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Rail still key for crude: Morgan Stanley

Jul 02, 2013 | 07:39 PM |

Tags  crude-by-rail, Morgan Stanley, Bakken shale, crude oil differentials, Thorsten Schier

NEW YORK — The crude-by-rail phenomenon might be slowing due to narrowing margins in oil production from some shale plays like the Bakken, but it is unlikely to disappear anytime soon, according to analysts at Morgan Stanley Research.

"Investors have become increasingly concerned about the sustainability of crude-by-rail volumes, as crude oil differentials (WTI-Brent) have compressed to their lowest levels in 18 months. Bears argue that differentials are now too low to justify the economics of crude-by-rail, and if they remain this low, shippers will increasingly shift to less expensive alternatives such as pipelines or foreign crude imports," the analysts wrote in a June 24 note.

However, Morgan Stanley analysts believe oil volumes transported via rail will not collapse because long-term agreements between producers and shippers are lowering rail costs and new oil-producing regions still lack pipelines.

Shorter contract terms, geographic optionality and a less-diluted product still give rail key advantages over pipelines, keeping rail a part of the long-term crude transportation infrastructure, according to the bank.

Also, permitting is not an issue for rail as networks are already in place. TransCanada Corp.’s Keystone XL pipeline has been delayed for almost three years due to permitting issues, for example.

Crude transport by rail is still more expensive at about $18 per barrel compared to pipeline costs of about $12 per barrel, though project costs for pipelines significantly exceed those of rail, Morgan Stanley analysts added.

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