FUELSNews 360 - Q1 2016

M A R K E T N E W S & I N F O R M A T I O N

FUELSNews 360° Quarterly Report Q1 2016

Table of Contents

FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activityin the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends andreporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain.

5 Executive Summary

6 Overview

6 January through March, 2016

7 1st Quarter Summary

8 Economic Outlook

8 Global Economic Outlook

10 U.S. Economic Outlook

12 Fundamentals

12 Bulls Find Footing in Falling Crude Oil Production

14 Refined Product Inventories Exceeding 5-year Averages

16 IEA Calls the Bottom While Warning of Middle East Price War

18 U.S. Refining Buoyed by Domestic Crudes and Distillate Export Markets

20 Regional Views

20 PADD 1A, NortheastCommentary–Evan Smiles

23 PADD 1B & 1C, Central & Lower AtlanticCommentary–Chris Carter

26 PADD 2, MidwestCommentary–Dan Luther

28 PADD 3, Gulf CoastCommentary–Dan Luther

32 PADD 4, Rocky MountainCommentary–Nate Kovacevich

34 PADD 5, West Coast, AK and HICommentary–Matt Elder

36 Canada

38 Alternative Fuels

38 Renewable FuelsCommentary–Jessica Phillips

40 Natural Gas

44 Electrical Power

46 Transportation

46 Transportation Logistics

49 Mobile Refueling for DEF

50 FUELSNews 360˚ Supply Team

FN360 Q1 2016_Layout 1 5/2/16 8:48 AM Page 3

As Q1 of 2016 has established, this will be a difficult year to predict crude oil prices and a good year for contrarians. Several conflictingglobal crude oil discontinuities converged into clearer view as we exited 2015 and moved into 2016. These discontinuities are locked in atug of war to establish a “new normal” crude price and global supply/demand equilibrium.

Bearish crude oil realities dominate the news cycle. Iran is re-entering the world crude markets (amid indications that Iran has ambitiousgoals to ramp crude production) while Saudi Arabia is pumping crude at record levels to drive out higher-cost producers in the Americas.Record crude inventories are building around the world and U.S. crude production continues near record levels despite the decline in activewells. All this bearish news is occurring against a back drop of softening Chinese demand.

So, why, against these headwinds, has crude oil rebounded off its $26 low in February to find a footing in the high 30s – low 40s in earlyApril? Two words—”Bullish Sentiment,” stemming from several factors: production degradations in the UAE, Nigeria and Iraq; decreasedNorth American drilling amid the rapid decline in rig counts (down 50% from one year ago, and 80% from 2014); numerous shutteredwells (for the time being anyway) in U.S. shale plays; weakness in the U.S. Dollar; and a rumored (but unrealized) crude oil productionfreeze by the Russians, Saudis and other Middle Eastern countries.

While bearish realities are more visceral and real than bullish sentiment, the bulls have lent early support to a gradually emerging globalsupply-demand balance that is forecast later in 2016.

Domestically, the U.S. oil industry is a tale of two nations. Upstream, tens of thousands of jobs have been lost in the oil and gas sector asunemployment in that industry approaches ten percent. Downstream, refineries are running flat out as robust domestic gasoline consumptionand exports (9.75 million b/d in March—a record high for the month) have not kept pace with falling gasoline inventories (11-millionbarrel decline in March). Gasoline supply/demand realities have helped support domestic gasoline crack spreads and prices over the pasttwelve months.

As refiners maintain gasoline production to meet demand, distillate has been dragged along for the ride with inventories increasing despiteslightly growing distillate consumption and exports. High distillate inventories, combined with near five-year peaks in distillate production,have depressed ULSD prices and crack spreads in Q1 with the average ULSD crack spread dropping to 25 cents/gallon in March, the lowestMarch crack spread since 2010.

Strong gasoline consumption and exports should keep refineries running at record levels, maintaining refined products output andinventories. This, of course, is good news for ULSD buyers as increased distillate inventories work to moderate prices in 2016. However,concurrently global crude oil supply/demand should find a balance in 2016. With balanced crude oil supply and demand, we anticipatecrude oil prices will firm-up, which will lead to firming distillate prices as well. So, enjoy low ULSD prices in the first half of 2016, butprepare for what will most likely be firming crude and refined product pricing later in the year.

Q1 2016 Executive Summary

5 © 2016 Mansfield Energy Corp.

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The first quarter of 2016 began with a weakening of the futures market,as poor economic news from the end of 2015 and a mild winter depressedprices. Crude supplies continued to expand, as Iran re-entered the marketdetermined to restore production levels to their pre-sanctions levels, andother OPEC countries continued to pump at high levels. OPEC outputjumped 280 kbpd in January. WTI futures values dropped below $30/b inFebruary. Oil stockpiles were brimming, and forecasts of demand growthwere trimmed. It seemed possible that crude prices could spiral down to$20/b. In the U.S., stocks of crude oil passed 1.2 billion barrels for thefirst time in history.

OverviewJanuary 2016 through March 2016

WTI Crude Futures

Source: New York Mercantile Exchange (NYMEX)

dollars per barrel

With the world seemingly awash in oil, Saudi Arabia, Russia, Venezuelaand Qatar stepped in with a proposal to cap oil output at January levels.Admittedly, these were high levels, but the proposal set off a rally. Crudeprices climbed back to the high $30s and even low $40s in March. Froma barrel perspective, since an agreement was not reached at the DohaMeeting on April 17, the cap remained non-binding. From a marketpsychology perspective, however, the talks have demonstrated that theproducers first, are watching the market, second, will take action if pricesdip too low too fast, and third, are staying the course to shut in highercost producers, particularly those in North America. •

First Quarter Summary


Summary, 1st Quarter 2016

$38.68

$1.1816


17685.09

$1.4223

The crude price rally was quickly reflected in productmarkets. RBOB (gasoline) futures ramped up quicklyand surpassed diesel prices. Winter temperatures inmuch of the Northeast and Ohio Valley had beenmild, which reduced heating oil use and encouragedtravel. RBOB prices rose above $1.40/gallon inearly March and remained in the $1.40 –$1.50/gallon range for the rest of the month.Diesel prices, which had slumped to $0.90/gallonin January, recovered to the $1.15 – $1.25/gallonrange in March. At the retail level, gasoline prices atthe end of the quarter averaged $2.066/gallon,38.2 cents per gallon less than a year prior. Retaildiesel prices averaged $2.121/gallon, 70.3 centsper gallon less than in the previous year.

Like crude inventories, product inventories reachedlavish levels. Domestic distillate inventories soaredwell beyond their seasonal averages as refinersaggressively pursued cost-advantaged barrels fortheir lucrative gasoline outputs and the usualdistillate dumping grounds in Europe rapidly filled to capacity. Distillate inventories of 160 – 165million barrels were at five-year highs.

Gasoline inventories also reached record heights,swelling to nearly 259 million barrels in February.End-March stocks of approximately 243 millionbarrels were higher than end-March stocks in all years extending back to 1990, when the EIA first started reporting gasoline stock levels. •

Overview


As this issue of FUELSNews 360° goes to press, theInternational Monetary Fund (IMF) has just releasedits April 2016 World Economic Outlook (WEO). Whilethe news is not all bad, it is significant that theheadline is “Too Slow for Too Long.” The baselineprojection for global growth is 3.2% for 2016, in linewith 2015, but 0.2% less than was forecast in theJanuary 2016 WEO. Among the reasons cited wereChina’s slowdown and weak commodity prices. Lastyear’s growth was 3.1%, and the group had lookedfor better growth this year than the revised forecastof 3.2%. The IMF has in the past considered growthof 3.0% to be a technical recession.

As always, oil prices play a key role. Low oil priceshave lengthened recessions in Russia and Brazil, andthey have slowed growth in other oil exportingcountries, including Saudi Arabia, Nigeria, Venezuelaand Canada.

IIIIIII

IIIIIII

Global Economic Outlook

GDP, Constant Prices, Percent Change

Source: International Monetary Fund

According to the IMF, uncertainty has increased, and the “risks of weaker growth scenario are becoming more tangible.” The IMF projects that the recoverywill strengthen in 2017, which is driven mainly by emerging economies. Its theme of “too slow for too long,” however, included concern over theslowdown in capital flows to emerging markets. Still, the IMF believes that there are many policy actions available, across the globe, to strengthen growth.


