000 per day). The math is simple, so don't expect truckers to fill the gap as long as there is high demand for short haul trips.

The shortage of pipelines, rail facilities, and now trucks has led to the historic spread between foreign brent crude and WTI (the futures spread was $27 on October 14). As the Bakken and other oil plays continue to grow, the problem will only be answered by major pipeline expansions. Some of those are already in the works, but more are likely on the way.

R.T. Signature]

NuStar, EOG Agree to Rail Offloading in St. James, LA

St James, Louisiana will be home to a rail facility that EOG Resources and NuStar will use to offload crude from the Eagle Ford Shale and other oil plays. By using rail, EOG will be able to market its crude outside of South Texas Gulf Coast area and will likely get better prices as Eagle Ford production grows. EOG was proactive in getting agreements to ship crude in the Bakken Shale and it looks as if they're on the same track in the Eagle Ford. 

The project will facilitate movement and storage of crude oil production from the Bakken, Eagle Ford and other developing shale plays in the United States.

The new project will include the addition of new rail and unit train unloading facilities. Two new storage tanks with a combined 360,000 barrels of capacity will also be built in conjunction with the project. The new facility will be equipped to receive at least one 70,000-barrel train per day and will have enough track and other infrastructure to stage an additional train to await offloading. The rail project is expected to be completed in the first quarter of 2012, and the tanks are expected to be completed and in service in May 2012.