fuelsnews 360 - q2 2014

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

Q2

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2nd QUARTER

A PR I L MAY JUNE

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We began the second quarter with one headline military conflict and concluded with three. Consequently, an otherwise bearish quarter rose

to near record highs due to geopolitical strife and fears of production disruptions abroad. The ongoing situation in Ukraine deteriorated into

violence, tensions in Libya quieted momentarily before erupting violently with the rebel seizure of Parliament, and — seemingly out of left

field— Iraq’s tenuous hold on peace slipped, resulting in a Sunni insurrection fueled by the Islamist State of Iraq and the Levant (ISIL).

These three events far outweighed promising indications from American oilfields which produced near 30-year highs, flooding the Gulf Coast

with light, sweet oil. Crude inventories in Houston hit record highs in early May, topping 215.7 million barrels in storage and requiring a

reduction in crude oil imports to relieve the glut. Crude production, averaging 7.4 million barrels a day in 2013, increased to an encouraging

8.4 million barrels a day in May — the highest level since March 1988.

Crude oil exports drew significant attention this quarter as volumes maintained their highest sustained levels since 1985. While the export

ban remains, the Obama administration granted more companies the right to ship domestically-produced crude overseas and — more

commonly — across our borders. To complicate matters, the U.S. Department of Commerce issued its ruling in June allowing lightly-

processed crude oil condensates to be exported as refined product — arguably undermining the controversial crude oil ban.

Macroeconomic indicators were mixed during the second quarter as China’s Manufacturing PMI rebounded nicely from a disappointing first

quarter while Europe’s Central Bank, in an attempt to drive euros out of savings and into the economy, implemented negative interest rates

for the first time in modern history. At home, the Federal Reserve’s steady tapering of the Quantitative Easing (QE) program continues as

unemployment rates move progressively lower and consumer spending rises.

Finally, a series of high profile acquisitions early in the second quarter raised concerns for the “Mom & Pop” convenience store as well as

regional fuel distributors. Marathon’s purchase of Hess assets in the retail sector, Energy Transfer Partners’ acquisition of Susser Holdings,

and Lehigh’s tumultuous grab for Virginia-based Petroleum Marketers all consolidated extensive c-store networks into even larger holdings

— improving cost advantages over independent, often single-store, owner/operators.

Q2 2014 Executive Summary

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FUELSNews 360° Quarterly Report Q2 2014

Index

FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity

in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and

reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain.

4 Overview

4 April through June, 2014

5 Second Quarter Summary

6 Economic Outlook

6 Global Economic Outlook

8 U.S. Economic Outlook

11 Fundamentals

11 OPEC

12 Domestic Production, Consumption, and Exports

16 Retail Market Acquisitions

18 FUELSNews 360° Commentaries

18 Commentaries; Andy, Dan and Evan S.

19 Commentaries; Jessica, Chris and Evan P.

20 Regional View

20 PADD 1A, Northeast

23 PADD 1B & 1C, Central & Lower Atlantic

26 PADD 2, Midwest

28 PADD 3, Gulf Coast

32 PADD 4, Rocky Mountain

34 PADD 5, West Coast, AK and HI

36 Canada

39 Alternative Fuels

39 Renewables 42 Natural Gas

46 Transportation & Logistics

47 Diesel Exhaust Fluid (DEF)

48 U.S. Fuel Taxes

49-50 FUELSNews 360˚ Supply Team

Maintaining the 2014 trend, WTI crude futures sought higher territory in the second quarter as geopolitical strife cropped up infamiliar venues. In the previous quarter, Russia’s invasion of Crimea sparked crude’s rise above the $100 mark. As tensions inUkraine lingered on, rebel militia in Libya stormed the country’s Parliament building, denouncing the governing body anddisrupting oil production. Shortly after, a Sunni revolt in Iraq drove military forces back, seizing much of the nation’s northernterritory along with its largest refinery.

Overview

April 2014 through June 2014

4 © 2014 Mansfield Energy Corp.

Source: Oil Price Information Service (OPIS)

Islamist Militants Seize Mosul, Iraq

WTI Crude Inventories Drop

U.S. Jobs Report Paints Positive Outlook

China Demand Reportedly Slowing

Ukrainian Separatists Seize Gov't Buildings

WTI Crude Futures (Dollars per Barrel)

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Baiji oil refinery, 200km north of Baghdad was seized by Sunni rebels in June.

Overview

Second Quarter Summary


2.9708

Summary, Second Quarter 2014

New York Harbor (NYH) ULSD futures rose steadily at the start of the quarter due to escalating tensions in Ukraine. Prices thenfaltered when speculation of a slowing Chinese economy threatened global demand forecasts. After rising gradually for the monthof May, values bottomed out in early June as production increases created a surplus domestically. However, futures recoveredsharply through June on the news of armed militia seizing the second-largest city in Iraq, the No.2 oil producer among OPECnations. RBOB gasoline followed the same direction and ultimately hit the highest prices of the quarter at the end of June.

105.37

3.0770

Source: Bloomberg Finance L.P.

16,826.60

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Lowering its annual growth expectations for the global economy by0.4 percent, the World Bank cites a slow first quarter in the U.S.due to an abnormally cold winter, Ukraine’s civil unrest weighingon the European economy, and China’s economic rebalancingfollowing several months of negative indicators. Despite theirdownward revision to a 2.8-percent growth rate for this year,World Bank analysts suggest growth rates should increase as high-income economies inject approximately $6.3 trillion to theglobal market over the next three years in contrast to the $3.9 trillion contributed over the three previous years.

According to the Washington-based firm, high-income nationsshould anticipate growth in the neighborhood of 1.9 percent by the end of 2014, with targets of 2.4 percent next year and

2.5 percent in 2016. The Euro Zone, on track to grow by only 1.1 percent this year, continues to draw down averages.

Developing nations, which are heavily impacted by thecontributions of their larger neighbors, suffered similardisappointment in the second quarter. The World Bank’s reducedforecast for high-income nations trickled down to developingeconomies, leading to their third year of growth rates below 5 percent. While China is expected to lead the pack with a 7.6 percent growth rate, a lack of transparency in their financialreporting and weak indicators throughout the first quarterencourage skepticism despite a strong second quarter. In the worstcase scenario, China’s rebalancing efforts fail and developingeconomies throughout the East suffer as a result.

Global Economic Outlook

“The World Bank’s reduced forecast for high-income nations trickled down to developing economies, leading to their third year of growth rates below 5 percent.”



Previously anticipating the U.S. to grow at a rate of 2.8 percent, the International Monetary Fund (IMF)determined the nation simply could not overcome thefrigid first quarter, faltering housing market, and lack ofinternational demand for U.S. goods to achieve initialgoals. Reducing expectations by nearly a third to a flat

2 percent rate, IMF Managing Director Christine Lagarde questioned theFederal Reserve’s choice to taper near-zero policy rates before the domesticjob market enjoys a full recovery. Conversely, the Fund criticizes excessivepublic spending without sufficient revenues to back the Fed’s initiatives.