According to the World Bank, gross national income (GNI) per capita grew at5.1% per year from 2004 to 2014, growing from $6,584 in 2004 to$10,799 in 2014 (constant U.S. dollars). The gap between rich and poor is aconstant concern. In North America, the GNI per capita was $54,879/capita,versus only $1,646/capita in Sub-Saharan Africa. However, the rates ofeconomic growth in North America have lagged other world regions. Many

Indexed Growth in GNI by Region, 2004=1.00

developing countries experienced double-digit growth in GNI per capita duringthe 2004 – 2014 decade. The following figure indexes GNI growth since2004. The greatest rates of increase have been in Sub-Saharan Africa, LatinAmerica and the Caribbean, and the Middle East and North Africa. In theseregions, GNI per capita in 2014 was approximately 2.5 times as much as itwas in 2004. These are the regions that have raised the world’s growth rate.•

Source: World Bank


Average Unemployment Rate (16 years old & above)As the U.S. economy moves into 2016, theoverall feeling is that of a country almostrecovered from recession, but with a lingeringsense of caution. As the following figureillustrates, unemployment remained stubbornlyhigh from 2009 through 2014. It peaked at9.6% on average in 2010. Last year,unemployment averaged 5.3%. Data for thefirst quarter of 2016 show that unemploymenthas fallen to 4.9%, just 0.3% higher than itwas in 2007.

U.S. Dollar Weakens, Crude Oil Rallies

Source: DTN ProphetXIIIIIII

IIIIIII

U.S. Economic Outlook

Source: Bureau of Labor Statistics

The first quarter of 2016 also brought a collapse, then a quick rally in crude oil prices, alongside a strengtheningthen weakening U.S. Dollar, as shown below. The Federal Reserve Bank in December 2015 lifted rates for thefirst time in nearly a decade, signaling its faith in the strength of the economy. Since then, however, the progresshas leveled off. Federal Reserve Chair Janet Yellen stated that the policy would be to “proceed cautiously.” At itsmeeting in March, the Fed announced that it now forecasts two quarter-point increases in the coming year ratherthan the four it had initially planned. Some officials warned of “appreciable” risks to the economy depending onthe timing of the next rate increase.

The Consumer Sentiment Index dropped three months in succession after hitting 92.6 in December 2015. It fell to 92 in January,91.7 in February, and 91.0 in March. This indicates a bit more consumer caution, though it shows a far rosier sentiment than wasseen in 2008 – 2011, when the index bumped along in the range of 55 to 75.


Trimmed Personal Consumption Expenditures (PCE) Percentage of Change

Source: Federal Reserve Bank of Dallas

Consumer Sentiment Index

Source: University of Michigan

January and February of 2016 brought a slight increase in Trimmed Personal Consumption Expenditures (PCE). Domestic energy pricesremained low, improving consumers’ purchasing power at home. Most economic agencies, however, forecast that energy prices will rise bythe end of the year. The U.S. domestic oil and gas industry has been hit hard by low prices. Production is declining. Althoughunemployment has fallen for the U.S. as a whole, unemployment among oil and gas workers was estimated at 8.5% in 2015, and wasexpected to reach 10% in 2016. With energy prices forecast to rebound, additional job formation and wage growth will be needed. •

January February March92.0 91.7 91.0

Consumer Sentiment Index Q1 2016

Crude Oil Inventories Approach All-time High

Source: Energy Information Administration (EIA)

Crude Oil Lacks that Old Familiar Feeling as Bulls Find Footing in Falling Production

Fundamentals

Commercial crude oil inventoriesapproached the nation’s 545-million barrel record duringthe first quarter. At the end ofMarch 2016, crude inventoriesstood at 534.8 million barrels. At the same time, inventoriesstored in Cushing, Oklahoma(pricing hub for NYMEX crude oilfutures) were 66 million barrels.

U.S. crude inventories grew by more than 47.5 million barrels in the first quarter. Lowprices took a steady and severe toll on the U.S. upstream industry. The nation’s oil-seekingrig count, already down over 60% at the end of 2015, shed another 214 rigs betweenthe first week of January 2016 and the first week of April 2016. According to BakerHughes, during the week of January 8, 2016, there were 664 oil and gas rigs at work inthe U.S. This number fell to 450 active rigs by April 1, 2016. One year prior, on April 1,2015, there had been 1,028 rigs, therefore, 578 rigs have shut down in just one year.

The effects of the numerous rig closures manifested as steady weeklyproduction losses beginning in mid-January. A 158,000-barrel-a-day,six-week retreat lasted until the end of February and continued intoMarch. Production of 9,219 kbpd on January 1, 2016, fell to 9,008kbpd on April 1, 2016, a drop of 211 kbpd during the first quarter.Traders expect declines to only worsen, defending prompt crude oilprices against bearish inventory data.

Domestic Oil Production Wanes as Rig Counts Collapse

Average Oil Production per Well in the Permian Region



Even as rig counts declined sharply, the industry’ssizeable fracklog and rising first-month productionrates caused drillers to respond swiftly. •


Fundamentals

Domestic Distillate Inventories Tread Water Ahead of Seasonal Midwest/North Plains Demand


Meanwhile, domestic gasolineinventories rose from 232 millionbarrels at the beginning of January to258 million barrels by mid-Februarybefore seasonal drawdowns broughtthe level to 242.6 million barrels atthe end of the quarter. High inventoriesactually extended the nation’s surplusin comparison to 5-year seasonalaverages to 24.5 million barrels.

Refined Product Inventories Exceeding 5-year Averages

Distillate inventories, on the otherhand, continued to tread water,refusing to follow the normalseasonal downturn. Inventories atthe end of the quarter were 161.2million barrels, which is 34.1million barrels, or nearly 27 percent,above the 5-year seasonal averageof 127.1 million barrels.

Domestic Gasoline Inventories Exceed 5-year Averages



Fundamentals

Without additional cold-weather demand to soak upsome of these excess barrels, some refiners mayslow output after completing turnaround operations,but ultimately, gasoline will be the deciding factor fordriving output. Summer-grade premiums nearlydouble refiners’ gasoline margins and with theexpiration of cheaper March futures, distillateproduction will be pulled along for the ride—causingexcess distillate supply, which will benefit dieselconsumers as prices dip lower still.

As we begin the second quarter of 2016 (asillustrated in the figure below), gasoline and dieselinventories rose slightly over the prior week andcrude had a modest decline. Crude and refinedproduct inventories are up year over year. •

U.S. Domestic Inventories


Fundamentals

IEA Calls the Bottom While Warning of Middle East Price WarHalfway through the first quarter, the market recorded its lowest domestic crude oil pricein twelve years at $26.05 a barrel. Up roughly 50 percent since then, barrel prices nowearn more than $40 a barrel and traders seem confident petroleum prices will onlycontinue to mend as rig counts decline further and domestic production slides lower, but the Paris-based International Energy Agency (IEA) does not necessarily share thesame opinion.

Global oil supplies slipped 180,000 barrels a day in February as non-OPEC nationstrimmed output in response to lower barrel prices, according to the Agency’s monthly OilMarket Report (OMR). By the end of the year, IEA analysts expect non-OPEC productionto fall by 750,000 barrels a day while OPEC nations struggle to find balance, supportinghigher product prices and the IEA’s claim of “signs that prices might have bottomed out.”

Monthly Iran Crude Oil Production


Fundamentals

Even so, the Agency went on to say, “This should not, however, betaken as a definitive sign that the worst is necessarily over,” as totalglobal production still rose by roughly 1.8 million barrels a daycompared to February 2015 when domestic rates were actually200,000 barrels a day higher and rising. While domestic rates havedeclined recently, OPEC nations now wage a very public battle formarket share, disregarding lower barrel prices and offsetting all non-OPEC cuts. Domestic suppliers must wait on the sidelines as oil-dependent nations decide crude oil’s trajectory. A post-sanction Irancould prove to be the fly in the ointment.

Talk of a production freeze encouraged bullish traders, increasingbarrel prices during the month of March 2016 above $40/b. It ispossible that stronger prices in the second quarter could invitestruggling domestic drillers back into the field but a production capwould only impact the global supply balance if everyone participates(i.e., Iran) and non-OPEC production continues to decline. Several oilministers have already threatened to increase production to the max ifother producers do not rein in output. While Iran’s return to the markethas been more gradual than predicted, the Islamic Republic’s risingoutput, combined with retaliatory barrels from partner-competitors,could force the price of oil back to February lows.



U.S. Gasoline Import Requirements Are a Small Fraction of Demand


Although U.S. crude production is threatenedby low prices, output remains well abovehistoric levels. Many refineries in theMidwest, Rocky Mountains and Gulf Coasthave enjoyed access to ample supplies oflow-cost crude feedstocks, and theirutilization rates have soared. Most fearedthat lifting the outdated restrictions onexports of domestic crude this year wouldeliminate this advantage. U.S. crude exportsduring the first quarter remained atapproximately 420 kbpd, actually decliningslightly from their fourth quarter 2015 levels.Refinery utilization rates remained high. Atthe beginning of January, the refineryutilization rate was 92.5%. By the last weekof March, it declined slightly to 90.4%.

U.S. Refining Rolls Along,Buoyed by Still-AmpleDomestic Crudes andDistillate Export Markets

The gasoline-maximizing capability of theU.S. refining industry is without peer inthe world. In June of last year, aproduction record was set with refinerand blender net production topping the10-million-barrel-per-day mark. As thefigure illustrates, gasoline exportsaveraged approximately 440 kbpd duringthe first quarter, versus gasoline importsof 560 kbpd. Currently, exports aretrending down and imports up as thesummer driving season approaches, butU.S. import requirements constitute avery small percentage of demand.

