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Crude Intentions · Talk Track by Telegraph

• 0:01
  SPEAKER_00: I'm Diddy Kinder, and I'm Aaron Sligan.
• 0:04
  SPEAKER_00: You're listening to Don't Dwell On It, the podcast where we pause just long enough to figure out what's really moving freight rail forward.
• 0:12
  SPEAKER_00: Let's get into it.
• 0:15
  SPEAKER_00: Welcome back to Talk Track, a Telegraph podcast where we talk about, discuss, and respond to the events of the day that are affecting the railroad community.
• 0:27
  SPEAKER_00: My name's Harris Liggan, CEO here at Telegraph, and I'm joined today by our director of freight market intelligence, David.
• 0:34
  SPEAKER_00: Thanks for joining in.
• 0:35
  SPEAKER_00: And um we're really diving into some topics today that are, I think, have a pretty broad global coverage, but we're really digging into how it impacts railroad shippers, equipment owners, really anybody that's involved in the freight rail space.
• 0:52
  SPEAKER_00: And today's topic is actually the um increasingly wild energy disruption that we're seeing from the conflict in the Middle East.
• 1:03
  SPEAKER_00: Dave, are you are you locked in and ready to talk?
• 1:06
  SPEAKER_01: I am really excited to talk with you about this.
• 1:09
  SPEAKER_01: I think, you know, sometimes people maybe don't fully understand how these things can be connected.
• 1:14
  SPEAKER_01: You know, something happening half a world away is going to show up on the American Railroad.
• 1:17
  SPEAKER_01: But I really believe that it does, and some of the conversations we've been having internally this past week and the stuff we've put out externally, I hope makes that case strongly for people who are interested in hearing it.
• 1:30
  SPEAKER_00: You know, it's it's interesting because with within the transportation space, um, most folks are used to the concept of fuel surcharge or FSC.
• 1:41
  SPEAKER_00: So maybe before we dive into the broader context, I think at a very high level, kind of walk us through how fuel disruptions, fuel prices, how that impacts the cost of procuring transportation.
• 1:57
  SPEAKER_01: Sure.
• 1:57
  SPEAKER_01: I think it's a great way into you know kind of understanding the moment that we're in.
• 2:02
  SPEAKER_01: And and really that allows us to speak to an important constituency of ours, which is, you know, shippers who have to be thinking about how much all of this is going to cost.
• 2:10
  SPEAKER_01: So I I think the the basic idea for someone who hasn't you know dealt with this kind of thing before is to understand that the contract between the shipper and the carrier often has a carve-out that allows the cost of fuel to go up and down at the market.
• 2:27
  SPEAKER_01: And you know, it it it makes perfect sense.
• 2:29
  SPEAKER_01: Um, you know, if if you're doing heavy haul movements, you know, these are far lower fuel efficiencies than you get with your personal vehicle.
• 2:37
  SPEAKER_01: It's a lot.
• 2:37
  SPEAKER_01: You know, railroads spend a lot of money on diesel fuel, as do trucking companies.
• 2:42
  SPEAKER_01: So modern contracts typically entail some mechanism by which if the fuel price meaningfully changes, the price for service can change to you know absorb some of that cost difference.
• 2:55
  SPEAKER_00: Okay.
• 2:55
  SPEAKER_00: Okay, that that that that's that's helpful because um I think when we tend to think about the cost of procurement, there's the line haul, there's the fuel surcharge, there are oftentimes acid swirls, and and those things combined to create effectively a total limited cost of what kind of it takes to procure and move something from point A to point B.
• 3:15
  SPEAKER_00: One of the interesting things that I always, you know, in my experience with the railroad, we would always talk about um revenue.
• 3:21
  SPEAKER_00: It was always almost kind of this carbout for that.
• 3:24
  SPEAKER_00: And those, those kind of future-looking forecasts at a prior life, oftentimes the railroads had found themselves in a almost a fuel hedging cycle, like because they they they bought so much.
• 3:37
  SPEAKER_00: They were pretty active in the markets from a hedging standpoint.