A hot topic on both the domestic and international stages, President Obama’spromise to raise the nation’s minimum wage gained momentum in thesecond quarter. U.S. Secretary of Labor Thomas E. Perez announced aproposed ruling in the first half of June which would earn workers employedthrough federal service and construction contracts $10.10 an hour. Seattlemayor Ed Murray lent strength to the initiative, brokering a deal which raisesthe city’s minimum wage to an astounding $15 an hour over the course of 5 years. Finally, the IMF’s comparison of historical U.S. and internationalstandards to the nation’s current minimum wage bolsters the President’sargument further — claiming a raise would provide a meaningful boost inafter-tax earnings for millions of the nation’s poorest households, yet theyprovide no firm recommendation for a final value.

U.S. Economic Outlook

Consumer Sentiment Index

Source: University of Michigan

Consumer Sentiment IndexApril May June84.1 81.9 81.2

Consumer sentiment in the U.S. looked to be returning to thehigher levels seen in the second quarter of last year, jumping morethan four points to 84.1 in April 2014. May proved to be lessoptimistic, realizing levels similar to the beginning of the year asJune finishes at the same level experienced in January.

IMF Managing Director, Christine Lagarde

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PPI Producer prices were somewhat sporadic in the secondquarter of 2014, posting the highest gain in more than a year forthe month of April and then unexpectedly retracing its steps in May.The May drop was heavily influenced by reduced energy prices forthe month. Despite large gains throughout the first half of 2014, itseems that producer price inflation is still relatively well contained.

Producer Price Index (PPI) Month-to-Month ChangeApril May June*

1.05% -0.20% -0.25%

Consumer Price Index (CPI) Month-to-Month ChangeApril May June*

0.64% 0.33% 0.35%


Headline vs. Core Producer Price Index(Year-over-year Percent Change, Seasonally Adjusted)

Source: U.S. Bureau of Labor Statistics

U.S. Economic Outlook

Producer Price Index (PPI) Month-to-Month ChangeApril May June*

1.05% -0.20% -0.25%

Consumer Price Index (CPI) Month-to-Month ChangeApril May June*

0.64% 0.33% 0.35%


CPI Consumer prices, generally much less volatile than theirproducer counterparts, posted gains in the second quarter of 2014.Core CPI gains in May were the highest since 2011, lendingweight to the idea that inflation is on the rise. Gains in consumerinflation rates could influence the Fed to alter its recovery policies.

Headline vs. Core Consumer Price Index(Year-over-year Percent Change, Seasonally Adjusted)

Source: U.S. Bureau of Labor Statistics

*Projection

*Projection

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“ The market's recent rise indicates traders expect theworst and have little confidence in OPEC's assertions.”


Fundamentals

Violence in OPEC partner nations this quarter dominated the news. Concerns overpossible crude oil supply disruptions led to WTI’s 8-percent gain over the quarter.While OPEC representatives claim the organization could easily cover any newdemand for crude oil, sources suggest many of its members are already operatingnear or at capacity. Most are doing their best to assist with Libya’s one millionbarrel per day shortfall and would prove little help against Iraq’s approximatelythree million barrels a day.

While no significant oil fields have been lost to Iraqi militants as of yet, themarket’s recent rise indicates traders expect the worst and have little confidence in OPEC’s assertions. Even if global producers compensate for the loss of OPEC’ssecond-largest producer, the graph below illustrates the impact an increase ofproduction from partner nations would have on WTI futures.

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Spare capacity (million barrels per day) Price per barrel (real 2010 dollars)

Spare capacity 2.5 million barrels per day Forecast

OPEC spare capacity WTI crude oil price

Source: Energy Information Administration (EIA)

OPEC Spare Production Capacity and WTI Crude Oil Prices (Million Barrels per Day)

OPEC Nations Vow to Cover Shortfall of Ailing Partners

Barrels to Canadian refineries account for the majority of ournation’s crude exports. Lobbyists in favor of lifting the ban argueour neighbors to the north don’t consume enough to soak up thenearly 60 percent increase flowing from U.S. oil fields, whichapproaches all-time highs at 8.5 million barrels a day.

With light, sweet inventories along the coast at record highs, theObama administration’s decision regarding the ban coulddramatically impact the cost of WTI crude oil or hinder the nation’sgrowing drilling industry. Therefore, when the U.S. Department ofCommerce announced their decision to allow the export of ultra-light condensates, industry participants took it as a sign the

Crude Oil Exports Quadruple in Two Years, Reaching 15-Year HighDespite a nearly 40-year-old ban on crude oil exports, tankers have been hauling away domestically-produced crude at near record rates thisspring. Averaging 268,000 barrels a day, national exports have more than doubled in the last year. In 2012, exports averaged only 41,000 barrels a day —a sixth of the average volume for April of this year.

Fundamentals



Balancing Domestic Production with Consumption and Exports

U.S. Exports of Crude Oil (Thousand Barrels Per Day)

White House supports lifting the ban or, at least, the controlledincrease of crude oil and equivalent exports.

The agency issued a private ruling —limiting the decision to selectparticipants— allowing Pioneer Natural Resources and EnterpriseProducts Partners to export ultra-light condensates freely as “refinedproducts.” Requiring minimal processing to achieve the stabilityneeded for export, foreign refiners will have little trouble distillingthese condensates into gasoline, diesel, and other valuableproducts. Analysts say condensates could be flowing at a ratetotaling 700,000 barrels a day by the start of next year shouldmore participants enter the arena.

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“Despite a nearly 40-year-old ban on crude oil exports, tankers have been hauling away domestically-produced crude at near record rates this spring. ”

Fundamentals


Bakken Turns a Billion

Spanning roughly 25,000 square miles beneath North Dakota,Montana, Saskatchewan, and Manitoba —two-thirds of whichresides within North Dakota state lines— the Bakken shaleformation produced its billionth barrel of oil during the secondquarter of this year. While not significant on its own, it is indicativeof the momentum generated by atypical drilling methods withinthe region.

It took North Dakota 38 years to produce its first billion barrels(1989) and 22 to achieve its second (2011). Now, state officialsbelieve they’ll eclipse three billion barrels this year or the next asthe state produces approximately 1 million barrels a day. In lessthan a decade, North Dakota has gone from being the nation’sninth-largest crude oil producer to its second — Texas being No.1.

Experts have been aware of the estimated 7.4 billion barrelreserve —the largest continuous oil accumulation ever assessedby the U.S. Geological Survey— trapped beneath the region for

decades, but crude oil prices wouldn’t support costly horizontaldrilling operations until recent years. Credited with producing 94 percent of North Dakota’s current crude output, drillers firsttackled the Bakken formation through Montana in 2000 andspread to North Dakota over the next several years.