U.S. Refinery Utilization Rates Remain Strong



Fundamentals


The meteoric rise of U.S. diesel exports is one of themost astonishing—and often overlooked—results ofthe Shale Revolution. The figure below illustrates howdiesel exports shot up from 110 kbpd in 2004 to1,186 kbpd in 2015. These exports have found readymarkets overseas where many economies are morediesel-oriented than gasoline-oriented, but they alsoplace the U.S. in a role as an export-refining center. As such, the industry’s profitability is more subject toglobal oil prices, and domestic diesel prices arebecoming more sensitive to global demand for U.S.distillate exports. •

Presently, U.S. gasoline demand remains around 2.5times as large as diesel. As U.S. refineries run at highrates to produce gasoline, however, diesel productionhas risen in tandem. During the first quarter, U.S.diesel exports averaged around 1,240 kbpd, whilediesel imports averaged only 180 kbpd.

The U.S. Has Become a Premier Exporter of Distillate


The Meteoric Rise of U.S. Diesel Exports


Fundamentals

BEAR


PADD 1 East CoastPADD 1A Northeast

Regional Views

Evan’s Estimation IThe first quarter of 2016 in the Northeastern U.S. turnedout to be an unusually warm start to the year, withtemperatures well above average for a large part of thewinter. As a result of this warmer weather, New YorkHarbor ULSD basis numbers stayed well depressedcompared to previous years. Basis numbers did make aslight rebound compared to the fourth quarter of 2015,however, but still continued to remain a discount to theNYMEX heating oil screen. Gasoline (RBOB and CBOB)basis in the NYH region also traded below the NYMEXRBOB screen on average over the first quarter of 2016.

My prediction for the second quarter of 2016 in theNortheast is bearish on the distillates and bullish on thegasoline. After coming out of a warm winter and lower-than-normal distillate demand, already elevated distillateinventories are going to remain steady or continue to build.This will force downward pressure on the NYMEX heating

Evan Smiles, Supply SupervisorSee his bio, page 50

PADD 1A Wholesale vs. DOE Retail Diesel (dollars per gallon)

Source: Energy InformationAdministration (EIA)

“My prediction for thesecond quarter of 2016 inthe Northeast is bearish onthe distillates and bullishon the gasoline. ”

BULL

oil and push NYH ULSD basis numbers further belowthe NYMEX. I can see basis numbers returning tovalues that we saw in late 2015/very early 2016 of -0.03 to -0.05. In regards to gasoline, the peak of thedriving season is typically through the summer months.With it already feeling like we are in the early days ofsummer, gasoline demand could elevate even earlierthis year causing some upward pressure on the market.The switchover to summer gasoline will also helpbolster prices through this second quarter.

Regarding gasoline, the peak driving season is typicallythrough the summer months. It feels like we arealready in the early days of summer, gasoline demandcould elevate even earlier this year causing someupward pressure on the market. The switchover tosummer gasoline will also help bolster prices throughthis second quarter. •


PADD 1 East CoastPADD 1A Northeast

New York Harbor ULSD—Winter 2015/2016Distillate supply in the New York Harbor region historicallyruns tight as we trek through the coldest months of the year.The main factors causing this are the extreme coldtemperatures, forcing a spike in heating oil and ULSDdemand, and the logistical nightmares of delivering product,due to high winds and numerous snowstorms. The previoustwo winter seasons (before this most recent one) showed justthat as distillate supply was constricted and prices spiked.

The winter of 2015/2016, however, has proven to be out ofthe ordinary and one that many will never forget. Mildertemperatures and lighter-than-normal precipitation wereexperienced throughout the Northeast, with temperaturesdropping into the negative temperatures in the New Englandstates for just one weekend. These warmer temperatureshave kept heating oil and ULSD supply plentiful from the

moment winter started to the conclusion of the season.Even the refinery and pipeline issues that were experiencedthroughout February (PBF’s Delaware City shutting down,the Buckeye pipeline shutting down to Long Island due to asunken barge, Irving Oil’s St. John refinery’s FCC unitmalfunctioning) could not bolster ULSD prices above whatthe NYMEX was trading at (see graph below).

These warmer temperatures have caused an already over-supplied Northeast to become more flooded with distillatesupply. Now that the distillate season is coming to a closeand we are about to enter the height of the gas season,distillate supply could remain elevated at least through thenext winter season. This oversupply means cheaper dieselfor the end consumer for an extended period of time(barring any refinery or pipeline disruptions). •

Pennsylvania Gas RequirementThe State of Pennsylvania, along with numerous otherstates, currently has a 1 psi Reid Vapor Pressure (RVP)allowance in place for all gasoline blended with 9% –10% ethanol that is in effect until May 1, 2016. Withthis waiver expiring within the next few months (beforethe ASTM standard is revisited), the state is attemptingto get an extension granted. This extension, if approved,will diminish any supply issues and reduce any pricespikes that would have arisen if a stricter gas productwere to be mandated.

The counties around the Pittsburgh markets are still attemptingto dissolve a low RVP mandate, as they are the only countieswithin the state that require low-RVP CBOB product in thesummertime. This requirement has caused logisticalnightmares for some years from May to September as producthas become hard to find, therefore pushing prices higher. Ifthis requirement is not repealed before the start of summer,another season of low RVP gas will have to be endured in thecounties surrounding Pittsburgh, which could cause headachesfor wholesalers and consumers. •

“This extension, ifapproved, will diminishany supply issues andreduce any price spikesthat would have arisen ifa stricter gas productwere to be mandated. ”

Regional Views


Chris’ Concept IFor the second quarter of 2016 I’m predicting we will see both Gasoline and ULSD prices continue to rise. The springrally for Gasoline will begin soon as we start turning storage tanks for the summer RVP requirements and will bringhigher prices. I’m also slightly bullish for ULSD; I believe we are going to see GC ULSD trade in the -.05/-.06 range forthe next few months. As we continue closer to summer, it will be interesting to see how the potential active hurricaneseason will continue to impact basis. •

Chris Carter, Supply ManagerSee his bio, page 50

PADD 1B Wholesale vs. DOE Retail Diesel (dollars per gallon)

PADD 1C Wholesale vs. DOE Retail Diesel (dollars per gallon)

BULL



“As we continue closerto summer, it will beinteresting to see howthe potential activehurricane will continueto impact basis. ”

PADD 1 East CoastPADD 1B & 1C Central & Lower Atlantic

Regional Views


The first quarter of 2016 didn’t see the large basisswings seen over the past two years. In 2016, GCBasis traded around -.0472. That’s almost .10 higherthan experienced in 2015 and .06 cpg higher than in2014. Several factors contributed to this: lower flatprices, refinery turnarounds, NYMEX carry and a mildwinter compared to previous years.

As a result of higher Gulf Coast Values and lower NewYork Harbor ULSD basis values, Colonial Line Spacetraded at much lower levels than 2015. This year linespace premiums only traded at or above .03 cpg gallona few times, while last year during the same periodULSD spaced averaged .06 cpg. Current projectionshave the remainder of the year less than half a cent.

Due to the low volatility over the six months, OPISspreads continue to show the Gross Contract Average(GCA) to Net Contract Unbranded Low (NCUL) forULSD in several major cities across the SE. Historicallywe see spreads increase during the first quarter,however, the mild winter and low flat prices continueto put pressure on OPIS spreads. •

Q1 GC Basis

Q1 Colonial ULSD Line Space Premium to Tariff

OPIS GCA to NCUL Spread–Trendlines


Regional Views


Palmetto PipelineIn March Kinder Morgan lost another battle in Georgia regarding their plans to build the Palmetto pipeline intoJacksonville. Kinder Morgan plans to build a pipeline from Belton, SC, to Jacksonville, FL, servicing severalterminal cities in South Carolina, Georgia and Florida. In March a Georgia Superior Court Judge upheld a decisionfrom May 2015 denying Kinder Morgan a certificate of “public convenience and necessity.” This permit wouldallow Kinder Morgan to secure its route. Even after this ruling in March, Kinder Morgan doesn’t plan onabandoning the Palmetto project. Kinder hopes to begin construction by the end of 2016. Kinder Morgan hascontinually expressed that it would lower gas prices for residents in southern Georgia and Jacksonville. KinderMorgan also is stating that the pipeline would help take tankers off Georgia Highways. Georgia and SouthCarolina both are proposing legislation that would prevent eminent domain for petroleum pipelines.