• 3:40
  SPEAKER_00: Now, obviously, though those times have come and gone.
• 3:43
  SPEAKER_00: Um, but one of the markers that they would often pay attention to, especially in the North American domestic transportation market, was um the price of West Texas intermediate crude oil or WTI as it's known in trading parlance.
• 3:58
  SPEAKER_00: Um, as we're talking today, it's it's up roughly 50% to where it was just 30 days ago.
• 4:05
  SPEAKER_00: And um recently it breached$100 a barrel.
• 4:08
  SPEAKER_00: I I think that like it touched briefly 118.
• 4:12
  SPEAKER_00: We know that this is the result of the conflict, the closure of the strait.
• 4:17
  SPEAKER_00: And I know that you've been thinking a lot about it.
• 4:19
  SPEAKER_00: You've been you you even wrote something recently about this.
• 4:22
  SPEAKER_00: How do we understand that implication of something happening here impacting what is going on in the North American freight network, specifically railroads?
• 4:30
  SPEAKER_01: Yeah, gosh, there's there's two things that that I would want to hit sort of right at the beginning of the conversation on that.
• 4:37
  SPEAKER_01: And and the first is that, you know, for people who don't follow WTI Wex Testis Intermediate Crude Prices,$100 is is a lot.
• 4:46
  SPEAKER_01: You know, I I you know people who do follow may know that, you know, before all of this we were sitting in something like the$60 per barrel range.
• 4:54
  SPEAKER_01: And now, as you mentioned, we're breaking$100.
• 4:57
  SPEAKER_01: And just to put a little more context to that, you know, several jobs ago in my career, I was an economist at the U.S.
• 5:03
  SPEAKER_01: Department of Energy.
• 5:04
  SPEAKER_01: And probably, you know, one of my highest profile responsibilities then was whenever the WTI price broke$28 per barrel, I was supposed to write three bullet points to explain that for the Secretary of Energy's office.
• 5:18
  SPEAKER_01: So like 100 and 100 plus is a lot.
• 5:22
  SPEAKER_01: So I you know I think the mainstream press has started to use the term energy crisis.
• 5:26
  SPEAKER_01: And at least in my view, that is a very merited term here.
• 5:30
  SPEAKER_01: So that's like the first thing I want people to understand.
• 5:32
  SPEAKER_01: It's not a little elevation, it's a very serious one.
• 5:35
  SPEAKER_01: And the the second thing I think to think about is you know, we said that that frankly trains use a lot of fuel, which you know I think probably makes intuitive sense to people.
• 5:45
  SPEAKER_01: But you know, we've done some analysis here in the lab where we really see a strong correlation between the operating expenses reported by um publicly traded Class I railroads and that WTI crude oil price.
• 5:56
  SPEAKER_01: And we know that you know operating expenses are top of mind for the people who run railroads.
• 6:02
  SPEAKER_01: So the the first direct connection between what's going on in the Middle East and what's happening, I think, on the tracks, if you will, is these operating expenses are gonna go up.
• 6:12
  SPEAKER_01: There's earnings calls scheduled for April.
• 6:15
  SPEAKER_01: I think that we're gonna hear a lot about this in those earning calls.
• 6:18
  SPEAKER_01: And then what the shippers, I think, should keep in mind is there is that fuel surcharge mechanism by which you know those costs can be passed on.
• 6:27
  SPEAKER_01: And I think shippers should be thinking about that.
• 6:29
  SPEAKER_01: And I'd encourage them to understand there's usually sort of a lag to that, but but all of this moves around the world and and it you know moves into all of our homes, into into all of our uh expenses as the situation unfolds.
• 6:43
  SPEAKER_00: Right, right.
• 6:44
  SPEAKER_00: So like I I think that's that's a very clear kind of like two-part point of considerations.
• 6:50
  SPEAKER_00: One of the things that folks are going to be looking at on the PLs and the earnings statements that are coming out, operating expenses likely gonna go up.
• 6:57
  SPEAKER_00: The offset there is those costs, at least a portion of that will be passed on to the buyers in the transportation market.