Now, with crude oil demanding over $100 a barrel on most days,drillers and refiners are both eager to capitalize on the abundantreserves of light, sweet crude beneath North Dakota and Montana.Consumers, however, have yet to see savings from increaseddomestic production as retail fuel prices have risen roughly 65 percent in the last decade thanks to a dramatic increase inrefined product exports. This illustrates the point that globaleconomics affect domestic prices more than anyone would like toimagine.So long as there is money to be made by shipping propaneto Central and South America, diesel to Europe, and gasoline toAfrica, the price range will be determined on a global scale whileimmediate volatility is likely to be driven by domestic fundamentals.

Distillate Inventories (Million Barrels)

Distillate Days of Supply (Million Barrels)

Distillate Inventories Slowly Rebound from First Quarter LossesSetting new 3-year lows nearly every week this year, distillate inventory levels finally peeked above the lows in the last weeks of June.Approaching the range’s 7.5-million barrel average, inventories show steady recovery as we began the year 22.7 million below average andreached a deficit of 33.0 million barrels in the last weeks of January. High refinery outputs should help to speed building inventories as welook ahead to increased demand beginning in late Q3.

Fundamentals

Average days of distillate supply suffered in the second quarter, falling 6.8 days below the 3-year average of 34.4 days at its worst in early May. Growing refinery outputs aided in therecovery to the range’s lower end in late June, but the industry averaged only 29 days ofstanding supply in the second quarter — four days below the 15-year average — leavingconsumers more vulnerable to supply disruptions.




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In late April, Energy Transfer Partners (ETP) and Susser Holdings Corporation (SUSS) announced a definitivemerger agreement valued at roughly $1.8 billion. The deal grants ETP general partner (GP) interest, incentivedistribution rights (IDRs), a 50.2 percent stake in Susser Petroleum Partners LP (SUSP), and ownership ofSusser’s convenience store locations.

Sunoco, a well-known East Coast retailer and subsidiary of Energy Transfer Partners LP (ETP), will soon addSusser’s 630 Stripes locations to their roster as they acquire one of the largest non-refiner suppliers of motorfuel in Texas (1.3 billion gallons sold in 2013). Once combined with Sunoco’s existing network of more than5,000 retail stores, synergy opportunities are expected to exceed $70 million annually from fuel,merchandising, and improved “buying power” reflecting economies of scale.

Shareholders of Susser Holdings may either receive $80.25 in cash or 1.4506 ETP common shares inexchange for each share held in Susser Holdings. Susser Petroleum Partners LP (SUSP) continues operating outof their Houston, Texas office and still trades on the New York Stock Exchange as a master limited partnership.

Fundamentals


Acquisitions Become the Name of the Game

ETP Acquires Susser for $1.8 Billion — Adding 630 New C-Stores to Sunoco Network

Fundamentals


Lehigh Gas Acquires Petroleum Marketers in $61-Million DealThe first day in May, Lehigh Gas issued a press release announcing their $61-million acquisition of 64-year-old, employee-owned PetroleumMarketers Inc. (PMI) of Virginia and its network of convenience stores. PMI employees were shocked by the announcement as they’d beenled to believe Texas tycoon Joseph “Trey” Smith of Pinehurst Petroleum would be taking the reins and to expect no change in location oroperations. What Smith hadn’t disclosed were his intentions to divest the bulk of his newly-acquired investment in less than 24 hours to Lehigh Gas Partners while retaining PMI’s lubricants division.

Over the years, PMI had grown to include transport services, bulk facility management, food distribution, and lubricants. They sold roughly 91 million gallons last year through a combination of branded dealers and their own convenience store network along the Route 81 interstate.Exxon and Shell both recognized PMI as one of their top branded distributors in the U.S. gross sales across all divisions amount to more than$1 billion each year.

Lehigh intends to continue operating the PMI convenience stores with certain sites being transferred to third parties over time. However, the lubricants business was to be sold to an undetermined third party after the deal closed.

This came less than a week after Energy Transfer Partners (ETP)’s purchase of Susser Holdings and illustrates a growing trend of investmentfirms and limited partnerships scooping up smaller operations. Lehigh Gas Chairman and CEO Joe Topper expressed his excitement over theacquisition saying it “adds materially to our presence in Virginia and complements our locations in Tennessee along the I-81 corridor.”

Marathon Doubles its Speedway Retail Store CountIn late May, Marathon Petroleum Corporation announced the $2.87-billionacquisition of the East Coast’s largest company-operated convenience store chain— Hess Retail Holdings LLC. Taking ownership of Hess’ 1,300+ locations,Marathon’s retail subsidiary, Speedway LLC, will expand their footprint to animpressive 2,736 sites across 14 new states— bringing the total to 23 states.

In addition to Hess’ retail chain, Marathon stands to gain transport operationsand existing shipper history, including 40,000 barrels a day on Colonial Pipeline.

Expected to close late in the third quarter of this year, this deal will mark the endof Hess’ 80-year history in the downstream market. In the fourth quarter of lastyear, Hess sold their network of twenty East Coast terminals to Buckeye Partnersand their bunker fuels business to a company based in Greece.

Source: Michael Karas, Associated Press

Right again! “Mr. Humility,” they call me. WTI started off the second quarter right at the $100 mark and herewe are the end of June brushing the $107 level. Granted, without the latest developments in Iraq, we’dprobably still be at the $100 level, but I’ll take my wins where I can get them!

Regarding ULSD futures, we are still stuck in the same range we have been for virtually 3 years now. I’m goingto stay in that range until at least the fourth quarter but we’ll see how demand goes as we get closer.

Now, regarding RBOB, anyone that reads the daily FUELSNews hopefully caught my “Family Truckster” articleand, therefore, knows I’m definitely not right all the time —explaining why I need to keep my day job. I stillbelieve RBOB has room to move lower, but I think I’ve long outlasted my call on that one.

So, for the third quarter of this year, I don’t see us getting above the $115 mark on crude —even with thecontinued violence in the Middle East— and most likely the events will calm down, relaxing the bullish sentimentin market. While I’m sticking with my bearish sentiment on RBOB, I see ULSD futures sitting in the same rangethey have for the past few years. So, the forever bull becomes the bear for the third quarter of this year.

Andy’s Answer

FUELSNews 360˚ Commentaries


Concern that Iraqi oil production could be disrupted by militants led to a spike in crude oil prices to close thesecond quarter – a fear premium has been built into current values. However, the Baghdad government shouldbe able to maintain control over the richest oil fields south of the nation’s capital; additionally, the KurdistanRegional Government may soon strike a deal to take full control over oil exports in that region, so output mayactually increase from the country by year’s end. The physical oil market is little changed from just a fewweeks ago and is not as tight as recent price moves would suggest. While the fear premium may continue topersist as long as the unrest in Iraq, I expect concerns to subside by quarter’s end and prices to stabilize.

Dan’s Dissertation

As we enter the third quarter of 2014, everyone’s eyes are on the situation unraveling in Iraq. As ISIScontinues to push through Iraq, this could threaten oil exports and supply from OPEC’s second-largest crudeproducer. I don’t think this violence will escalate to the point that exports are affected to a large degree.Iran, and/or other countries, will assist with getting this situation under control and will halt the ISIS’ terror onIraq. Since the oil market is already inflated from this ongoing attack, I expect to see the market drop off.