Regional Views

Dan’s Dissertation IFuel buyers in the Midwest should expect higher prices during a volatile second quarter. The region will experience aswath of refinery downtime due to a strong spring maintenance season that will see major regional players such asFlint Hills Pine Bend (MN), Citgo Lemont (IL), Husky Lima (OH) and BP/Husky Toledo (OH) undergo maintenance.This is just as agricultural demand picks up due to spring planting season, increasing diesel demand. Additionally, RVPchanges and more demand at the retail pump should send gasoline prices up. Relative to NYMEX futures, expecthigher Midwest diesel and gasoline prices during a rocky April and May. •

Dan Luther, Sr Supply ManagerSee his bio, page 50

PADD 2 Wholesale vs. DOE Retail Diesel (dollars per gallon)

BULL


“Additionally, RVPchanges and moredemand at the retailpump should sendgasoline prices up.Relative to NYMEXfutures, expect higherMidwest diesel andgasoline prices during arocky April and May.”

PADD 2 Midwest

Regional Views


In February Midwest gasoline inventories reached theirhighest peak in over twenty years. Falling crude oil inputcosts—sourced predominantly from heavily discountedCanadian oil projects—and demand for crucial winterdistillates stoked refinery production despite lower gasolineneeds during a seasonally slow driving season.

As inventories swelled, prices moved significantly lower,pinching refinery profitability in the Midwest. Productionslates vary widely, but refiners’ margins traditionally followthe price of gasoline as it represents roughly two-thirds of theaverage facility’s refined product output. As inventoriesreached their peaks, Midwest markets experienced a nearly55-percent collapse in Chicago gasoline prices, cuttingrefiners’ margins to a similar degree.

If every Midwest barrel were priced using the WesternCanadian Select (WCS) discount to West Texas Intermediate(WTI), Chicago area refiners would gross just over $15 abarrel, a $3.25/bbl premium to the national estimate.Those sourcing WTI barrels from the Gulf Coast, however,suffer margins of less than 50 cents a barrel. Once youfigure in the higher operating costs of Chicago area refiners,it’s no wonder producers are considering cuts.

As summer gasoline season approaches for most on June1st, buyers may continue to see discounts for prompt pricesas suppliers look to move higher RVP inventories. Butheaded into the summer season, Midwest pricing is set toincrease on higher seasonal demand and a heavy springrefinery turnaround season. •

High Gasoline Inventories Weighed on Midwest Prices

Midwest Crack Spreads Decline by Nearly Half


Regional Views


With a majority of the Gulf Coast’s seasonal maintenance coming to an end in April, production should be strong for mostof the second quarter. While there will be an opportunity to push barrels into PADD 2, given the strong Midwest turnaroundseason there, those flows are limited by pipeline capacity. U.S. Gulf Coast exports of products are also expected to remainlower than this time last year as Latin American countries increase their domestic refinery capacity and some countries, suchas Venezuela, experience economic woes, decreasing gasoline demand. While the upcoming Summer Olympics in Brazilmay lead to a short-term spike in gasoline demand, it should not have a lasting effect on exports. Summer driving seasoncan always be volatile, but supply should outpace demand in the Gulf Coast for both diesel and gasoline leading to lowerprices in the region relative to NYMEX futures. •


Dan’s Dissertation I Dan Luther, Sr Supply ManagerSee his bio, page 50

BEAR


“Summer drivingseason can always bevolatile, but supplyshould outpacedemand in the GulfCoast for both dieseland gasoline leading tolower prices in theregion relative toNYMEX futures.”

PADD 3 Gulf Coast

Regional Views

31 © 2015 Mansfield Energy Corp.29 © 2016 Mansfield Energy Corp.

Houston, We Have a ProblemThe rapid growth of Texas and many oil-producing states has come toan end. Exploration and production companies suffered another roundof layoffs during the first quarter as executives conserve capital in theindustry’s current lower-for-longer environment. Consequently, mostE&P companies will curb capital expenditures on incremental shaleprojects as long as oil’s forward curve remains under $50 a barrel,which many energy agencies do not expect to change until sometimelater this year or in the first half of 2017.

According to the Oil & Gas Journal, total U.S. capital expenditures forupstream, midstream, downstream and corporate activities will fallmore than a quarter this year to $136 billion after suffering a 36.1-percent decline last year. While slimmer year-over-year cuts mayseemingly suggest the market’s found its footing, estimates includedrising investments in refining, petrochemical and pipeline spending,offsetting steep cuts in the upstream sector and improving figures.

The stress of low oil not only impacts the E&P companies. JP Morgan warned of“stress” in energy loans, which prompted criticism of Dodd-Frank “too big to fail”provisions, while midstream energy companies slashed all-important dividends topreserve cash assets. In many areas, pipelines have actually been overbuilt, forcingoperators to drop rates to encourage shippers. Meanwhile, large “take or pay” dealsproved costly in the near term as producers failed to meet their commitments and wentinto default, leaving pipeline companies few options in recovering their investments.

In the end, fossil fuel companies across the nation—not just Texas—should preparefor even harder times to come. Credit-assessment agency Fitch Ratings announced late in the first quarter oil and gas companies had already defaulted on roughly $6billion this year. Worse still, Fitch expects companies to default on $9 billion before the end of April and another $40 billion before the end of 2016. Companies unable to suffer through lower oil prices will eventually seek bankruptcy protection andliquidate assets at pennies on the dollar to the benefit of competitors with low debtratios, i.e., Big Oil. •

Regional Views


Production Inhibited at Many Gulf Coast Refineries, Export Demand Down on Lighter Latin American PurchasesSeveral major Gulf Coast refiners operated below capacity during thefirst quarter of 2016. The list of refineries that ran at reduced rates wasa “who’s who” of the biggest producers in the U.S. In mid-January,flooding on the Mississippi caused ExxonMobil to cut production at its502,000 bpd Baton Rouge (LA) refinery to avoid containment issues.Another unplanned incident occurred at Exxon’s 344,600 bpdBeaumont (TX) refinery when a storm caused a power outage onJanuary 21st that interrupted electricity to the entire plant for twoweeks. A robust schedule of planned maintenance also occurred duringthe first quarter. Refineries—including Motiva’s 603,000 bpd PortArthur (TX) plant, Exxon’s 560,500 bpd Baytown (TX) plant andMarathon’s 522,000 bpd Garyville (LA) plant—all took units offlinefor maintenance during the quarter. The effects of reduced productioncan be seen in the Gulf Coast distillate production estimates by the EIA.

PADD 3 Net Production of Distillate Fuel Oil

Offsetting diminished production, several large importers of Gulf Coast refinedproducts from Latin America reduced purchases in the first quarter. Venezuelareportedly imported less Gulf Coast gasoline amid the nation’s severe recession anda reduction of domestic gasoline subsidies. On the distillate side, Brazil andColombia imported less diesel due to domestic refinery improvements. Petrobras,the Brazilian state oil company, claimed that January production of diesel in itsBrazilian refineries was a new record high of about eight million barrels. Since2014, Brazil has cut their monthly imports from the USGC by roughly 40 percent. InColombia, Ecopetrol’s Cartagena refinery began production at its new processingunit, which some traders believe could cease imports to the country. If that were thecase, it would be a reduction from 6.1 million bbl of oil products imported intoColombia from the U.S. in November 2015. The U.S. has acted as the “refiner tothe world” for much of the last several years, but reduced products exports to LatinAmerica should mean more refined products are sold domestically. •


Magellan Pipeline MaintenanceDisrupts Fuel Supply into Dallas

In early January Magellan initiated the first stage ofplanned hydrotesting on their 10" Waco-Dallaspipeline, disrupting supply on a major fuel source intothe Dallas market. The testing lasted approximatelyeight weeks through mid-March, constraining refinedproducts shipments on the pipeline. Hydrotesting isroutine monitoring to inspect pipeline strength and tocheck for leaks.

With pipeline batches into Dallas hindered, someshippers had trouble keeping inventories afloat, whichsent spot fuel buyers chasing product around theMetroplex. Adding to buyers’ troubles, rack pricesstrengthened given the supply imbalance; Dallas USLDlow rack shot up over $.05 on January 11th, the daythe hydrotesting began and remained elevated duringmuch of the pipeline work.

After completing maintenance on the Dallas portion ofthe line, Magellan began work on the Waco line,which should last through mid-April. After the work iscomplete, fuel buyers in Central Texas along the Waco-Dallas line should expect values to return to normallevels as pipeline shipments flow unimpeded. •

Dallas Rack USLD Premium to Gulf Coast Wholesale

PADD 3 Gulf Coast

Regional Views

Nate’s Notion IRefined product prices in the Rockies bottomed out during the first quarter as higher crude oil prices translated intohigher input costs for refineries. Gasoline economics became extremely weak in the Midwest (PADD 2), forcing manyrefiners to cut runs in response to less attractive margins. Meanwhile, the West Coast stayed relatively strong comparedto the rest of the nation. The Rockies seems to have been more impacted by weakness in the Midwest than strength onthe West Coast, however. I think the same conditions hampering Group 3 economics are hitting Rocky Mountainrefineries and suspect the rebound in gasoline prices should continue into the second quarter ahead of the summerdriving season. Prices should also benefit from planned maintenance in PADD 4, reducing refinery utilization in the regionand combining with rising seasonal demand to support prices throughout the second quarter. Whether a rally provessustainable all the way into the third quarter will largely depend on the direction of crude oil, however. •

Nate Kovacevich, Supply ManagerSee his bio, page 50



BULL


“ I think the sameconditions hamperingGroup 3 economics arehitting Rocky Mountainrefineries and suspectthe rebound ingasoline prices shouldcontinue into thesecond quarter aheadof the summer drivingseason.”

