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February 2, 2015: Foreign Crude Makes a Comeback and Collapses U.S. Oil Railcar Market

Despite overall oil-train traffic maintaining near record highs the several years long bidding war for trains to haul crude oil across North America has come to an abrupt end. The industry is now experiencing the wild fluctuations of the global oil market. The abrupt slump in the tank car market is has more to do with narrowing crude oil spreads combined with ample tank car supply from manufacturers than with the over 50% dive in U.S.. crude oil prices over the past seven months.

Large rail companies have been resolutely upbeat even while facing the growing expectations that the booming U.S.. oil production will begin to slow as early as this summer. Reuters obtained data from energy industry intelligence service Genscape that showed last year's  monthly lease rate for the most common oil rail car was as high as $2,450. However, last month those same cars were  leasing for only $1,300 per month. Tom Williamson, owner of Transportation Consultants, stated "The rates for cars, used to transport more than half of North Dakota's crude, are at their lowest in about three years."  Oil by train traffic surged at least 42-fold since 2009 to approximately 1 million barrels per day but the delivery of petroleum products like crude and gasoline by rail grew by less than 1% in the week of January 22. According to the American Association of Railroads that was the worst week for growth since August 2011.

Falling world crude prices has made it harder for shale producers to offer big discounts. The shrinking margins have made importing crude from overseas a more attractive alternative to shipping domestic oil by rail considering the lower cost of sea transport. The spot market for rail cars has essentially dried up which has forced the owners to either park or convert the cars to other uses. At this time the manufacturers are still working through their orders for new cars that were placed during the surge in traffic. Mr. Williamson stated "There is going to be people out there with new cars and nowhere to ship them."

New freight car orders has fallen 13% from last year's highs and is estimated to drop another 70% this year.

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