• 7:04
  SPEAKER_00: And so there are a couple of different ways investors likely will read that and and view it.
• 7:09
  SPEAKER_00: Ultimately, this is uh this is a drag for shippers who have had a fairly favorable shipping market for some time now.
• 7:17
  SPEAKER_00: So that's that that that's that's an interesting thing.
• 7:20
  SPEAKER_00: Do when I I don't want to just simply look at it from like a very binary or myopic lens of like expenses going up, expenses getting passed on.
• 7:31
  SPEAKER_00: I I think that that's important, but I think that's been prevalent in the industry for some time.
• 7:36
  SPEAKER_00: What isn't, I think obvious, because it's very opaque how global conflict here impacts freight volumes here, you know.
• 7:48
  SPEAKER_00: I think equipment owners have to think about the utilization and the flow of the rail cars that they're actively leasing out in the market today.
• 7:56
  SPEAKER_00: And so I know a lot of the work that you've done on the market consist has started to become much more commodity specific and getting into very specific markets.
• 8:04
  SPEAKER_00: How do you think the energy crisis is going to impact freight volumes?
• 8:11
  SPEAKER_00: And how should I think equipment owners and maybe even shippers that are in the commodity markets think about that?
• 8:16
  SPEAKER_01: Gosh, the this is the angle on this that I'm I'm personally most excited about.
• 8:20
  SPEAKER_01: And I think we're at Telegraph we're you know able to leverage our data to break new ground and to really generate insights that I hope people will find helpful.
• 8:29
  SPEAKER_01: And it's exactly that space that, you know, it really is the lessors or the the the owners of these rail cars.
• 8:35
  SPEAKER_01: And and I guess I'd like to make two um predictions or or share two notions that you know we can think about, and hopefully anyone that listens to this can think about and share with us what they think of these ideas.
• 8:47
  SPEAKER_01: But the first one is is a multi-step one that has to do with agriculture.
• 8:52
  SPEAKER_01: If if if I explain it um in in sort of too piecemeal or too complicated of a way, please stop me.
• 8:59
  SPEAKER_01: Uh agriculture's close to my heart.
• 9:01
  SPEAKER_01: I'm from Iowa, I'm still somewhat.
• 9:02
  SPEAKER_00: Yeah, you're you're an Iowa guy, right?
• 9:04
  SPEAKER_01: Oh yeah, yeah, yeah.
• 9:05
  SPEAKER_01: I I I used to teach at something called corn school.
• 9:08
  SPEAKER_01: So I uh I love this stuff.
• 9:10
  SPEAKER_01: And and sometimes when you love something, um it's actually harder to explain.
• 9:15
  SPEAKER_01: So if if I don't connect any dots, I I trust you'll keep me honest on that.
• 9:20
  SPEAKER_01: But the the mechanism that's on my mind is that most farmers in the part of the world where I come from are in these grain belt states.
• 9:29
  SPEAKER_01: You know, we would call these farmers row crop farmers, you know, big farms make their livings farming, not a hobby farm, you know, commercial, professional farming.
• 9:38
  SPEAKER_01: Uh really have two choices, at least you know, in Iowa, Illinois, the area where I'm from, and it's corner soybeans.
• 9:45
  SPEAKER_01: And that matters because corn is critically dependent upon nitrogen fertilizers and input.
• 9:53
  SPEAKER_01: Nitrogen fertilizer is made from natural gas, and the price of natural gas is very much tied to the price of crude oil.
• 10:00
  SPEAKER_01: You know, so everything we said about these sky-high energy prices, it's not just oil and gasoline for your car, it's also nitrogen fertilizer to grow the corn crop.
• 10:12
  SPEAKER_01: You know why that matters is because in in American row crop farming, we are in the last weeks possible to decide what crop you're going to plant.
• 10:21
  SPEAKER_01: And if I'm a farmer looking at the situation right now, I'm saying, Wow, the cost of my nitrogen fertilizer, if I'm going to grow corn, is going way up.
• 10:30
  SPEAKER_01: Last year we had a record high corn harvest, so corn prices aren't high.
