The decision on whether to approve the Keystone pipeline will be made in the coming months. So after years of planning, fighting, and grandstanding in the media, the oil industry and the environmentalists will finally have a resolution.
The Keystone pipeline, if approved, will transport 800,000 barrels of oil per day over 2,100 miles from Alberta, Canada to the Gulf coast, where it will be refined into gasoline and other products.
That’s no short haul. And the fact that oil can be transported all those miles, incur transportation charges, and then still be profitably refined underscores just how much opportunity exists in the energy transportation market.
Interestingly, while the Keystone and other proposed pipelines are stuck in limbo, one sector of the market is already profiting from the lucrative crude transport business — railroads.
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Railroads Helped Push
TRAN to Record High!
Rail stocks fell out of favor with the investing public due mostly to their close ties to the beleaguered coal industry. In fact, because coal was such a large part of revenues, it wasn’t a stretch several years ago to say that when the coal sector caught a cold, rail stocks caught pneumonia.
But lately railroad stocks have surged as the economy has started to rebound. And the transportation of crude oil around the country has become very profitable for everyone involved. Railroads helped push the Dow Jones Transportation Average (TRAN) to a record high on March 19, as rails began transporting cheap and plentiful crude oil out of the Dakotas to refineries in the mid-west, Gulf Coast, and Northeast. And in doing so they are earning big fees.
What’s more, regardless of whether the Keystone pipeline gets approved, it looks as though the positive fundamentals for the rails are here to stay …
First off, even if the Keystone pipeline is approved, it’ll be years until it’s running at capacity.
Second, the profitability of the rails transporting crude oil is based much more on the spread, or difference, between WTI Crude and Brent Crude (WTI is the crude we have here in the U.S., Brent Crude, is used in other parts of the world).
Without getting too technical, most experts I talk to say when the price of Brent Crude is more than $3 above the price of WTI Crude, it’s profitable for the rails to transport the oil. Currently, the spread between the two is about $13, so there’s quite a bit of cushion.
|Railroads are seeing revenue soar as transportation demand for oil and natural gas picks up.|
There’s no question that shale oil and gas is leading an energy industry revolution in this country. But unlike the last 10+ years, the big money in the oil and gas sectors probably won’t be made by changes in the price of the commodities, but instead by transporting oil and natural gas liquids. And rails will continue to play an integral part in that transportation.
You could play the railroad sector by investing in individual stocks. However, you might prefer the diversification that comes with exchange traded funds. One to consider is the iShares Dow Jones Transportation Average Fund (IYT). Railroads make up a lot of the index this ETF tracks. So although this is not a “pure play”, it does give you significant exposure to the rails.