PADD 4 Rocky Mountain

Regional Views

31 © 2014 Mansfield Energy Corp.33 © 2015 Mansfield Energy Corp.33 © 2016 Mansfield Energy Corp.

Refinery MaintenanceExpected to ThinSupplies in IsolatedPADD 4 Markets

Refined product prices in the Rocky Mountain(PADD 4) region began their seasonal ascentnear the end of the first quarter as demandexpectations increase the closer markets get tothe summer driving season and supplies tightenwith the onset of spring refinery maintenance.Between now and early May, three RockyMountain refineries will slow or halt operationsto perform much-needed refinery maintenanceahead of peak summer production. Suncor’sDenver refinery, Big West’s Salt Lake City facilityand HollyFrontier’s Cheyenne plant all expect atleast partial shutdowns. PADD 4’s operablecapacity totals roughly 650,000 barrels per dayand planned maintenance is expected to reducecrude throughput by at least ten percent at theseason’s peak.

The Denver and Cheyenne outages could prove themost problematic from a supply standpoint as bothheavily influence regional supplies and plan to cutproduction in April to perform seasonal maintenance.Colorado’s only refinery, Suncor, will perform plant-wide maintenance, further stressing downstreaminfrastructure as inventories from across the regionwill likely supply the balance.

However, some terminals do not have the capacity forincreased demand and truck traffic, which could resultin long lines this spring. Suppliers may even long-haulloads from other states, if Colorado terminals cannotsupport the increased volume and extended waittimes disrupt delivery schedules significantly.Replacement barrels will likely originate from theBillings market or cities in western Group 3 (i.e.,Nebraska and Kansas) and the Texas panhandle.

Padd 4 Distillate Inventories Below Average Heading into Disruptive Refinery Maintenance Season

Expect rising refined product prices across theRockies this spring. Of course, just how highprices rise will depend on how well suppliershandle existing inventories. Already belowmulti-year seasonal averages, distillateinventories could present a challenge thisspring. Elevated refiners’ margins actuallywork in the consumer’s favor this time,however. Gulf Coast (PADD 3) and Midwest(PADD 2) refiners will likely chase lucrativegasoline margins heading into the summerdriving season, resulting in greater distillateproduction as well. These excess barrelsshould backstop regional inventories, ensuringproducts flow toward the Rockies instead ofeastern markets. •


Regional Views

Basis volatility on the West Coast dropped off significantlyversus this time last year thanks to two driving factors (punintended): extreme weather and Exxon’s anticipated returnto the SoCal gasoline market.

This year’s record El Niño pattern brought much-needed rainto a parched California. Of course, the phrase, “when itrains, it pours” comes to mind. Daily newscasts were filledwith stories of beachfront apartments falling into the ocean,frequent flash flooding and mudslides along the Westernseaboard. As you’d expect, torrential rains—typical of astrong El Niño—generally keep non-essential traffic off theroads, cutting into regional fuel consumption and applyingdownward pressure to gasoline prices in primary commercialsupply points. Thankfully, forecasters expect storms tosubside as we move into the summer months, encouragingdrivers to get out there and DRIVE!!

At the same time, major West Coast refineries, with theexception of Exxon’s SoCal refinery, completed first-quarterturnaround early this year without much fanfare,

Matt’s Musings I Matt Elder, West Coast Supply SupervisorSee his bio, page 50

BULL


“At the end of the day, Ihave to believe driverswill end up paying a littlemore than they have beenused to in recent months.Refiner capacity roughlyequals consumer demandin the summer, and risingcrude oil prices will lendsupport to an unusuallydeflated fuel market.”

contributing to softer basis values this quarter. Adding tobearish pressure, analysts and PBF buyers expect Exxon’sgasoline-producing units to return to full strength by the end of April after more than a year offline, finally balancing theCalifornia gasoline market. If all goes according to plan, PBFEnergy will then take control May 1st and, given PBF’s historyof refinery optimization and maximizing efficiency, consumers could enjoy additional savings as PBF clears theremaining cobwebs.

The question then becomes, “Who will win this tug of war?Refiners or consumers?” Lower prices, clear skies and animproving job market should place more cars on the road inthe coming quarter and Economics 101 says, “Greaterdemand should result in higher gasoline prices.” Meanwhile,increased gasoline production/supply and reduced uncertaintyshould weigh on fuel prices. At the end of the day, I have tobelieve drivers will end up paying a little more than they havebeen used to in recent months. Refiner capacity roughlyequals consumer demand in the summer, and rising crude oilprices will lend support to an unusually deflated fuel market. •


PADD 5 West Coast,AK, HI

Regional Views


While consumers save upwards of a billion dollars a day on refined productsin comparison to seasonal averages only a few years ago, they could still beas much as 20cpg lower if not for California’s escalating Cap-at-the-Rack(CAR) and Low Carbon Fuel Standard (LCFS) fees. Fourteen months ago,they added less than half a cent per gallon to the cost of fuel and regulatorswill need to continually increase pressure on refined products to meetaggressive, anti-emission goals set by the State’s legislators.

In accordance with Governor Jerry Brown’s plan to cut petroleumconsumption by half before 2030, the California Air Resources Board (CARB)re-adopted the LCFS late last year, lowering the statewide carbon intensitythreshold of transportation fuels by 10 percent before 2020. Until recently,the LCFS program cost consumers less than 35 points per gallon (0.35cpg)for gasoline. Roughly halfway through 2015, however, that cost creptsteadily higher to more than 4.5cpg by the start of 2016 before settling intoa 4.8cpg to 5cpg range.

In addition to California’s LCFS program, regulators expanded their cap-and-trade program at the start of 2015 to include fuel marketers, who thenpassed rising expenses to end-users across the wholesale rack. Cap-at-the-Rack fees—the wholesale rack assessment of California’s expanded cap-and-trade regulations—share a similar story, beginning January 2015 with abaseline rate just over 10cpg, but now trading in the 14.5 to 15cpg range.

LCFS and Cap-at-the-Rack combine to equal the 20cpg premium referencedearlier. Unfortunately, drivers already pay a hefty premium for the State’s low-RVP, low-emission, boutique gasoline standard. Even so, in mid-March, regular,California-grade gasoline prices averaged more than $2.50 a gallon at theretail pump and these two compliance fees alone accounted for over 8percent of the total fuel cost.

Before you break out the pitchforks and torches, understand that theseprograms are ultimately intended to reduce greenhouse-gas (GHG) emissions.Both the LCFS and cap-and-trade programs penalize suppliers for processingcrude oil into motor vehicle fuels while granting low-emission and renewablealternatives a cost advantage in the marketplace. Ethanol, biodiesel andrenewable diesel all offer lower CO2 emissions versus their fossil fuelcounterparts, qualifying for generous federal tax breaks while side-steppingCalifornia’s rising regulatory fees.

While reducing GHG emissions by up to 80 percent, renewable diesel alsocosts less than most traditional diesel refined in California, despite weakercrude prices, adding to the product’s overall cost advantage. Nationwideconsumption of renewable diesel increased more than 80 percent year-over-year and Californians consume more than 70 percent of all gallons, providingfairly convincing evidence that CARB programs will ultimately achieve theirgoal of pricing traditional fossil fuels out of the market. •

CARB Says, “Fossil Fuel, Your Days in California are Numbered!”

Regional Views

Method 1: Steam & Gravity Drains


The substantial drop in crude oil prices deeply impacted oil companies on bothsides of the U.S.-Canadian border. At the end of 2014, the energy sectoraccounted for nearly a quarter of total GDP in Canada’s western province ofAlberta and added 63,700 positions, more than half of all jobs created inCanada that year, according to the nation’s employment records.

Now, cash-strapped companies have halted new oil projects and slashed capitalexpenditures in response to the market’s more than 75-percent collapse.Roughly 65,000 workers lost their jobs in 2015, raising unemployment ratesfrom 4.4 percent in October 2015 to 7.0 percent in just three short months.Adding downward pressure to wages and consumer spending, Canada’sFinance Minister, Bill Morneau, expects the oil industry’s rout to reduce thenation’s overall GDP by roughly $15 billion this year. But should Canada beany more or less exposed to falling oil prices than their neighbors to the

Low Oil Leads to Slower Economic Growthand Fuel Demand in Producing Regions

south? Negative economic headwinds will undoubtedly influence thesupply/demand situation for refined products along both sides of theborder, but Canada’s oil-sand industry could prove the deciding factor inthis debate.

