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0 Aug 28 2013 @ 10:58am by Matt Smith in Crude Oil, Global Energy

Strong as an Ox

I like this phrase a lot. I think it’s because of a colleague I used to work with in London, who instead of saying ‘good morning!’ or ‘how are you?’ would ask ‘are you strong?’ – to which you could only reply ‘strong as an ox’. (Well, you could say ‘no’, but that would kinda spoil it…). It is this phrase which resonates with me this week, as there have been a couple of market dynamics hitting the headlines which exhibit the attributes of the aforementioned bovine. So let’s get to work.

First up the rupee. The Indian currency is hitting a record low this week as a lack of confidence in the emerging market has sent investors fleeing. The second most populous country in the world is currently experiencing economic growth decelerating to its slowest pace in a decade, combined with a record current account deficit due to overspending.

Despite the government taking steps to address these concerns through economic reform, impending tapering in the US is having a far-reaching effect, as it increases borrowing costs and further exacerbates the plight of India trying to attract investment.

This is hardly strong, burrito boy!’ I hear you holler. But let us take a look at crude oil – which is based in US dollars – and how much the cost of Texas tea spirals higher when your currency is unraveling. Stronger than a herd of oxen:

Next up, a story revisited by the Wall Street Journal this week – that of the super strength seen in US oil transportation…by other means than pipeline.

More oil is being transported by trucks, barges, and trains than at any point since records began in 1981. Startling stats ahoy: oil delivered by trucks grew 38% in 2012 on the prior year, while crude on barges grew 53%, and rail deliveries…..quadrupled.

North Dakota, which is leading the charge in terms of shale play production (for now), sees about 70% of its 800,000 barrels a day leaving by rail.

According to the Association of American Railroads (AAR),  crude shipments by rail were 9,500 carloads in 2008, increasing to 233,811 in 2012…and are estimated to be 389,000 this year.

Canadian shipments reflect a similarly meteoric rise – 16.6 million barrels of crude were shipped to the US by rail last year (2% of total Canadian exports), with industry estimates suggesting this could grow to 73 million barrels this year, and on to nearly 110 million barrels next year (see below).

As the chart at right illustrates, the amount of crude transported by truck and by barge is by far the largest share of non-pipeline transportation, with crude by rail minor in comparison.

That said, shipments by both barge and truck are expected to decline once $40 billion of pipelines – currently planned or under construction – come online, closing the arbitrage window of opportunity. Nevertheless, crude by rail looks here to stay to a significant degree.

I hope these two exhibits of oxen-like strength have been useful. ‘Til next time….stay strong!

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