Another factor leading me to believe this market will be bearish in the third quarter is supply and demand,domestically and internationally. U.S. domestic crude supply is currently at a 25-year high and continues torise. Internationally, I believe OPEC countries will have a surge in supply after internal conflicts in thosecountries are lessened (could come as soon as this upcoming quarter). With this increase in supply and lowdemand, this will make the oil market slide in the third quarter.

Evan’s Estimation

BEAR BEARBULL BULL

BEAR BEARBULL BULL

BEAR BEARBULL BULL

FUELSNews 360̊ Commentaries

Who’s tired of talking about the 2014 Renewable Fuel Standards 2? The question is, “who isn’t?” At thisrate, it will practically be 2015 before we know the EPA’s requirements for 2014; and what about therequirements for 2015?!

It’s probably hard to tell by my opener, but I am bearish for third quarter renewables. It can only get betterfrom here, right? I think so. Surely Congress and the Administration will find it more productive to finalizethe rule than hold continual meetings on Capitol Hill to bide time and pacify the moment. Ethanol is alreadyfinding some pricing relief and I expect that to continue with increased production and plateaued demand. I think biodiesel will get there once the industry has some real expectations to get their arms around –maybe more like late Q3, but I anticipate prices will depress.


Jessica’s Judgment

Chris’s ConceptFor the third quarter of 2014, I expect the market to continue its rise. Obviously, the market is paying closeattention to the ISIS insurgents in Iraq. If Iraq has any disruption to the 2.5 million barrels a day of export,it could send Brent prices into the $140’s, dragging WTI along for the ride. The U.S. economy is improvingas well, with new job creation expected to total roughly 230,000 a month by year end. Non-supervisoryworkers —which account for 83 percent of the workforce— enjoyed an increase of 2.4 percent in pay overthe past year. As the economy continues to show signs of improvement, I predict we will continue to see themarket rise.

Evan’s Expression The second quarter followed headlines —not fundamentals. That being said, I hate to jinx myself as I did lasttime and say “surely THREE military conflicts will be the worst that could happen!” I might be held liable if Chinaattacks India, California sinks into the ocean, and four hurricanes converge on Galveston Bay at once!

I believe the headlines will continue through the third quarter as Ukraine struggles to gain its footing, Iraq learnsthe definition of “representative government,” and Libya’s various factions duke it out again. Additionally, I don’tthink we’ve heard the last from Syria and we are just entering hurricane season. Forecasts are calm, but I have asneaking suspicion our recent luck will be tested.

Beneath the headlines, I expect to see increased exports of both refined products and crude or crude equivalents —draining any excess product which might havecontributed downward pressure to the market. I hope more of those barrels find their way to the East Coast in support of struggling refiners still cut off fromcheaper shale oil stocks.

Despite these seemingly bullish points, I still believe the market lacks support for crude at $110 a barrel. With traders —those not invested to service a physicaldemand— still long in the market, we’ll see a prolonged round of profit-taking in the third quarter before we go into the winter. So, being the stubborn individualmy mother raised, I must retain my bearish sentiment and wait for the fall.

BEAR BEARBULL BULL

BEAR BEARBULL BULL

BEAR BEARBULL BULL


A mandate limiting five states— Massachusetts, Vermont, NewJersey, Rhode Island, and Connecticut— to a maximum of 500ppm sulfur in all heating oil sold within state lines kicks in July 1st.Since 500-ppm is a new product for the Northeast markets, somesuppliers plan on switching to ultra-low sulfur heat (15-ppm) andsome are taking advantage of a possible blending margin, blendinghigh-sulfur heat with ultra-low sulfur heat. Blending margins,logistical bottlenecks, and terminal tankage are just a few factorssuppliers must consider when looking at the benefit of blending a500-ppm spec rather than moving to a simpler 15-ppm spec.

PADD 1 East CoastPADD 1A Northeast

PADD stands forPetroleum Administration for Defense Districts

During World War II, the United States was divided into five PADDs to organize theallocation of fuels derived from petroleum products, including gasoline and diesel.The purpose was to spread the nation’s oil supply among the regions, therebyeliminating the possibility of a single strike wiping out the country’s oilinfrastructure and resources.

PADD 5:West Coast,

AK, HI

PADD 4:Rocky

Mountain

PADD 3: Gulf Coast

PADD 2: Midwest

PADD 1:East Coast

Regional View?

Did You Know?

The spread between high-sulfur heating oil and ultra-low sulfurdiesel has been narrow recently through the warmer spring andsummer months, which reduces blending margins. If we see thespread widen this year as we did this past winter, expect manysuppliers to take advantage by blending high-sulfur and ultra-lowsulfur product to produce heating oil which meets the 500-ppmmandate. However, as temperatures fall and consumption ofheating oil rises, drivers will feel the pinch more than ever assuppliers drain on-road diesel inventories to blend with high-sulfurproducts to meet demand.

Five New England States Implement Strict Heating Oil Mandate

PADD 1A Wholesale vs. DOE Retail

Source: Energy Information Administration (EIA)FN360o


PADD 1 East CoastPADD 1A Northeast

Laurel Pipeline Allocations Impact Pennsylvania ConsumersIn the second quarter, the main —and now only major— pipeline transporting refined products from theAtlantic Coast through southern Pennsylvania to Pittsburgh experienced major delays. Having just pulledthrough the coldest winter in recent history and given that the Sunoco Logistics pipeline no longer carriesrefined products to Pittsburgh, the region suffered severe supply disruptions.

Historically, gasoline shipments to the region overtake diesel in the second quarter as we enter the peak travel season. However, supplierswere still restocking diesel supplies which had been drained during the winter. The two conflicting interests increased demand for pipelinespace, resulting in shipment delays of up to a week and product shortages in central and western Pennsylvania.

The shortage of refined products impacted many markets, but Altoona and Pittsburgh suffered the most. Multiple suppliers shut offunbranded wholesale racks for days at a time, reserving product for their contract and branded customers. Netbacks in the region for dieseland gasoline turned extremely positive— indicative of a market in which unbranded rack prices exceed the costs associated with shippingproduct along the pipeline.

The Laurel Pipeline has since returned to normalcy and product shortages in Central and Western Pennsylvania have been resolved.

DOE Creates a One Million Barrel Northeast Regional Gasoline Reserve

Following Hurricane Sandy in October of 2012, the Northeastsuffered bone-chilling temperatures and persistent power outages.Many home owners were dependent upon gasoline-poweredgenerators for their heat and light sources as they waited patientlyfor utilities to jump into action. Unfortunately, without power,refiners were forced to do the same and gasoline quickly fell intoshort supply.

Consequently, Secretary of Energy Ernest Moniz announced in Maythe Department of Energy will establish the Northeast region’s firstfederal gasoline reserve. Spurred on by severe supply disruptions inthe wake of Super Storm Sandy, the reserve will complement theone million barrel Northeast Home Heating Oil Reserve (NHHOR)which proved vital in fueling first responder vehicles and emergencygenerators when traditional delivery systems failed for lack of power.