According to a 2013 David Hughes study, the average energy return oninvestment, or EROI, for conventional oil is 25:1, suggesting one unit ofenergy consumption yields 25 units of crude oil energy. Alberta’s surfacemining operations sport a mere 5:1 ratio. Not very good. Worse still,miners can only access resources up to a depth of roughly 250 feet, orabout 20 percent of the nation’s 173-billion-barrel proven oil reserves.Beyond that point, drillers employ in-situ recovery methods, which liquefysolid oil deposits with steam and return only 2.9 units of crude oil energyfor every unit invested—by far one of the industry’s worst investments.

Method 2: Cyclic Steam Stimulation

Consequently, production cuts across Canadian oilfields ultimately result in steeper refined productconsumption losses, prompting Canadian refinersto either cut runs or find a new home for their fuelin the U.S. If Canadian operators choose the latter,refined product barrels will likely flow south via railover the coming months, which could furtherhamper the supply/demand balance in thenorthern United States. Already suffering anoversupply of their own, states like NorthDakota—traditionally net-short diesel andcurrently quite long—could find tanks overflowingwith product, sending prices to new lows on both

sides of the border. Eventually, negative refiners’margins would prompt production cuts in the U.S.as well, sending prices higher and continuing thecycle of volatility.

Markets with the greatest exposure to oil-sectorfuel demand—Alberta, North Dakota andMontana—should brace for the worst as regionaldemand is closely tied to the price of oil. As barrelprices slip, oil recovery operations slow, reducingfuel consumption both at the rig and along theroads as less frequent shipments require fewertrucks, railcars and yard vehicles. Those pursuing

Alberta’s costly oil sands suffer the greatestexposure to oil prices, considering surface minersconsume five times as much energy/fuel as theirconventional counterparts and oil sands cannotmove along traditional pipelines, influencing raildiesel demand.

Most energy agencies agree on an average 2016barrel price close to $40 before increasing another$5 a barrel next year. Until producers consistentlylock in rates in that 2017 range, refined productdemand in these regions will likely languish andeconomic development along with it. •

Source: Canadian Association of Petroleum Producers (CAPP)

CanadaRegional Views

While renewable fuel prices reflected much of the refined product market’s year-over-year declines,producers, distributors and consumers could not help but wish for a more dramatic decrease. The activetax credit certainly helps, but the Bean-Oil-to-Heating-Oil spread ticked up this quarter and RINs did notrise enough to counteract those effects. Regardless, biodiesel regained its discount to ultra-low sulfurdiesel, once again encouraging discretionary blending in markets without a state mandate/incentive.Meanwhile, California renewable diesel imports from Finnish refiner Neste Oil continue increasing to meetCARB standards at considerable discounts to traditional ultra-low sulfur diesel.

Ethanol economics improved as well. With 2015 ethanol production estimated at roughly 966,000barrels per day and the 10-percent blend wall raising concerns, January ethanol exports increased by5.41 million gallons, or 6.6 percent (in comparison to December 2015) to 87.08 million gallons.

Second quarter 2016—and really the balance of the year—has a positive outlook: production up,prices down, supply and demand the way it was intended. Renewable Energy Group’s Geismar, Louisiana,renewable diesel production facility resumed operations this quarter, improving second-quarter U.S.production and consumption figures. •


Finalized EPA Ruling Bolsters RenewableIndustry amidFalling Oil Prices

Renewable Fuels

Jessica Phillips, Renewable Supply& Distribution SupervisorSee her bio, page 50

Jessica’s Judgment IBULL

“While renewable fuelprices reflected much ofthe refined productmarket’s year-over-yeardeclines, producers,distributors andconsumers could not helpbut wish for a moredramatic decrease.”

At this time last year, the future of the renewable fuel industry appeared uncertain.Legislative support seemed weak and declining petroleum prices placed renewable fuelmarketers on the defensive. With the reinstatement of the $1/gal biodiesel blender’sfederal tax credit, however, low-emission alternatives finally regained their discount toultra-low sulfur diesel and production got the shot in the arm it needed. According tothe U.S. Energy Information Administration (EIA), December 2015 biodieselproduction exceeded November rates by roughly 2 million barrels, largely due to thetax credit’s return.

Considering crude oil barrels traded at their lowest rates in roughly adecade last year, biodiesel sales proved exceptionally resistant,declining by only 37 million barrels, or 2.9 percent, year-over-year. InJanuary, the Environmental Protection Agency concluded U.S.consumers used approximately 2.1 billion gallons of biodiesel in 2015,surpassing the Renewable Volume Obligation of 1.73 billion gallonsand further illustrating the Renewable Fuels Standard’s support of thenation’s biodiesel production and distribution. •

2015 1,268 781 465

2014 1,271 792 491

2013 1,359 942 434

B100Production

Sales ofB100

Sales of B100 included in biodiesel blends

YEAR

*Figures in millions of gallons Courtesy of EIA

Alternative Fuels


Source: Oil Price Information Administration (OPIS)

RINs Enjoy Quiet Quarter with No Major Legislation

RIN BriefRINs enjoyed a relatively uneventful first quarter with 2016 D4 Biodiesel RINs relatively range-bound between 70 and80 cents per RIN, falling to only 69.75 cents on January 22 before climbing to a first-quarter high of 80.25 cents onFebruary 25. At the end of the quarter, biodiesel RINs traded for 79.38 cents. Similarly, 2016 D6 Ethanol RINSmaintained a roughly 10-cent spread throughout the first quarter, mainly hovering between 65 and 75 cents per RINbefore moving into the second quarter at a rate of 73 cents per RIN. •

While ethanol advocates contend with the 10-percentethanol blend wall, encouraging automakers toapprove and warranty vehicles consuming E15 orgreater, biodiesel supporters bask in the warmth ofB20 endorsements. Domestic automakers Ford, GMand Fiat-Chrysler produce more than 78 percent of thenation’s diesel-burning vehicles and have longsupported B20 consumption. However, their 78percent market share accounts for only 13 percent ofthe nation’s total diesel fuel consumption.

Heavy-duty trucks, in fact, represent more than 87percent of the nation’s actual diesel demand andbiodiesel producers have finally gained anotherimportant ally in this high-yield market. PACCAR, themanufacturer of Peterbilt and Kenworth trucks, nowapproves the use of B20 biodiesel blend in their newand legacy heavy-duty equipment, adding more than

Biodiesel Earns Crucial Supportfrom Heavy-Duty Manufacturer

100,000 trucks running an average of 12 billion milesannually to the U.S. carbon reduction initiative. Now, everymajor engine manufacturer in the nation supports B20consumption with the exception of Daimler’s Detroit Diesel,which still approves blends of only up to 5 percent. •

Alternative Fuels

Cash PriceThroughout January and February 2016, cash prices generally traded above the promptmonth contract, which is typical at a time of peak demand. However, 2016 opened inmuch the same way as 2015 closed, so although cash traded at a premium to prompt,natural gas prices continued to drop across the board. January and Februarytemperatures were generally mild with no sustained cold periods. As February gave wayto March and above normal temps became the norm, cash began trading at a discountto prompt. This was an unusual turn of events while in a winter month, and thus asignal that storage withdrawal activity would be coming to an early close.•

Forward PricesThough term pricing remained flat during January, it resumed its downward trend from2015 at the beginning of February. A March rebound did bring calendar 2017 andbeyond pricing close to where it was at the beginning of the quarter. April 2016contracts, on the other hand, have seen a steady downward trend throughout Q1.•

Natural Gas


Domestic Natural Gas Prices

SUPPLY

Northeast Gas Production—Marcellus and Utica Shales

Natural Gas Supply/Demand Fundamentals

As we entered 2016, natural gasproduction in the Northeast continuedto increase year over year; Januaryand early February saw an increasein production of 18% YOY. Thoughproduction in the Marcellus regionhas been growing in the recent past,there has been difficulty moving thisgas out of the Northeast. With recentinfrastructural upgrades by variouspipelines, such movement has beenon the increase lately. Interstatepipelines that have been able totransport gas in this way includeRockies Express, Texas Eastern,Columbia Gas, Tennessee Gas andTRANSCO.•

Alternative Fuels

New Natural Gas Pipelines Expand Northeast Production, Flow



AnticipatedNatural Gas ProductionGrowth

Total U.S. natural gas production is expected to drop to 0.9% in 2016. Drilling activity has been on a steep declinedue to the fact that natural gas prices are at historic lows. In 2017, on the other hand, supply is expected to resumegrowth as new demand from LNG and Mexico exports warrant. It is no surprise that any such growth will occur outof Marcellus and Utica plays where marginal cost of production is lower than anywhere else in the country. •

U.S. Natural Gas Production and Imports

DEMAND

LNG “Exporting-Ability”

U.S. Lower 48 LNG Export Facilties


Source: Energy Information Administration (EIA)Short-term Energy Outlook, 2016

Alternative Fuels

With the initial export shipment of LNG from the United States that took place inFebruary, the U.S. finds itself in a new position where it can meet LNG demand fromoutside the country. Because of the growth in supply from shale resources, coupledwith the fact that domestic natural gas prices have dropped in recent years, the abilityto meet international demand has grown. Though Alaska has been able to export LNGfor quite some time, this marks the first time that such an occurrence took place fromthe Continental U.S. Despite the fact that the U.S. remains a net importer of naturalgas, the recent LNG export is a sign of things to come and no longer will natural gasexports to Mexico be one of the only sources of exporting.

