The transportation situation has been further compounded by the glut of oil accumulating in the middle of the country as new Bakken shale output is flowing there along with increased oil imports from Canada. To date, the restriction on moving large volumes of crude oil from the Cushing, Oklahoma storage point to Gulf Coast refineries has resulted in depressed oil prices at that mid-continent site. The low oil price has significantly helped the few mid-continent refineries in operation that benefit from a low feedstock price and high final product prices. The recent reversal and expansion of the Seaway Pipeline will help to correct this geographical supply imbalance and should result in boosting mid-continent oil prices. But this move hasn't solved the problem totally, and won't be a solution if additional oil continues to come from the Bakken formation and Canada.

To try to overcome these problems, the oil industry is reverting back to historical methods of moving oil such as truck, train and barge, or a combination of the three, in addition to pipelines. Railroads are becoming a popular transportation option for shale oil, especially the oil from the Bakken formation in Montana and North Dakota. Recently, Phillips 66 (PSX-N) announced a 5-year contract with Global Partners L.P. (GLP-N) to move Bakken oil to the company's Bayway refinery in New Jersey. Global will use its rail loading, logistics and transportation network to deliver about 50,000 barrels per day to Phillips 66. This is merely one of many new and expanded contracts to move oil production from the Bakken and South Texas Eagle Ford formations to refineries.

Eoin Treacy's view The pace with which new supply is being developed in North America's shale oil regions , companies face a challenge in find ing a way to get their product to market. Since pipelines are politically contentious, take time to build and because companie s do not yet know how much oil will need to be transported, demand for rail capacity has increased. This is likely to remain a growth area for as long as it takes new pipelines to be built

This development is a significant contributing factor in the outperformance of the Dow Transportation Average. It broke out to new all-time highs a month ago. While overbought in the short-term, a sustined move back below the 200-day MA would be required to question medium-term scope for additional upside.

Union Pacific Corp remains in a broadly consistent medium-term uptrend and a sustained move below the 200-day MA, currently near $120 would be required to question medium-term upside potential. Canadian National Railway has a similar pattern. (Also see Comment of the Day on August 24th) , Kansas City Southern has also been trending consistently but is temporarily overextended relative to the 200-day MA and susceptible to mean reversion. Genesee & Wyoming and Canadian Pacific Railway have similar patterns.

The concentration of CSX Corp and Northfold Southern's networks in the densely populated North East and particualrly near the Marcellus Shale wh ich have been most gas-centric and are closer to pipeline infrastructure may have contributed to their underperformance relative to those posted above