• 10:36
  SPEAKER_01: And it's really tempting.
• 10:42
  SPEAKER_00: They've not actually come out and gone to market.
• 10:44
  SPEAKER_00: Okay.
• 10:45
  SPEAKER_01: Yeah, so so it you know, if I'm making that cropping decision right now, which you know I really have to make, the seeds essentially have to be sown by early April.
• 10:54
  SPEAKER_01: I'm thinking low corn prices, low prices for corn, high input prices to grow corn, I'm gonna go soybeans.
• 11:03
  SPEAKER_01: If I go soybeans, you know, thinking about, for example, like my family's farm, if I grow corn, I can grow something like 190 bushels per acre.
• 11:12
  SPEAKER_01: If I grow soybeans, I can grow something like 70 bushels per acre.
• 11:16
  SPEAKER_01: That's a big change in volume, and it's a uh similarly sized change in weight.
• 11:23
  SPEAKER_01: So the first thing to think about there is just if we're talking about American farmers switching from corn grain to soybean, we're looking at a uh a significant decrease in the volume of grain in the 2026 harvest, which translates to a significant decrease in the volume of essentially grain hopper cars we need to move it, and that's both by volume and weight.
• 11:47
  SPEAKER_01: And then the second piece of it is soybeans and corn don't necessarily follow the same paths, the same trajectory.
• 11:54
  SPEAKER_01: A lot of corn goes north-south.
• 11:57
  SPEAKER_01: So from places like Iowa, we'll go south to feed lots, say in Missouri, or we'll maybe go further south down to ethanol facilities or export facilities in the Gulf of Mexico.
• 12:07
  SPEAKER_01: Soybeans, much more of a movement westward towards export ports in the Pacific Northwest.
• 12:14
  SPEAKER_01: So that gives us tr a trajectory change in where the grain hopper cars would need to be deployed most profitably this year.
• 12:23
  SPEAKER_01: So I I think we we have a real reason to believe there's a change in both the volume and the the geographic placement of grain hoppers in 2026.
• 12:33
  SPEAKER_01: The second one that that's on my mind has to do with tanker cars.
• 12:36
  SPEAKER_01: You know, and one of the things that we've seen, depending on the market price for oil, sometimes if the price is high enough, it makes sense to move oil not via pipeline, which is the cheapest way to move it, but to move it in tanker cars.
• 12:49
  SPEAKER_01: But you only get there when you have a very high market price for crude oil.
• 12:53
  SPEAKER_01: Then essentially the seller of that oil can eat the extra expense of train compared to pipeline.
• 13:00
  SPEAKER_01: And if this conflict endures and those prices stay up, I think we could see some traffic moving that way too.
• 13:06
  SPEAKER_01: So there's real potential for commodity shift.
• 13:09
  SPEAKER_01: And when we think about the very challenging situation that rail car lessers find themselves in, you know, where should these rail cars be most profitably deployed?
• 13:18
  SPEAKER_01: I think they've got to watch these shifts.
• 13:20
  SPEAKER_00: Yeah, so Dave, that is a that's a I I mean, those are interesting trends that are, I mean, they're they're not service level, right?
• 13:29
  SPEAKER_00: We've got to go a couple layers deeper here.
• 13:32
  SPEAKER_00: Um when we think about this, how are you monitoring it?
• 13:36
  SPEAKER_00: And and do you think this is gonna be something we to we discuss more heavily in the next market contest?
• 13:41
  SPEAKER_01: I think for sure that we'll discuss it, and and we should.
• 13:44
  SPEAKER_01: You know, I think we're sort of positioning ourselves as thought leaders here, willing to make you know, bold uh bets that we think are the right ones.
• 13:52
  SPEAKER_01: And you know, I think this is a great place to put a flag on our own analysis.
• 13:55
  SPEAKER_01: You know, how do we watch it?
• 13:57
  SPEAKER_01: The the first one I think of is that the the government runs an annual survey of farmers' planting intentions.
• 14:03
  SPEAKER_01: They essentially ask all the farmers what are you going to grow this year?
