West Texas Intermediate (WTI) to North Sea Brent $30-per-barrel crude spreads are a thing of the past, which means tighter differentials for rail with trade closer to variable costs. Meanwhile, according to Travis Brock, vice president, commercial development and strategy, Strobel Starostka Transfer, market players will be prompted to rethink crude oil logistic methods in the US to keep variable costs low and sustain healthy returns.
In response to this new logistics challenge, Brock told attendees at the Hart Energy Crude in Motion conference in late October that inevitable changes in the crude oil logistics market mean there will be new “structural price differentials” between the production and market areas, which will evolve as infrastructure is put in place for both pipeline and rail.
“To that point, production prices must drop to open the rail or pipeline arbs to incentivize midstream solutions to clear those volumes,” he said. “My take on this going forward is that either the producers or the refiners are going to have to underwrite infrastructure to make it happen. They've got the most to gain through these types of solutions, and I think they're the ones who will have to put the money out or make commitments to help pull it through.”
The initial disruption of historic price marker relationships with the Brent crude oil price spurred the building of domestic rail terminals as an interim solution for accessing landlocked reserves.
“In 2011, when the shale boom happened, Brent moved on with global pricing and Cushing turned into Hotel California: You can check in anytime you want but you can never leave,” Brock said.
“The massive price-marker arbitrage that we've seen the past couple of years between WTI and Brent, which really financed the first round of crude by rail, made it easy to go spend $30 million to $50 million to build a terminal. That time is over and we won't be seeing that again. That restriction on Cushing has been solved with a pipeline solution.”
As a testament to ongoing eccentricities of shale plays, Brock pointed out that within the past 100 days (in late October), WTI and LLS (Louisiana Light Sweet) crude prices had dislocated from Brent. The Brent-LLS spread—which typically fluctuates in a negative $5-to-$4 range—jumped as high as $8 in early October, begging the questions: Is this another paradigm change, and has Brent completely dislocated from the US Gulf Coast?
Eventually, if the US doesn't need any light crude oil to come to the Gulf Coast, there's no reason for Brent to be correlated with LLS going forward. “We may be seeing the very beginning of that,” Brock said.
As new opportunities for building supporting infrastructure materialize, Brock pointed out that the urgency to build rail terminals will likely be missing from the equation this time around, which should drive operating costs down in the long term. When the WTIBrent spreads were wide, he said, companies hastened to build rail terminals in an attempt to capture high margins while the arbitrage remained open, but now priorities have shifted.
“I think that in the future, because we don't have that tailwind behind us, that we're going to have a lot more focus on [rail terminal] efficiency, low costs and sustainability,” he said.
—Nicole Johnson
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