Expected to start by the end of the summer, the reserve will be splitacross two locations with one in the New York Harbor area and theother in New England.

“Providing relief for several barge-fed markets along the East Coast, which have struggled with supply since December of 2012, consumers may enjoy cost reductions, as foreign-flagged vessels often present discounts of several cents a gallon over higher- demand Jones Act vessels.” (Pg. 25)


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

PADD 1B Wholesale vs. DOE Retail


PADD 1C Wholesale vs. DOE Retail




Florida and North Carolina Consumers Get a Break from Low-RVP Gasoline Finally putting an end to the suspense surrounding low-RVP gasoline sales in several southern markets,the federal EPA announced in May that Florida and North Carolina customers would not be required to fill up on 7.8psi RVP gasoline this summer. All of Florida, along with the Greensboro “Triad” and Durham“Triangle” in North Carolina, now have a single 9.0psi RVP requirement year-round. Charlotte, NCremains a 7.8psi-mandated region, however. Effective May 30th, the ruling greatly simplifies gasolinesupplies for all three regions, resulting in more reliable fuel supplies and potentially lower prices at thepump for consumers.

A Kentucky lawyer cited the EPA’s failure to consider air quality in surrounding metropolitan areas. His adverse statements during the open comment period triggered delays in publishing the agency’s final decision. However, EPA regulators determined the regions were compliant with ozone standards and should not be held to the higher standard.

“Effective May 30th, the ruling greatly simplifies gasoline supplies for all three regions, resulting in more reliable fuel supplies and potentially lower prices at the pump for consumers.”

U.S. Summer Gasoline Requirements

Memphis Refinery Outage Leads to EPA Waiver Residents of Shelby County, TN —home to Valero’s crippled 195,000-bpd refinery— received muchneeded relief from the EPA’s low-RVP requirement at the start of June. The agency issued a waiver, whichremained in effect through June 26th, freeing consumers to use the cheaper and more readily available9.0 lb. product while Valero performed repairs.

At fault for Memphis’ supply woes since the first quarter, Valero’s refinery offers the only source of low(7.8-lb) RVP gasoline for the metro area and suppliers were ill-prepared to meet the EPA’s requirement.Without the waiver, consumers would have experienced frequent product outages and price spikes.

RFGRVP 7RVP7.8RVP 9



U.S. Customs Breathes Life Back into Buckeye’s BORCO AssetsBuckeye Partners announced in May it would begin blending gasoline components at their BORCO facilityon Grand Bahama Island. A U.S. Customs and Border Protection (UBP) ruling this spring cleared the wayfor the transportation of unfinished fuel components to the Bahamas for blending prior to re-exporting asa finished product into the U.S. without requiring a Jones Act vessel. Consequently, imports of gasolinerose to their highest levels since the start of 2012 in the middle of May.

Providing relief for several barge-fed markets along the EastCoast, which have struggled with supply since December of2012, consumers may enjoy cost reductions, as foreign-flaggedvessels often present discounts of several cents a gallon overhigher-demand Jones Act vessels. Located only 80 miles off the Florida coastline and ranking as one of the world’s largeststorage terminals with capacity of 21.6 million barrels, theCustoms ruling affords Buckeye an opportunity to fully capitalizeon their recent acquisition. It is still too early to know how thiswill impact East Coast terminals, but will provide reliablealternatives to Houston barrels while offering suppliersopportunities to capitalize during tough market conditions.

Wilmington

Charleston

Jacksonville

BORCO

Ft. Lauderdale

Houston


PADD 2 Midwest

Chicago Area Gasoline Prices Reach Highest in the Country

“Beginning each year on May 1st at the terminal level, this seasonal change sometimes leaves gasoline suppliers scrambling to switch their supply networks to the lower emission summer spec.”

PADD 2 Wholesale vs. DOE Retail


Chicago Gasoline vs. NYMEX RBOB Futures (Dollars per Gallon)

Source: Platts and NYMEX

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The seasonal changeover doesn’t just affect blenders and retailers, but often refiners as well. For instance, on the news of multiple refinersbidding for summer spec gasoline, Chicago area RBOB experienced its biggest one-day jump on May 28th increasing more than 10 cents pergallon over NYMEX RBOB’s gain on the day. Unfortunately for gasoline consumers, this is not an uncommon occurrence in the Chicagomarket. In 2013, RBOB values exceeded NYMEX futures by as much as 80 cents per gallon during this same period.

As warmer weather finally arrived in the Midwest, so did thechangeover to summer gasoline standards in many metropolitanareas. Beginning each year on May 1st at the terminal level, thisseasonal change sometimes leaves gasoline suppliers scrambling toswitch their supply networks to the lower emission summer spec.Federal guidelines require retailers in certain metropolitan areas toreduce VOC (volatile organic compound) emissions by at least

21.4 percent —assuming a 10 percent ethanol blend—betweenJune 1st and September 15th. The result can be skyrocketingprices in regional gasoline cash markets. Chicago seemed hardesthit. Over the course of the month of May, gasoline prices in thearea increased nearly 25 cents per gallon while NYMEX RBOBgained only about 6 cents per gallon on the month.

Midwest ULSD vs. NYMEX HO Futures (Dollars per Gallon)

Source: Platts and NYMEXFN360o


Midwest ULSD Prices Unseasonably WeakMidwest diesel prices moved lower in relation to futures as the second quarter came to a close.This is an unusual seasonal move, as typically spring planting season bolsters demand throughthis time of year. However, diesel supplies felt abundant as distillate production reached historichighs for this time of year.

PADD 2 Midwest

PADD 2 Net Production of Distillate Fuel Oil (Thousand Barrels per Day)

Benefiting from price-advantaged mid-continent and Canadian crude oil inputs, many Midwestrefiners exceeded standard production levels in the second quarter. Additionally, expansionprojects at several large refineries in the region have been completed in recent months,resulting in higher output.

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ACCUWEATHER 2014 FORECAST

2013NUMBERS

NOAA NORMAL

TROPICAL STORMS

HURRICANES

MAJOR HURRICANES

10

5

2

14

2

0

12

6

3


PADD 3 Wholesale vs. DOE Retail PADD 3 Gulf Coast

2014 Hurricane Season — Lion or Lamb?

Generating the fewest hurricanes since the early 80’s and producing no major storms, last year’s hurricane season was a welcome reprievefrom the devastating 2012 season, which produced two pre-season named storms, tied for third in most named storms produced in a singleseason, and culminated in the late-season destruction of Super Storm Sandy—the second-costliest hurricane ($68b) in U.S. history behind2005’s Hurricane Katrina.

So, what will 2014 bring? Will we suffer through another 2012 or enjoy the relative ease of 2013? The 2014 hurricane season openedquietly, earning an uncommon distinction as the first season in a decade to produce no named storms in the months of May and June. In2004, a similar El Niño pattern disrupted storm winds early in the season only to give way to several of the Gulf’s most destructive anddeadly storms.

