Home > Uncategorized > The Oil Hub Where Traders Are Making Millions – Businessweek

The Oil Hub Where Traders Are Making Millions – Businessweek

While the giant pool of oil has been a boon for Cushing, there are signs the glut is reaching a point of diminishing returns. As the surplus grows, the smart money is starting to circumvent Cushing by taking oil straight from the well to the refinery and cutting out the storage middleman. “Cushing is no longer the premier market,” says Fjeld-Hansen.

Since 2008, Musket has been buying oil from the wellhead in North Dakota and railing it straight to the Gulf Coast refiners. “We were probably one of the very first people to make that move,” says Fjeld-Hansen. Initially, Musket sold its North Dakota barrels into Cushing. But Fjeld-Hansen says he hasn’t sold a drop of oil at Cushing in more than a year. Recently he’s also been sending it to the East Coast by rail, where refiners are stuck taking more expensive imported oil. He’s up to about 40,000 barrels per day. “Why would I sell into Cushing when the price is so depressed there?” he says. “Let’s say it costs me $9 to rail from North Dakota to Cushing, but it costs me $12 to go all the way to the Gulf Coast. If I can get an extra $10 to $15 at the Gulf Coast than what I would get at Cushing, why in the world wouldn’t I just keep going?”

In an odd step back in time, railroads are moving more crude these days than they have since the early part of the 20th century. In 2009 railroads moved a total of about 7.5 million barrels. In the second quarter of 2012 alone they moved more than 36 million barrels. The trend has given a boost to railroad companies such as BNSF (BRK/A) and Union Pacific (UNP). Rather than sign long-term contracts with pipeline companies, big oil producers such as Phillips 66 (PSX), Statoil (STO), and Hess (HES) are starting to lease and purchase their own rail cars. In a September note to clients, Goldman Sachs Energy analyst David Greely wrote that rail is starting to overtake the reversed Seaway as the biggest means of clearing out the Midwestern oil supply.

Still, there’s a reason companies built all those pipes half a century ago. Moving oil by pipeline costs about one-third what it does to move it by railroad. Using trucks and barges is even more expensive than trains. Eventually new pipeline projects will be completed, and America’s infrastructure will reorient itself around all this new domestic oil. Yergin sees this as part of a much larger “geographic pivot” that will further decrease U.S. dependence on overseas oil and make for a much more integrated North American oil market with Cushing at its heart.

Until then, as long as oil remains stuck in the middle of the country, unable to efficiently find an economic home, West Texas Intermediate prices are likely to remain depressed. As long as that price spread is there, creative oil traders will take advantage of it and make big profits. Barry Meredith and his tugboat will keep working the loop, helicopters will keep circling over Cushing on their spy missions, and Brian Swearingen of High Sierra will keep trading. “I’ve been in this business for 30 years,” says Swearingen, “and I’m having more fun than I’ve ever had.”

via The Oil Hub Where Traders Are Making Millions – Businessweek.

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