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With Pipelines Filled to the Brim, Oil Companies are Turning to Railroads for Relief
The lack of pipeline space is weighing on oil prices, forcing producers to pay up to ship crude by rail.

A gusher of growth in Canada
Canadian National Railway (NYSE:CNI) and Canadian Pacific (NYSE:CP) have been seeing an uptick in crude-by-rail volumes this year because of pipeline issues in their home country. Canadian National, for example, has transported 50% more oil by rail on a revenue-per-ton mile basis so far in the third quarter of 2018 than it did in the same period of last year. Meanwhile, Canadian Pacific's crude volumes rose 13% in the second quarter to about 134,000 barrels per day (BPD).

Even higher amounts of crude will be heading on the rails in the coming months, with Canadian Pacific expecting its volumes to double by early 2019. One of the driving factors is that the country's pipeline crunch won't ease anytime soon, given the latest setback for the Trans Mountain Pipeline. With the court overturning that pipeline's approval, it has "added years to crude by rail," according to comments from Canadian National Railway's CFO at a recent conference. The company has been able to secure multi-year contracts "at very favorable rates," since Canadian oil producers desperately want better market access for their oil.

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Producers in the U.S. have also been experiencing some pain at the oil pump. That's after capacity on pipelines out of the fast-growing Permian Basin started running out of room earlier this year, causing crude to sell for as much as an $18-per-barrel discount to WTI. Now oil shippers are turning to railroads for help.
Union Pacific (NYSE:UNP) is one of the companies working to capture this opportunity to ship oil out of the Basin. The railroad operator noted on its second-quarter call that it had some capacity to move Permian crude and should see results in the third and fourth quarters. Union Pacific has since signed a deal with a logistics company to ship 400,000 barrels of crude per month through the next year, which lines up with when new pipelines should enter service, though that agreement could last into 2020 if needed. More deals could follow as other producers seek ways to gain greater market access for Permian oil.

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