Analysis: As Mississippi oil barge arbitrage window shuts, another opens

The brisk flow of oil barges shipping crude oil down the Mississippi has slowed to a trickle this summer, curbed by the vanishing gap in prices between inland and coastal prices. Yet the barge market has barely lost a step.

Now, instead of moving a glut of North Dakota crude out of Oklahoma or St. Louis, refiners and traders have redeployed their nimble fleet to the inland waterway linking southern Texas ports to Gulf of Mexico refineries, tapping into cheap barrels of Eagle Ford shale, officials say.

The small shallow-draft Port of Victoria, just 30 miles south of the Texas shale oil patch, loaded river-going barges with nearly 55,000 barrels per day (bpd) of Eagle Ford crude last month, more than double January's rate.

Meanwhile, business at the port of Catoosa, Oklahoma, a 45-minute drive from the storage hub of Cushing, slowed to just 4,300 bpd in June, one-third the norm earlier in the year.

The shift in flows is the latest turn in the rapidly evolving North American oil trading landscape, where arbitrage opportunities regularly surface, only to vanish months later, as the market works out the logistical kinks of moving fast-rising shale production to willing refiners.

The barge trade took off two years ago, as a lack of pipeline capacity to pump surging North Dakota and Canada oil output to Gulf Coast refineries forced traders to turn to alternate, more costly means of transport: barges, trucks and trains.

The nation's fleet of over 3,000 inland barges, each capable of hauling between 10,000 and 30,000 barrels of crude, were pressed into service shipping oil south along the Mississippi, or along other Midwest waterways, to the Gulf Coast, lifting day rates and boosting revenues for barge owners like Kirby and American Commercial Lines.

That traffic has collapsed since May as the gap between benchmark U.S. crude in Cushing, Oklahoma, and global marker Brent narrowed this summer to parity. New pipeline capacity drained those Midwestern inventories, erasing the profits companies could make barging oil to the Gulf Coast.

"If the arb is there, they want to jump in, and they could literally flood my facility when the WTI-Brent spread opens up," said Marshall Bockman, vice president of Gateway Terminals LLC, a unit of marine logistics company Seacor Holdings Inc. that operates a rail-to-river terminal near St. Louis.

For the moment, however, spot trade has dried up, leaving Bockman with just two long-term customers: "If it isn't there, the barrels will flow wherever the arb is."

That's just what the barge trade is doing. While profits from moving oil north to south have evaporated, business is booming for moving crude west to east across Texas as a glut of Eagle Ford oil depresses prices near Houston.

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WATERWAYS

Barges that formerly sailed the Mississippi now navigate the Gulf Intracoastal Waterway (GIWW), a thousand-mile inland canal skirting the coast from Texas to Florida. They join tankers and barges already operating parallel routes along the Gulf Coast, as refiners there await new pipeline capacity to come online that will connect them to production sites further west.

At the Port of Victoria, loadings of crude oil onto inland barges there have steadily climbed from nothing two years ago to 70 to 75 monthly loadings since June, up from just 45 or 50 a month early in the year, says port director Jennifer Stastny.

"So many of the barges that were in the Midwest, they're being relocated down to the Gulf Coast," she said.

That has risen "exponentially" in the last two months, she said, with the port loading 1.7 million barrels of Eagle Ford crude -- an average of nearly 55,000 bpd -- in July. Those barges move south on a man-made canal to join the GIWW.

Little-known companies are loading the crude bound for refineries in Texas City, Texas, and further east in Lake Charles, Louisiana, near "petrochemical alley" where big plants line both riverbanks. They are ideally suited to take delivery of crude by barge rather than by rail, which is more popular inland.

Barges are about 30 percent cheaper than rail, said Steve Clark, commercial manager at shipping and logistics agency GAC Shipping USA Inc, in Philadelphia, Pennsylvania.

At Corpus Christi, Texas, the number of inland barges loading liquid cargoes -- about 85 percent of which are crude oil -- is up over 17 percent in the first half of 2013, said Ruben Medina, director of business development for the port.

The flood of barges along the GIWW has led to delays of 24 hours at Victoria and several days at Corpus Christi. Both are currently adding cargo docks to handle even more inland traffic.

At day rates of around $8,500 for a two-barge tow, each carrying 30,000 barrels, a typical 14-day round trip from Corpus Christi to refineries in New Orleans puts transport costs at around $3.50 to $4 per barrel, shipbrokers said.

For crude heading from Victoria to refineries in nearby Freeport, Texas, a mere 24 hours by barge, per-barrel costs could be half that, they said.

Those economics could shift once again towards the end of 2013, when the second phase of reversal of a pipeline to carry crude from Houston to Houma, Louisiana, is expected to be completed.

SOUTHERN MIGRATION

The tank barge fleet's southern migration is the latest in quick fixes for oil players struggling to adjust to the rapidly changing U.S. landscape.

Surging output from Texas' Eagle Ford shale play, North Dakota's Bakken region, and crude from Canada had been backing up at Cushing, Oklahoma since December 2011, driving inventories to a string of record highs that peaked in January of this year.

Waterborne crude oil shipments from the Midwest region known as PADD 2 to the Gulf Coast area known as PADD 3 hit a record 113,000 bpd in May, the last month for which data is available, according the U.S. Energy Information Administration. That is up from an average 13,000 bpd in 2010 and 54,000 bpd in 2012.

The economics of such costly arbitrage routes have collapsed in the past few months. After trading at more than a $20 a barrel to global benchmark Brent in February, the discount for inland U.S. crude at Cushing has evaporated this year, removing the incentive to use barges.

U.S. crude has traded at less than a $4 discount to the international benchmark for most of the past month and a half, far less than the $17 or $18 it costs to move a barrel from the Bakken field to the Gulf Coast by train and barge.

"The barging has pretty much stopped since the end of June," said Rex Gilbreath, a partner at Petro Source Terminals, a storage tank operator at the port of Catoosa, Oklahoma along the McClellan-Kerr Arkansas River Navigation System, a short truck drive east of the Cushing hub.

Total crude oil loadings at Catoosa, where Gilbreath began barging crude oil around two years ago, fell to just 4,000 bpd in July -- only 6 barges for the month -- which is less than a third of the average 13,000 bpd in the first four months of the year, said Jeff Yowell, communications director for the port.

Just as the trade has shifted direction, so to have larger players - from oil majors like BP to refiners like Valero - moved to secure more barges on longer-term charter, pushing aside some of the smaller trading companies and helping ensure a likely longer-term flow on the waterways.

"Many of the small trading shops are slowing down, but there's still a need among refiners and majors to keep crude flowing to their refineries," said Shawn Ballard, a marine broker at L&R Midland in Houston, Texas.

(Reporting by Anna Louie Sussman, editing by Jonathan Leff, Matthew Robinson, Andrew Hay)