AccuWeather.com’s recent long-range forecast suggests another below-average year, but not as quiet as last year — indicating approximately10 tropical storms, five hurricanes, and two major hurricanes in the Atlantic Basin. Only two of these 17 events are expected to make landfallsomewhere along the U.S. coastline.

Hurricane Season, Atlantic Basin

Source: AccuWeather.com


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“The 2014 hurricane season opened quietly, earning an uncommon distinction as the first season in a decade to produce no named storms in the months of May and June.”

Brent-WTI Crude Oil Spread (Dollars per Barrel)

Sept 23, 2011 Peak

$29.59

Current

$4.96

PADD 3 Gulf Coast

Cushing Glut Relocates to Gulf Coast Storage Prior to the industry’s exploration of shale formations in the West, the spread between West TexasIntermediate (WTI) crude oil prices and European Brent barrels stayed low and often indicated U.S.barrels suffered a slight disadvantage to foreign crude — hence why so many refineries along theEast Coast preferred crude stocks from Africa and Europe. However, once shale oil began pouringinto Cushing, OK, domestic barrels lost much of their value and the spread widened — grantingU.S. refiners a significant advantage over their foreign counterparts. After all, whether it started as$100/barrel WTI or $110/barrel Brent, the diesel produced still sells for $4/gallon.



Following the completion of TransCanada’s700,000-bpd crude oil pipeline in the first quarter,WTI values rose sharply, narrowing the spread andmaking foreign barrels more appealing than inrecent history.

Cushing barrels continued to flow southward in thesecond quarter, stripping away any remainingdiscount on WTI crude. Meanwhile, tanks along theGulf Coast filled rapidly, reaching record highs of215 million barrels in storage. That’s roughlyequivalent to one-third of the nation’s entireStrategic Petroleum Reserve. With more than halfof the nation’s refining capacity positioned alongthe Gulf Coast, however, it seems the logical homefor such vast reserves.

Cushing, OK Crude Oil Inventories (Million Barrels)


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Gulf Coast (PADD 3) Crude Oil Inventories (Million Barrels)


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PADD 3 Gulf Coast

As a result of over-stocked tanks, imports of crude into the region slipped to 17-year lows in the first half of May. Not lasting long however,increased refinery inputs in the following weeks sparked a 20-percent rise in crude imports for the week of May 23rd —the largest weeklypercentage gain since 2008. So long as crude inventories remain at unprecedented levels with little excess capacity, expect imports to sufferhigher volatility depending more than ever on refinery operations.


PADD 4 RockyMountain

“According to the Association of American Railroads, U.S. crude oil shipments by rail topped a record 110,000 carloads in the first quarter.”

Carriers Fight Montana Officials Over Release of Railcar StatisticsEarlier this month, Montana state officials agreed to release statistics showing the number oftrains carrying crude oil through the state. Railroad carriers oppose the decision given recent,high-profile rail accidents and citing security concerns which could result from the disseminationof such information.

Many states —including California, Minnesota, Colorado, among others— elected to keepthis information confidential. According to the Association of American Railroads, U.S. crude oilshipments by rail topped a record 110,000 carloads in the first quarter.





PADD 5 West Coast,AK, HI



California Cap-and-Trade Program Expected to Tax MotoristsCalifornia’s Cap-and-Trade start date is fast approaching. Consumers won’t see the tax listed on their receipts, but it’ll be there —an estimated10–40 cents on each gallon of fuel sold. Californians already pay close to 53 cents in state taxes for every gallon of gasoline and 49.5 centsfor diesel. This move has already sparked fierce opposition within the industry and affected communities.

Scheduled to begin on January 1st, 2015, opponents to the California Air Resource Board (CARB)’s new program hope to educate the public onthis hidden tax through radio and social media with the intention of repealing the state’s fee. If they are unsuccessful, executives and bureauofficials warn low-income families and agricultural communities will be the hardest hit. Meanwhile, several fuel distributors expressed intentionsof vacating their positions in the market to avoid the administrative burden associated with the plan.

Program revenues, estimated at upwards of $2 billion in its first year, are expected to go towards green initiatives and programs designed toreduce greenhouse gas emissions. However, some State representatives have already suggested allocating the funds towards high-speed raillines and housing projects rather than environmental programs.

“Californians already pay close to 53 cents in state taxes for every gallon of gasoline and 49.5 cents for diesel. This move has already sparked fierce opposition within the industry and affected communities.”

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0Current $4.00 Predicted $4.40*

5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.24

4.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.24

Federal TaxesState TaxesCap & TradeDistributionRefiningOil

Cap & Trade Tax Increase (Dollars per Gallon)

*Cap & Trade costs estimated at up to 40 cents per gallon

4.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.244.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.244.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.244.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.244.5

4

3.5

3

2.5

2

1.5

1

0.5


5

0.50

0.210.45

2.60

0.210.45

2.60

0.50

0.40

0.24

0.24

PADD 5 West Coast,AK, HIExpected to supply the state of California revenues totaling $6.6 million in its first year and $12.3 million when fullyimplemented, the Office of Spill Prevention and Response (OSPR)hopes to collect 6.5 cents for every barrel of crude delivered torefineries within the state. Revenues will go towards expanding thedepartment’s effective range and coverage of inland rail terminals.

Both the State Assembly and Senate approved the plan, butGovernor Jerry Brown must still sign the bill before the tax goesinto effect.

This comes in response to concerns over the state’s growing crude-by-rail industry. Valero, for instance, intends to replace waterbornedeliveries of crude to their Benicia refinery north of San Franciscowith two 50-tanker trains a day. While harmful emissions fromlocomotives would normally be a concern, the state’s reportsuggests the reduction in barge emissions would more than offsetany negative effects. The OSPR, however, is better prepared tohandle spills in the Bay than on the ground —lending support tothe 6.5-cent tax.


Flint Hills’ North Pole Refinery Cracks its Last BarrelMarking the end of a 37-year run, the 85,000-bpd North PoleRefinery, owned and operated by Flint Hills Resources, stoppedreceiving crude oil shipments at the end of May as workersramped up the painstaking decommissioning process. Two crudeprocessing units were already shut down in 2010 and 2012 dueto shifting economics following the 2008 crisis, but production ofgasoline and asphalt had continued in spite of rising “qualitybank” penalties.

Workers proceeded to disconnect the facility’s storage tanks inpreparation for its next life as a receiving/shipping terminal.Currently employing 126 workers, the facility’s head count isexpected to total roughly 35 once the transition is completed.The Petro Star Refinery —roughly 1/10 the size of Flint Hills’—will continue to produce jet fuel and heating fuel, but will now bethe region’s leading supplier of naphtha, used to power threeGolden Valley Electric Association generators.

