Oil glut creating storage problems

Written by David C. Lester, Managing Editor
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With storage capacity for crude oil stretched, rail tank cars may offer a partial solution.
David C. Lester

The glut of oil caused by plummeting prices is beginning to outpace capacity for storage. According to a report by Yahoo! Finance, IHS Markit, a Canadian firm, projects that storage space will be gone by the middle of the year.

As a result, the industry is now looking at railroad tank cars as storage space. With crude tank farms and supertanker ships just about full, rail storage is seen as a viable alternative.

Sandy Fielden, director of research at Morningstar, Inc., said “Rail certainly is an economic option to store crude while the contango is at historic levels.” (A contango is a scenario where the futures price of a commodity is higher than the spot price). Fielden added “A trader has to mitigate risks associated with the quality and location because rail yards may not be located in major trading hubs.”

While the economics may be right for storing crude in rail cars during the next few months, Federal Railroad Administration rules say that tank cars loaded with crude or other hazardous materials can only be stored on private tracks. These rail yards must have robust security and equipment for fire protection. In addition, using rail cars for storage would require crude oil trains to carry the cars to the locations where they are needed. Jared Margolis, a senior attorney at the Center for Biological Diversity, says “That’s the big risk – moving it around so you can store it,” referring to accidents that could contaminate the environment with crude oil.

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