Producers eye tank cars for storage

US oil producers are looking to tank cars as a potential long-term storage solution as more traditional onshore tank options fill up amid a looming glut of domestic supply.

The unprecedented plunge in benchmark WTI crude futures to near $20/bl has made many long-haul rail movements uneconomic. Some big crude-by-rail operators like Canadian-based Cenovus Energy have ramped down their rail operations after benchmark prices for heavy oil in Hardisty, Alberta, recently traded in single digits.

The downturn has led to a large number of tank cars designed to carry crude, such as the DOT-117, being idled.

Oil traders are now looking to the empty tank cars as a potential long-term storage strategy, industry sources said. It could cost upwards of $2/bl each month to store crude in tank cars, not including freight costs and monthly rental fees, an industry source said. That's about four times as much as the $0.50/bl monthly storage costs at Cushing, Oklahoma.

Though rail car storage is smaller and more expensive than other tankage, its portable nature has drawn interest. A typical 105-car unit train can hold about 60,000 bl of crude, far short of the 200,000 bl tanks that are standard at onshore storage locations like Cushing.

A massive crude market contango has made storage plays attractive for companies that own or can acquire the needed tankage. On 31 March, the October WTI futures contract carried a $12/bl premium to the front-month contract, though that premium fell to under $7/bl on 2 April.

Most Class I railroads have been willing to move the loaded crude tank cars to privately owned storage yards through interconnections with short-line operators, one industry source said. One holdout is BNSF, which has quoted industry regulations that bar loaded tank car storage, industry sources said.

The Association of American Railroads (AAR), an industry group that sets some standards, said it had no rules that would preclude using tank cars for crude storage. Rail storage customers would need to comply with federal, state and local regulations, the AAR said.

BNSF did not reply to a request for comment.