California Legislation to Crack Down on Crude-by-Rail Shippers

Canada


Pivotal Keystone XL Bill Receives Committee ApprovalThe Senate Energy and Natural Resources Committee approved(12-10) a controversial bill on June 18th to bypass PresidentObama and approve the proposed Keystone XL crude oil pipeline.Transporting more than 800,000 barrels per day from Alberta,Canada to refineries on the Gulf Coast, the pipeline would requirepresidential approval because it crosses an internationalboundary. However, the vote by the Senate Energy and NaturalResources Committee would remove the presidential approvalprovision. Even though the Senate passed a key hurdle, itremains uncertain whether Senate Majority leader Harry Reidwould allow the bill to reach the Senate floor. Furthermore, if thebill was taken to the floor and passed, President Obama couldstill veto it. At the end of the day, the measure’s prospects arepretty slim, meaning a decision on the long-delayed Keystone XLpipeline doesn’t appear to be on the immediate horizon.

Suncor finished planned maintenance at Edmonton and Montreal refineries

Source: TransCanada

Suncor Energy completed planned maintenance at its refineriesin Edmonton, AB and Montreal, QC in late May. The plannedmaintenance activities for Suncor’s 142,000-bpd Edmontonrefinery began on April 7th and lasted approximately 8 weeks.Meanwhile, maintenance at the 137,000-bpd Montreal plantconcluded on May 30th after being shut down for roughly 4 weeks. Suncor operates three refineries in Canada and one inthe U.S. with refining capacity totaling 462,000 barrels per day.The company did not disclose specific details regarding the workundertaken at either refinery, but both plants are expected to godown again in the third quarter for further planned maintenancelasting 4 weeks and 9 weeks, respectively.

The Canadian government accepted the National Energy Board(NEB)’s recommendation to approve Enbridge’s Northern GatewayPipeline on June 17th. Transporting up to 525,000 barrels of crudeeach day from Alberta’s oil sands to a proposed tanker port inKitimat, B.C., the Northern Gateway Pipeline would allow Canadianoil producers to tap energy demand in California and Asia.

Enbridge submitted its application for the pipeline to the NEB in2010 and the application was later approved by a panel in 2013.However, the proposal’s approval came with 209 conditions.Enbridge’s CEO Al Monaco said the company would take the nextyear to work through these conditions, but shied away from makinga definitive commitment to the $6.5-billion oil pipeline’s construction.If Enbridge pursues the project —and assuming they address themore than 100 conditions requiring attention before shovels hit theground— the pipeline could be up and running by late 2018.


Canada

Enbridge Receives Government Approval for its Northern Gateway Pipeline

Some industry analysts say the growth of oil shipments by railand other export opportunities for oil producers could make itdifficult for Enbridge to shore up commitments from commercialplayers. Considering one of the NEB’s conditions for projectapproval required Enbridge to obtain firm transportation contractscovering at least 60 percent of the pipeline’s 525,000-bpdcapacity before construction commences, competition for barrelsmay delay construction well into the next decade or even provefatal to the proposed pipeline.

Oil sands production hit 1.93 million barrels per day last year.Estimates show production rising to 3.2 million barrels by 2020and reaching levels of roughly 4 million barrels each day by2025. With these estimates in mind, it would be years before oilsands production supported the Northern Gateway pipeline’sconstruction if the Keystone XL and Energy East projects obtainapproval first. The Energy East Pipeline, a 1.1-million barrel perday pipeline shipping oil to Quebec and New Brunswick as earlyas 2018, already locked up 900,000 bpd in firm commitments.Kinder Morgan Canada’s Trans Mountain Pacific pipeline reportedlysecured firm commitments totaling 708,000 barrels per day. Inthe near-term, there’s not a lot of crude left to satisfy all thepipeline projects being discussed. The order in which projectsreceive approval could dramatically impact those left on the tableand possibly spelling disaster for Keystone XL supporters.

Source: Enbridge via The Canadian Press

Proposed NorthernGateway Pipeline


CanadaCanadian Imports of U.S. Crude Nearly Double in 12 MonthsAccording to Statistics Canada, the nation nearly doubled its imports of crude oil from the United States in April when compared to thesame period a year ago. As discussed earlier in this issue, crude exports are restricted under federal law, but commercial players oftenreceive licenses to sell crude oil to foreign nations.

Canada imported approximately 8.1 million barrels in April from the United States, marking a 95-percent increase over last year’s volume.Imports increased only 4 percent compared to March 2014, when Canada brought in 7.8 million barrels from the U.S. In total, Canadianrefiners imported 17.5 million barrels, or 583,000 bpd, of crude oil in April.

The U.S. was the biggest import partner followed by Iraq, who exported roughly 75,000 bpd to the easternmost province ofNewfoundland and Labrador. While Canada produces 4.3 million barrels of crude each day, the country relies heavily on U.S. imports dueto pipeline constraints preventing the western oil-producing region from shipping its oil to Canada’s eastern refineries. Oddly enough, Texaswas the biggest exporter by state in the U.S. for the fifth consecutive month, shipping 4.4 million barrels of the 8.1 million monthly total,with the Irving Oil St. John Refinery taking most of the Texas crude coming from the Eagle Ford shale boom.


Alternative Fuels

Ethanol on the Up and Up?In mid-June, domestic ethanol production topped 972,000 barrels a day,its highest level since the Energy Information Administration (EIA) startedkeeping records in June 2010. The weeks of May 19th through June 13thshowed average ethanol production at 945,000 barrels per day, up 7.9%from June 2013. If producers maintained these levels of production for anentire year, it would equate to roughly 14.5 billion gallons of ethanol.

Increased production led to record length in domestic ethanol inventories bymid-June, increasing 15.2 percent from last year to reach a 15-month highat 18.42 million barrels. Stockpiles have since dropped slightly in light ofslow imports, greater exports, and rising gasoline demand. Blender inputs—a measure of demand— reflected a 2.8 percent increase from lastyear during the same 4-week period in June. Historically, gasolineconsumption spikes during the weeks surrounding the July 4th holiday, so itis expected for gasoline demand —and consequently ethanol— to climb.

So what is not up? Ethanol prices. In most cases, gains in the corn marketwould help maintain or boost ethanol futures, but with the release of theEIA’s ethanol production figures, corn fundamentals are unable to offersupport at the moment. If production continues at the present pace anddemand levels out after Independence Day, U.S. ethanol inventories havethe potential to grow rapidly, keeping prices on the decline.

Renewables

NYH Spot Ethanol vs. Gasoline Futures (Dollars per Gallon)

Source: Oil Price Information Services (OPIS)

FN360o


Renewables

Biodiesel Producers’ CrisisThe National Biodiesel Board conducted a recent survey finding that more than half of U.S. biodieselproducers idled at least one plant this year, 78 percent reduced production in comparison to 2013 rates,and 85 percent postponed or cancelled expansion initiatives. Nearly two-thirds expect to lay offemployees as a result of suffering production levels. Many blame the U.S. government for decliningproduction as erratic policy changes, delayed information, and poor communication increased uncertaintyfor all industry participants. Biodiesel advocates continue lobbying lawmakers to reinstate last year’s $1 tax incentive and expand the biodiesel volumes required in the highly anticipated 2014 RenewableFuel Standard (RFS2).