The Sabine Pass LNG Terminal, in southern Louisiana near the Texas border,was the site of this landmark LNG export. There are four additional LNGexport terminals that are currently under construction (three on the GulfCoast, one on the Atlantic Coast) that will enable the U.S. to have greateropportunities to meet such demand in the future. •


Natural GasPower Generation: Solar GeneratorAdditions Exceed NaturalGas Generator Additions

Alternative Fuels

Natural Gas Supply/Demand Fundamentals

Over the last five years, there has been an average of7.8 additional gigawatts (GW) of available capacity vianatural gas-fired generators. Demand for natural gas inthe power sector for 2016 looks to be right on par withthat average as it is anticipated that 8 GW of electricity,by way of natural gas-fired generators, are due to beadded. For the first time, however, it is expected thatadditions to capacity by way of solar generators willeclipse the addition of any single energy source. Solarinstallations should add 9.5 GW of electricity in 2016. •

Natural Gas StorageInventoryThe amount of gas that is in inventoryhas maintained its position of higherthan the 5-year maximum throughoutthe winter and well into Q1 2016.Continued falling prices throughout thewinter has slowed withdrawals,thereby maintaining inventory at ahigher than normal level, consideringthat it is winter. A 58% increase ininventory over the past 12 months,coupled with a 41% increase over the5-year average, speaks to the fact thatas prices declined, storage injectionshave continued. •


Working Natural Gas in Underground Storage Compared with the 5-year Maximum and Minimum


Alternative Fuels


Electrical Power Power Prices

CashOver the last five years, there has been an averageof 7.8 additional gigawatts (GW) of availablecapacity via natural gas-fired generators. Demandfor natural gas in the power sector for 2016 looksto be right on par with that average as it isanticipated that 8 GW of electricity, by way ofnatural gas-fired generators, are due to be added.For the first time, however, it is expected thatadditions to capacity by way of solar generators will eclipse the addition of any single energy source.Solar installations should add 9.5 GW of electricityin 2016. •

Forward/TermAs natural gas found a bottom toward the middle of February, forward power curves tended to mutethe gas movement. As seen in the chart above, the price of Cal 17 power across various regionalmarkets remained relatively steady throughoutthe quarter. •

Cal ‘1 7 Wholesale Peak Power Prices

Power SupplyA review of 2015-generation retirements producedthe same old story… less coal in the generationstack, and replaced by? You guessed it—naturalgas and renewables.

Nearly 18 gigawatts of electric generating capacitywas retired in 2015, a relatively high amountcompared with recent years. More than 80% of theretired capacity was conventional steam coal. Thechart below illustrates the scale of coal retirementsrelative to other generation retirements. •

Electricity Generating Capacity Retired in 2015 by Fuel and Technology


Alternative Fuels


Power Fundamentals

A contributing factor to the significant increase in 2015 coalretirements was the U.S. Environmental Protection Agency’sMercury and Air Toxics Standards (MATS) rule, which went intoeffect in April 2015. Some coal plants applied for and receivedone-year extensions to MATS, meaning that by April 2016, the listof coal retirements grew larger.

Scheduled Electric Generating Capacity Additions in 2016

Power DemandThe big news out of last quarter with regard to power demand came from the U.S. Supreme Court in a ruling on FERC Order745 (regulation of Demand Response Resource, DRR). In a 6 – 2 decision, the Supreme Court vacated a lower court rulingin determining that FERC acted within its powers under theFederal Power Act (FPA) as it asserted jurisdiction over demandresponse.

There is a range of views on how the market for demandresponse will proceed from this ruling. One thing is for sure:participation by those eligible is certain to increase. ISO and RTO capacity auctions will see supply/demand capacity curvesadjusted and price for capacity in future years will decrease (all else equal)—a good thing for consumers!

http://www.utilitydive.com/news/what-the-supreme-court-decision-on-ferc-order-745-means-for-demand-response/413092/ •

As we look forward to 2016, we see the evolution of a new generating stack. We expect toadd more than 26 gigawatts of utility-scale generating capacity to the power grid during2016. Most of these additions come from three resources: solar (9.5 GW), natural gas (8.0GW), and wind (6.8 GW). The chart below presents the timing of 2016 additions. (Note thesignificance of scheduled December additions; many projects expected to begin operationsometime in 2016 are conservatively estimated for a December completion date.)

Alternative Fuels

Source: Energy Information Administration (EIA), Electric Power Monthly


In December, President Obama approved thenation’s first long-term highway bill—FixingAmerica’s Surface Transportation Act (FAST)—which included provisions geared toward reformingthe controversial Compliance, Safety, Accountability(CSA) program. The FAST Act requires acomprehensive review and redesign of the currentenforcement prioritization program, ultimatelyensuring members of the public and lawenforcement agencies have access to the mostreliable safety analysis available.

Administrators removed property carriers’ CSA datafrom public view only minutes after PresidentObama signed the legislation on December 4,2015, leaving potential customers with limitedvisibility into companies’ safety records. However,after completing crucial compliance upgrades to itsSafety Measurement System (SMS), the FederalMotor Carrier Safety Administration (FMCSA)announced on March 7th the return of its publiclyaccessible “absolute measures,” a standardizedassessment of motor carriers’ overall safetyperformance.

Transportation Logistics

FMCSA analysts derive absolute measures frompublic safety records, but now stop short ofcomparing carriers to one another, as dictated bythe FAST Act. Instead, the agency simply uploadseach company’s basic stats along with raw incidentlogs, allowing potential clients to review dataacross the industry before making their owndecisions. The main point of contention is thatproperty motor carriers’ percentile scores stayhidden from public view to comply with the FASTAct while passenger carrier comparisons remainunaffected and fully accessible.

In addition to safety record handling, FMCSAauthorities updated their safety fitness ratingmethodology to better reflect on-road safety datafrom inspections, the results of carrierinvestigations, and crash reports. Regulators wouldalso replace the existing three-tier federal ratings(used since 1982) of “satisfactory–conditional–unsatisfactory” for federally regulated commercialmotor carriers with a single determination of“unfit,” which would require the carrier to eitherimprove its operations or cease operations.Implementing a powerful, data-driven ratingssystem has been an FMCSA priority since thelaunch of the Compliance, Safety, Accountabilityprogram in late 2010.

Finally, the FMCSA announced a commissionedstudy from the National Academies of Sciences,Engineering, and Medicine through its Committeeon National Statistics and Transportation ResearchBoard targeting high-risk truck and bus companies.

Safety in Numbers—FMCSA Returns CSA Datato Public View

The agency will examine the accuracy with theBehavioral Analysis and Safety ImprovementCategory (BASIC) safety measures to identify high-risk carriers and forecast future crash risk or othersafety concerns for motor carriers.

When all is said and done, the FMCSA’s proposedupgrades and currently available data offer carrierclients valuable data regarding their potentialhaulers. However, the FAST Act shifts the burden ofconverting data to insight onto the end-user. Toavoid operational disruptions and costly carriererrors, consumers should thoroughly vet third-party haulers. This could include—

• Years of service—are they relatively new or recently purchased?

• Fleet size—small fleets are not necessarily indicative of poor service, but it is certainly difficult to cover deliveries when one of three trucks breaks down unexpectedly.

• Geographic footprint—similar to fleet size. Can a carrier cover deliveries under stress or cover long-haul deliveries during a supply disruption?

• Crash history—aside from illustrating a historyof unsafe driving and possibly poor hiring decisions, a string of severe crashes (major property damage, injury, fatality, etc.) could foreshadow the decline or unexpected cessation of operations. •

Transportation


In late 2014, Congress ordered the Federal Motor Carrier SafetyAdministration to suspend enforcement of some controversial provisions tiedto the Hours of Service (HOS) restart rule, specifically the provision requiringdrivers to take two 1 a.m. to 5 a.m. periods as part of their 34-hour off-dutyperiod and wait 168 hours from the beginning of one restart period to thebeginning of the next. A year later when President Obama signed into lawthe FAST Act, he also approved fiscal 2016 omnibus funding requiring astudy of the restart rule, specifically explaining how the rule offersimprovements “related to safety, operator fatigue, driver health,” as well aswork schedules. Unfortunately, this legislation—intended to strengthen thesuspension of a few provisions surrounding the 34-hour restart rules—couldactually nullify the 34-hour restart completely.

The omnibus bill extends the suspension until the Department ofTransportation determines whether or not the more restrictive provisionsprovide “a greater net benefit for the operational, safety, health and fatigueimpacts.” In truth, the suspension can only be lifted if the DOT can establishthat commercial motor vehicle drivers who operated under more restrictiverestart provisions between July 1, 2013, and the day before the restartprovisions were suspended “demonstrated statistically significantimprovement in all outcomes related to safety, operator fatigue, driver healthand longevity, and work schedules.” But what happens if the agency agreeswith the suspension? What comes next?

