Rail Tank Cars As Oil Storage “Unlikely For Now”: Cowen

Written by William C. Vantuono, Editor-in-Chief
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Cowen and Company Freight Transportation Analyst Matt Elkott estimates that there is readily available tank car storage capacity for at least 25 million barrels of crude, which can be ramped up in the coming weeks. However, the Canadian railroads do not appear to have a strong appetite for this business, while their U.S. counterparts may be examining the prospects.

“Crude storage capacity shortages caused U.S. oil futures to plunge into negative territory,” Elkott says. “Could tank cars come to the rescue? Theoretically, yes, they can be part of the solution. We estimate there are at least 30,000 Class 3 flammable liquid tank cars, each with capacity of more than 30,000 gallons, in North America that could be deployed to hold oil. More equipment could become available in the coming weeks as some cars come off leases with limited renewal prospects, while others roll off manufacturing lines into a depressed-demand market.

“However, CN and Canadian Pacific do not appear to want this business. This is likely as they do not see a compelling economic case in which revenue generated would compensate for the liability risk of doing something as unfamiliar as storing oil in tank cars for indefinite periods as well as for the potential disruptions to other traffic on rail networks.

“It cannot be ruled out, however, that the Canadian government, in an attempt to help the oil industry, would intervene to pressure the railroads or try to make their economics from oil storage more compelling. The U.S. railroads have remained somewhat quiet on the question of using tank cars for oil storage, something that could signal higher willingness to entertain the idea.

Matt Elkott

“Based on channel checks on April 20, there is no evidence of oil being deployed to tank cars for storage yet, and equipment suppliers do not appear to have had many promising customer inquiries in this regard.

“The tank cars that meet the regulatory standards for transporting crude are primarily the DOT-117J (new), DOT-117R (rebuilt), and some CPC-1232 types. Since the purpose here would be to store rather than transport, the vast number of older, non-compliant DOT111 cars that are idled could theoretically be considered, but we believe that this is highly unlikely to occur because oil would still have to be received from the source in compliant equipment and then transloaded. Additionally, the railroads would most likely be opposed to the idea, even if regulators provided a temporary exception for storage. One other concern is that storing oil in tank cars would accelerate their corrosion.

“Our view is that the use of tank cars for oil storage cannot be ruled out but is unlikely, at least for now. If it does occur, among the publicly traded equipment suppliers, TrinityRail would be best positioned to benefit.”

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