The U.S. oil boom has helped business flow through railways, lifting transportation sector-related exchange traded funds. However, if oil prices continue to fall, railway companies can also suffer.
Year-to-date, the iShares Transportation Average ETF (NYSEArca: IYT) increased 24.1% and SPDR S&P Transportation ETF (NYSEArca: XTN) gained 29.7%.
IYT includes a 25.9% tilt toward the railroad and XTN has a 12.0% position in the sub-sector.
Crude oil sold at the wellhead in Bakken shale region across North Dakota dipped to $49.7 per barrel on November 28, revealing how geographic and logistical issues can cause disparate prices in areas where new shale plays have pushed U.S. oil product to a 31-year high, reports Dan Murtaugh for Bloomberg.
“You have gathering fees, trucking, terminalling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC, said in the article. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”
In comparison, West Texas Intermediate crude oil futures were hovering around $67.3 per barrel Wednesday.
Consequently, in order to turn a profit, more drillers are turning to railways to ship oil to large hubs for distribution. Tank carloads of crude are up 50% so far this year, compared to 2014, according to Pacific Standard Magazine.
However, if crude oil prices continue to weaken, railways may no longer be an option. For instance, in places with limited pipeline capacity, producers have to fill rail cars with crude and pay $10 to $15 per barrel to bring oil thousands of miles or more to the coasts for processing.
“To a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling,” John Auers, executive vice president at energy consulting firm Turner Mason & Co, said in the Bloomberg article. “They might start reallocating capital, you might see projects slowed or shut down.”
Nevertheless, cheap oil may still benefit other areas that the transportation ETFs track, including trucking and airliners. Cheap energy has helped cut down gasoline prices and costs, bolstering other transportation sub-sectors’ bottom line. IYT has a 23.2% weight toward delivery services, trucking 18.5% and airlines 15.0%. XTN includes trucking 37.1%, airlines 26.7% and air fright & logistics 20.0%. [Transportation ETFs are Loving Cheap Oil]
iShares Transportation Average ETF
For more information on the transportation sector, visit our transportation category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of IYT.