According to an urgent letter to Truckload Carriers Association members,the Department of Transportation had determined if the FAST Act “containsno language to direct our industry on a restart provision, then there is norestart provision to abide by.” The American Trucking Association (ATA)supports permanently suspending “bolt-on” provisions, which mayadversely impact safety and productivity by forcing trucks onto the roadduring peak morning traffic hours. However, legislators must instruct DOTauthorities in the event of a decision upholding the suspension.

Finally, Congress ordered the FMCSA to produce a study comparing theeffectiveness of the two restart systems as part of the original 2013suspension. However, because the study was not completed prior to theend of the fiscal year and legislators chose to continue the suspensionthrough the highway appropriations bill instead, a negative study at thispoint could prompt the DOT to vacate the entire restart provision, astechnical corrections cannot be made to an appropriation bill. The faultybill would instead be nullified, allowing legislators to pass a new bill.

The ATA emphasized that the daily work rules—11 driving hours, 14 on-duty hours, 10 off-duty hours, and a 30-minute rest break—are notaffected by the highway bill language and are not “on the table fordiscussion” as part of any restart-related solution. •

Po-ta-to, Po-tah-to Language Controversy with Hours of Service Rule

- - - - -

Transportation


On December 16, 2015, the Federal Motor Carrier Administrationannounced changes to the Federal Motor Carrier Safety Regulations(FMCSR), creating minimum performance and design standards forhours-of-service electronic logging devices, or ELDs. To improve HOScompliance and enforcement, new regulations dictate when andhow drivers will convert to ELDs while also establishing designparameters for device manufacturers.

With few exceptions, drivers still using paper logs will need to installan ELD to record their hours of service before December 16, 2017.Those already using compliant automatic on-board recording devices(AOBRDs) will receive an additional two years to upgrade existingequipment to units compliant with new regulations. The fewexceptions include short-haul or time-card drivers, affecting driversoperating heavy trucks within a 100-air-mile radius and non-CDLdrivers operating smaller motor vehicles within a 150-air-mile radius.Regulators will rescind exclusions, however, if exempt driversexceed time-card service limits on more than eight days during anyrolling 30-day period. Tow/drive-away operators will receive a passas well, along with anyone operating vehicles manufactured prior to2000 as their onboard computers don’t support ELDs.

According to new design parameters, devices must—

• Secure to the truck’s interior, preventing damage and making it easier to access

• Easily detach for inspection, allowing enforcement officer to verify data from outside the vehicle

• Display specific data—driver name, carrier name and address, total engine hours, total miles for drive period, and a detailed malfunction log

• Prevent/report physical or electronic tampering

• Maintain data encryption software

• Log users accessing the ELD system

• Account for all drive time

• Track all engine start and stop time

• Capture location at specific time intervals

• Make two specific automatic changes of duty status

Carriers must educate themselves and perform adequate due diligence before selecting an FMCSA-certified device. The FMCSA may de-certify any device found to be non-compliant with the new requirements. To aidcarriers in their research, the FMCSA compiled ELD information on theirwebsite at www.fmcsa.dot.gov/hours-service/elds/electronic-logging-devicesand intends to update it often. Carriers should also check back frequently for changes to the program. •

What you should know aboutElectronic Logging Devices (ELDs)

Transportation


Mobile Refueling for DEF

SafetyDoes your company have the ability to wet hose Diesel Exhaust Fluid (DEF)? If not, maybe youshould! More commercial and industrial fleets, which do not want their drivers directly fueling theirtrucks, are moving in the same direction when it comes refilling DEF tanks. There are alsocommercial and industrial fleets, such as those serving the construction industry, that operate onremote job sites away from their DEF storage tanks. For these fleets, their need to wet hose DEFdirectly into costly offroad equipment is quickly rising.

There are multiple ways to deliver DEF to offroad commercial and industrial fleets, whether byindividual 2.5 gallon jugs (smaller applications), 55 gallon drums or 330 gallon totes delivered viaa smaller sprinter van or flatbed truck, or a dedicated DEF tank truck. All of these options are utilizedacross the U.S., with the most prevalent option being 330 gallon totes on board a box truck orsprinter van, which carries a lower cost investment and driver than a dedicated or co-dedicated (i.e.fuel and DEF) tank wagon. Further, adding a dedicated DEF tank to an existing tank wagon addsweight and reduces the amount of fuel a tank wagon can carry.

So, how is this service priced today? We’ve seen thisservice priced a variety of ways, including a flat priceper gallon, a price per gallon plus a delivery fee, and anhourly fee plus product cost. Pricing depends upon thenumber of gallons delivered, the time on location, thenumber of DEF touches and whether or not a dedicatedDEF truck is used to make DEF deliveries.

In addition, Mansfield is seeing barcode/scannertechnology enter the DEF wet hosing space thatintegrates a barcode/scanner to provide faster andmore accurate tracking and reporting •

Transportation


Mansfield’s National Supply TeamMansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel, renewables andalternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to manage today’s complex national fuel supplychain. Although they work as a national team, each member’s regional focus enables Mansfield to deliver geographic-based supply solutions by more efficientlymanaging market specific refining, shipping and terminal/assets.

Nate KovacevichSupply Manager

Before joining the company, Nate worked as a SeniorTrader where his responsibilities included managingrefined product and renewable fuels procurement,

handling all hedging related activities and providing risk management tools andstrategies. He performed commodity research and analysis for customers withagricultural and petroleum related risk, devised and implemented risk managementprograms, and executed futures and option orders on all the major exchanges.

Evan SmilesSupply Mangager

Evan began his career with Mansfield as an intern inthe supply department, assisting in the Southeastregion. He quickly advanced into the role of Northeast

Supply Optimization Analyst and currently holds the position of Northeast SupplySupervisor, handling various tasks including supply bids, day deal purchasing,long haul analysis, contract negotiations/fulfillment and supply optimization.

Jessica PhillipsRenewable Supply & Distribution Supervisor

Jessica is based out of Houston, Texas, and is responsiblefor nationwide purchasing, hedging, and the distribution

of renewable fuels. Since joining the Mansfield team in 2009, she has heldmultiple titles: Contracts Coordinator, Regional Supply Analyst, Senior StrategicSupply Analyst, and as of late, Renewables Supply Supervisor. Jessica has a strongbackground in refined products’ scheduling, contracts, optimization and marketanalysis and continues to expand her knowledge in renewable and alternative fuels.

Ed YoungVice President of Commercial Operations,Mansfield Power and Gas, LLC

Ed provided consulting services to Mansfield EnergyCorporation in the management and optimization of

natural gas and power assets to wholesale and retail clients. In July 2015, heaccepted a permanent position with Mansfield Power and Gas, LLC (MPG). As VicePresident of Commercial Operations, he is currently charged with managing the day to day operations of MPG to include counterparty enabling, pricing power andgas opportunities, development of hedge and optimization strategies, and creatingmarketing material and fundamental analysis presented to customers.

Andy Milton Senior VP of Supply and Distribution

Andy heads the supply group for Mansfield. During histenure, the company has grown from 1.3 billiongallons to over 2.5 billion gallons per year. His industry

experience spans all aspects of the fuel supply business from truck dispatch,analytics, and index pricing to hedging and bulk purchasing. Andy’s expertise inpurchasing via pipeline, vessel, and the coordination via futures and options forhedging purchases enables him to successfully lead a team of experienced andmotivated supply personnel at Mansfield. His team handles a wide geographicarea of all 50 states and Canada, including all gasoline products, ULSD,kerosene, Heating Oil, biodiesel, Ethanol and Natural Gas.

Matt Elder West Coast Supply Supervisor

Matt is responsible for managing refined productpurchasing for both contract and bulk pipelinemovements, scheduling, hedging, supply bids,

optimization and fixed price analysis in California, Oregon, Washington,Idaho, Nevada and Arizona.

Dan LutherSr. Supply Manager

Dan is responsible for refined products supply andhedging in Mansfield’s region running from Texasnorth to Chicago. Before joining Mansfield, Dan

managed barge, rail, and truck fuel deliveries as well as ethanol tradingresponsibilities across the U.S.

Chris CarterSupply Manager

Chris is responsible for refined product purchasesincluding contracts, day deals and rack purchases. The Southeast region covers Florida, Georgia,

Mississippi, Alabama, Tennessee, South Carolina, North Carolina, Virginia andMaryland. His responsibilities also include supply contracts and current bids. Chris manages pipeline shipments of gas and diesel on the Colonial,Plantation and Central Florida Pipelines.

Disclaimer: The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy orcompleteness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This materialand any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement orrecommendation to buy or sell products, commodity futures or options contract.

* Some of the information provided is owned and licensed by OPIS. In no event shall any user copy, modify, publish, retransmit or otherwise reproduce information from OPIS. Copyright 2016. All rights reserved.

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FUELSNews 360 - Q1 2016