• 14:06
  SPEAKER_01: The result of the latest one will come out at the end of the month.
• 14:09
  SPEAKER_01: I think if we see 10 days, yeah.
• 14:12
  SPEAKER_01: You know, a change in expectations from what would have you know been expected previously.
• 14:18
  SPEAKER_01: So basically a a change in the corn soybean allocation compared to last year, then we'll know there's something to this argument about um volume.
• 14:26
  SPEAKER_01: And then trajectory, we'll see it in the telegraph data.
• 14:29
  SPEAKER_01: You know, we'll see changes in where rail cars are deployed.
• 14:32
  SPEAKER_01: We can search by commodity.
• 14:34
  SPEAKER_01: Are things moving away from a sort of corn-based north-south to a soybean-based central west uh trajectory?
• 14:42
  SPEAKER_01: We'll see it in our data and we'll certainly be monitoring it.
• 14:44
  SPEAKER_00: Yeah, it's it's been really interesting to see some of the trends across the Midwest regarding service as well.
• 14:50
  SPEAKER_00: I I I've been particularly, you know, watching some cycles, and so that interesting call out there as well.
• 14:56
  SPEAKER_00: Um going back to you for a minute, right?
• 14:59
  SPEAKER_00: You uh in earlier versions of your life have spent a ton of time living and working in around the DC area, prior DOE, prior DOT, um, and also the Kennedy Center, which is interesting.
• 15:14
  SPEAKER_00: Um, putting the DC hat on for a minute, um what is probably the policy angle that is not being talked about yet that folks should be considering?
• 15:26
  SPEAKER_01: There's one in particular that I think you know speaks particularly to American railroading, American freight railroading in 2026.
• 15:35
  SPEAKER_01: And that's you know the relationship with China.
• 15:38
  SPEAKER_01: And one of the things that that we called out when this you know whole thing started was you know, as we've modeled trade flows that end up on the railroads, we found a really meaningful relationship um between intermodal volumes and the US-China trade relationship.
• 15:53
  SPEAKER_01: And so one of the things you know we were looking forward to as we you know prepare our next contest report is you know what's coming up there.
• 16:00
  SPEAKER_01: Well, what was coming up was at the end of the month there was going to be a summit between Trump and Xi in Beijing.
• 16:06
  SPEAKER_01: And you know, for those of us, you know, who I think all of us want to see a very healthy intermodal sector, we sort of had hopes that this is going to be a very productive summit.
• 16:15
  SPEAKER_01: Maybe you know some of these trade tensions will be cleared and you know we can adjust our projections higher based on these trade flows.
• 16:23
  SPEAKER_01: And at that moment, I think we were thinking that in the real sticking point is tariffs.
• 16:27
  SPEAKER_01: So hopefully that stuff can be worked out.
• 16:30
  SPEAKER_01: Now we have a new, much bigger sticking point.
• 16:32
  SPEAKER_01: You know, most of the energy, if if people don't realize that is now sort of blockaded behind the Strait of Hormuz, was actually uh hydrocarbons going to China for their energy sector.
• 16:43
  SPEAKER_01: So I I think we have a real thorn in that relationship as a result of this conflict.
• 16:48
  SPEAKER_01: And so we called out early on, hey, this might make for um not a very productive summit compared to what we would hope.
• 16:55
  SPEAKER_01: And you know, I think the White House saw that too.
• 16:57
  SPEAKER_01: Of course, their field of vision is bigger than ours, but that summit was actually moved till May uh early in this week.
• 17:03
  SPEAKER_00: Yeah.
• 17:04
  SPEAKER_01: So on the policy side, I think the relationship with China is critically important and it is very much a play as a result of what's going on.
• 17:11
  SPEAKER_00: You know, it's it's interesting because I I felt as if there the lagging indicators had not pointed in an uptick quite yet.
• 17:18
  SPEAKER_00: But I think you and I have been discussing behind the scenes that there were things that we were seeing that it felt like if we had a handful of weeks of building demand, that we might see a little bit of a s of of a real true sustained swing back to a stronger demand market.
