One of the consequences of the U.S. oil boom is that all that crude gushing out of the Midwest has outpaced our ability to move it around. The result is a series of bottlenecks like the one in Cushing, Okla., where there are now more than 50 million barrels of oil stuck in tanks the size of 747s. That’s about a three-day supply of oil for the U.S., just sitting there.
This glut has led to big disparities in gasoline prices across the U.S. Right now, drivers are paying about $3.75 for a gallon of gasoline in New England, vs. $3.55 in the Midwest. While refiners on the East Coast are stuck paying higher prices for internationally priced Brent crude, imported mostly from West Africa, their Midwestern counterparts have access to abundant supplies of cheap domestic oil priced against West Texas Intermediate, which is about $20 cheaper per barrel than Brent. Not only are their margins better as a result, they’re passing some of the savings on to drivers.
The biggest challenge to fixing this problem, and connecting supply with demand, is getting some of North Dakota’s Bakken oil into the densely populated East Coast market. Building a 1,500-mile pipeline from North Dakota to New York would be the straightest way, but that’s not happening anytime soon. Which means that oil is moving east any way it can—by train, by barge, even by truck.
While some Bakken barrels have started arriving on the East Coast, a whole lot more are on their way in 2013. A number of projects scheduled to finish this year will more than double the amount of Bakken crude that finds its way to the East Coast, from about 300,000 barrels per day to more than 800,000, according to Eric Lee, an oil analyst at Citigroup (C).
One of the first projects came online this week in Delaware. PBF Energy (PBF) announced on Monday that it’s completed a rail terminal that will take delivery of about 110,000 barrels a day of Bakken crude. PBF says it expects to unload its first train filled with Bakken crude later this week. That oil will go directly into its Delaware City refinery outside Wilmington. A $68 million project outside Philadelphia is turning the site of a shuttered coal plant into a rail terminal that’ll be able to take delivery of about 80,000 barrels of oil per day by this fall. That oil, mostly from the Bakken, will then get barged up to refineries along the Delaware River and even into New York Harbor.
Last February, Sunoco (SUN) was desperate to find a buyer for its outdated 140-year-old South Philadelphia refinery, one of the oldest and biggest in the country. It was ready to shut the thing down before buyout firm Carlyle jumped in as a partner in July, pledging millions in investment. Now the refinery—which is capable of processing 330,000 barrels of oil a day, or roughly a quarter of the East Coast’s refining capacity—is building a high-speed rail unloader to move oil from trains and right into the refinery itself. According to Citi’s Lee, the South Philadelphia refinery is set to increase the amount of Bakken crude it takes to 180,000 barrels per day by the end of 2013, more than half the oil it processes.
Last month, Phillips 66 (PSX) signed a five-year deal with Global Partners, which will rail in about 50,000 barrels of Bakken crude each day into Phillips 66’s refinery in Bayway, N.J. Plains All American Pipeline (PAA) is finishing up a rail terminal in Yorktown, Va., that by the third quarter will be able to handle some 160,000 barrels per day of Bakken crude.
All of this is good news for East Coast refiners. It’s also a godsend for the railroads, which have nearly tripled the amount of petroleum products they carry since the first quarter of 2009. Carrying more crude helps offset the gradual decline in the amount of coal they haul. Demand for rail cars is so high right now that oil companies are having to wait up to nine months to lease them, says Fadel Gheit, a senior energy analyst at Oppenheimer (OPY). It takes up to a year to lease a barge, he says.
At $93.39 a barrel, the spot price of Bakken crude is trading about $3 below the price of WTI and more than $23 below the price of Brent. Using a combination of rail and barges, it costs anywhere from $14 to $16 a barrel to get Bakken crude to the East Coast. At today’s prices, that still leaves a barrel of Bakken crude $7 cheaper than imported Brent, plenty of room to improve margins for refiners. “East Coast refiners will make that trade all day,” says Gheit. “Every dollar saved is a dollar made.”
But here’s the big question: Will this lower gasoline prices on the East Coast, or simply pad refining profit margins? Both Gheit and Lee are less inclined to speculate about that. The path to cheaper gasoline on the East Coast starts with increasing its supply; more Bakken crude will probably help do that, since cheaper oil will likely compel refineries to use more of their capacity. Right now, East Coast refineries are running at about 82 percent capacity, compared with 88 percent in the Midwest. More gasoline should translate into cheaper gasoline, but don’t expect to see those savings anytime soon. Says Lee, “The best I can say is that it might dampen those higher summer prices.”
Translation: The East Coast isn’t going to see $2 gasoline anytime soon, but it might not see $4 either.