I have been a bear in Greenbrier Companies (GBX) since Q3 2015. My thesis was that the company had feasted on high oil prices and railcar demand to transport oil and frac sand cross country would tumble. In turn, demand for the railcars Greenbrier produces would have to decline. The EIA recently divulged the next shoe to drop — a decline in refineries’ need to transport crude oil cross country.

The Situation

The story of the financial markets have been the free fall in oil prices since Q2 2014. Another phenomenon has been the huge spread between WTI and Brent oil prices. Oil refiners can exploit the differential; their cost of sales can be determined by crude prices, yet the price in which they sell refined oil is set by the Brent price. Now that the spread has evaporated refiners may have less need to ship crude oil cross country via railcars. They can simply import it:

The movement of crude by rail (“CBR”) within the United States, including intra-Petroleum Administration for Defense Districts (PADD) movements, reached 928,000 barrels per day (b/d) in October 2014, with most of the shipments originating in the Midwest (PADD 2) and going to the East Coast (PADD 1), West Coast (PADD 5), and Gulf Coast (PADD 3). Since October 2015, CBR volumes have declined as production has slowed, crude oil price spreads have narrowed, and pipelines have come online …

As domestic crudes that price in the Midwest, such as West Texas Intermediate (“WTI”) and Bakken, are no longer at large discount to waterborne crudes such as North Sea Brent, there is less of a cost advantage for costal refineries to run the domestic crudes … The narrower the spread between domestic and imported international crude, the more likely costal refineries will choose to run imported crudes rather than domestic supplies shipped via rail.

In August 2015 the discount to Bakken crude and Brent averaged $8 per barrel. By November 2015 and January 2016 the spread fell to $2 and $1.69, respectively.