• 17:35
  SPEAKER_00: Feels like this doesn't support that narrative.
• 17:39
  SPEAKER_01: Oh, I agree.
• 17:40
  SPEAKER_01: I mean, you know, just in the sense that so much stuff, you know, in the current state of the world gets made in China, is sent to the US for importation on maritime vessels, gets off at the terminals, and then moves around the country on railroads.
• 17:54
  SPEAKER_01: When that's at risk, all sorts of volumes are are at risk.
• 17:58
  SPEAKER_01: And and that's at new risk, which we thought we had just gotten past the old ones.
• 18:02
  SPEAKER_01: So I'm I'm very much with you.
• 18:05
  SPEAKER_00: I mean the the the the strait being close, I I I was surprised at all the things that are impacted, right?
• 18:11
  SPEAKER_00: Oil, obviously, right?
• 18:12
  SPEAKER_00: You're pointing out natural gas.
• 18:13
  SPEAKER_00: Very clear.
• 18:14
  SPEAKER_00: Like the those two things are are very, very well understood.
• 18:18
  SPEAKER_00: Helium also at risk.
• 18:20
  SPEAKER_00: And that's involvement in the process of chipmaking also potentially has some knock-on effects later on.
• 18:27
  SPEAKER_00: Um, do we think that that this broader kind of like energy crisis is there anything that the shipper in that is operating in, I don't know, uh Minnesota, Illinois, Iowa can do to better position themselves for for what is you know continually evolving and unfolding.
• 18:51
  SPEAKER_01: I think that's a great call out.
• 18:52
  SPEAKER_01: I mean, the first thing that comes to mind is revisiting of the transportation procurement budget for the year.
• 19:00
  unknown: Okay.
• 19:00
  SPEAKER_01: If you're gonna be moving freight around, it's gonna be fueled uh by the things that have gone up dramatically in price.
• 19:06
  SPEAKER_01: You know, I think there is some potential, and this is something we're starting to look at now that you know, lanes that were sort of solely in trucking's camp before, maybe there's room for intermodal moves because on a ton mile basis you are going to save fuel by going on the rails.
• 19:21
  SPEAKER_01: And you know, that's something we are helping people think about all the time.
• 19:25
  SPEAKER_01: So I think there's there's sort of two things there.
• 19:28
  SPEAKER_01: Expect budget implications, consider um more fuel efficient movements through utilization of intermodal options.
• 19:36
  SPEAKER_01: Those would be the two that would come to mind.
• 19:38
  SPEAKER_01: And I suppose just making sure you understand the fuel surcharge components of your current transportation contracts, because they're happening whether you want them to or not, but you know, at least you should be prepared to understand what is within the realm of the possible there.
• 19:51
  SPEAKER_00: Okay.
• 19:52
  SPEAKER_00: Well, David, as much as I enjoy talking to you from this uh amazing phone booth, this has been a such a good conversation.
• 20:00
  SPEAKER_00: Thanks for uh for taking the the the time to chat through this.
• 20:03
  SPEAKER_00: And I think that if anybody that is watching this or or listening has any additional follow-up questions or feels like you might just need a second set of eyes to take a look at it.
• 20:13
  SPEAKER_00: Um David, I I'm sure you'd be comfortable if they reached out and wanted to get it.
• 20:18
  SPEAKER_01: This is my favorite stuff in the world to think about.
• 20:19
  SPEAKER_01: So if you're thinking about it too, please do reach out.
• 20:22
  SPEAKER_01: Awesome.
• 20:22
  SPEAKER_00: Well, thanks again.
• 20:23
  SPEAKER_00: Uh another great episode of Talk Track, and uh, we'll talk to you next time.
• 20:28
  SPEAKER_00: Thanks for tuning in.
• 20:29
  SPEAKER_00: And thanks for watching.
• 20:30
  SPEAKER_00: Don't dwell on it.
• 20:31
  SPEAKER_00: Stay tuned for more.
• 20:33
  SPEAKER_00: Follow the show wherever you listen to podcasts and find us on LinkedIn to keep up with what we're building.