Adding to the producers’ crisis, biodiesel blending economics have been suffering. In many non-mandatedmarkets without state tax incentives, suppliers suspended bio-blended offerings as costs surpassed promptheating oil values. Biodiesel traders are creating rules of engagement as they go, which creates a highly-competitive and opportunistic trading environment. Many producers are hedging current product losseswith the possible return of blender’s credits —some even going so far as to split potential credit revenueswith purchasers to encourage trading.


Soy Biodiesel vs. NYMEX Diesel Futures (Dollars per Gallon)

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RIN Price ReviewThe Environmental Protection Agency (EPA) issues Renewable Identification Numbers (RINs) to track renewable fuel usage within the supplychain, holding refiners to a blend quota. RIN prices lost traction after March’s high due to continuing delays in publication of the 2014 RFS2.D4 biodiesel RINs fell from an annual high of 70 cents per gallon blended while D6 ethanol RINS hovered around 50 cents per RIN. Aftersuffering a 23-percent (15-cent) decline in April, biodiesel RINs rebounded —adding roughly 10 cents per RIN— while ethanol RINs regainednearly all of April’s losses by mid-May. RINs finished Q2 strong, as in late June, biodiesel RINs traded 7 cents higher and ethanol RINs traded 5 cents higher than the prior day, which is the largest single-day jump in quite some time.

“Many blame the U.S. government for declining production as erratic policy changes, delayed information, and poor communication increased uncertainty for all industry participants.”


Renewables(continued)Consumers of diesel and gasoline should watch RIN values as blending renewable products with traditional petroleum-based fuels offers anopportunity to significantly reduce their per gallon fuel costs, depending on RIN values. Under current legislation, RINs represent discounts onrenewable fuels; often creating cost advantages for biodiesel and ethanol, despite their higher base costs. Therefore, consumers of bio-blendedproducts often purchase fuel at discounts of up to several cents per gallon.


Biofuel RIN Values (Dollars per Gallon)

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Globally GreenThe Paris-based International Energy Agency (IEA) projects global biofuels output toincrease 2.7 percent each year, reaching approximately 2.3 million barrels per day in2019—slower than suggested in the IEA’s 2013 Medium-Term Oil Market Report.The agency claims diminishing government support for biofuel policies hinders theproduction and consumption of renewable transportation fuels; criticizing both U.S.and European leaders for policy flaws and ambiguous future growth initiatives.

In 2013, biofuels accounted for 3.5 percent of the world’s road transportation fuelconsumption —falling well short of the IEA’s minimum threshold for reaching the2050 goal of 27 percent. Ethanol, the world’s most widely accepted and utilizedrenewable transportation fuel, struggles to gain its footing as demand stalled in boththe U.S. and Brazil —the world’s top two producers and consumers of ethanol. At home, the 10 percent blend wall limits domestic consumption while Brazil’s woesresult from declining sugarcane crops and federal governance of gasoline prices.


Natural GasProductionExpected to grow at a rate of 1.6 percent each year through 2040 —twice the forecasted consumption growth rate— increasing domesticnatural gas production should earn the U.S. the title of “net exporter” by the end of 2017. At that time, the industry will have replaced 1.5 trillion cubic feet (Tcf) of imported natural gas with cheaper, domestically-produced fuel. Consequently, volumes traveling abroad by LNGtankers and natural gas pipelines are expected to reach 5.8 Tcf a year by 2040 —88 percent of which should be realized before 2030.

-10

0

10

20

30

40

1990 2000 2010 2020 2030 2040

History 2012 Projections

Total production

Total consumption

Net exports, 2040 (18%)

Net imports, 2012 (6%)

Net imports

Net exports


While the EIA projects Asian markets to receive roughly two-thirdsof all American LNG exports by 2030 and represent 55 percent ofthe projected net natural gas export increase during the sameperiod, China’s 30-year deal with Russia for natural gas deliveriesinto northern provinces may slow exports to the nation. Canada,as well, plans to develop pipeline infrastructure for both crude andnatural gas products in an effort to improve global exports.

Conversely, the EU’s recent conflict with Russia prompted a searchfor more reliable channels to satiate the region’s nearly 19 Tcfdemand for Russian imports each year. Covering 30 percent ofEurope’s natural gas consumption in 2013, Russian producers maycontend with American traders of LNG should China’s demandfalter, despite logistical and cost disadvantages.

Courtesy of TransCanada


Natural Gas


0

2

4

6

8

10

12

1990 2000 2010 2020 2030 2040

History 2012 Projections

Industrial

Electric power

Residential

Commercial

Transportation

DemandDomestic consumption of natural gas is expected to riseapproximately 6 Tcf before 2040 when Americans will burn31.6 Tcf a year. As illustrated at right, consumption for electricalgeneration will rise as more coal-fired plants retire, making wayfor natural gas generation in parts of the nation less amenable to wind, solar, and geothermal sources, among others. The EIAforecasts the decline of natural gas consumption for residentialheating, however, citing the population’s migration to warmerclimates and improved efficiency of appliances and heating units.Representing the smallest —yet fastest growing— portion ofthe nation’s natural gas consumption, commercial vehicles,trains, and ships will contribute 850 billion cubic feet (Bcf) ofdemand by the end of 2040 —up from 40 Bcf in 2012.

Despite EIA forecasts, the transportation sector will continue torepresent only a fraction of the nation’s overall demand duringthe next 25 years. Growing from roughly 400 million diesel-equivalent gallons to 8 billion in 2040, the transportation sectorwill make up only 4 percent of nation’s expected 37.5 trillioncubic feet (Tcf) of production each year.

Natural Gas Demand by Sector (Trillion Cubic Feet Per Year)


“The EIA forecasts the decline of natural gas consumption for residential heating, however, citing the population’s migration to warmer climates and improved efficiency of appliances and heating units.”


“Legislators allude to economic opportunities in Asian markets as well as the geopolitical impact of shipping domesticallyproduced gas into areas of Europe threatened by Russia’s conflict with Ukraine.”


Natural GasDomestic InventoriesRebounding from their lowest levels in over a decade, natural gas inventories have more than doubled to 1,829 Bcf towards the end ofJune. At this rate, inventories are expected to reach normal levels by mid-October, just in time for winter demand to begin.

U.S. Energy Secretary Ernest Moniz toured the Northeast this spring, calling on legislators and utility providers to expand the region’s energyinfrastructure. Suffering the brunt of natural gas shortages this winter, Northeastern consumers are constrained by an aging network ofpipelines and a growing demand in the electric generation sector, which now relies on natural gas for more than half its output compared to 30 percent in 2001.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)


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ExportsThe Energy Department announced revisions to their LNG export application review process this quarter. The current review process has beencalled a “deli counter” approach —granting priority based on application file date. This encourages companies to “take a number” evenbefore obtaining Federal Energy Regulatory Commission (FERC) approval —a pre-requisite for final administrative consent —and allowingunprepared applicants to delay those waiting in line. If implemented, the Department will only review those projects which have clearedinitial regulatory hurdles, “prioritizing resources on the more commercially advanced projects.”

Should the proposed changes be adopted, companies such as Cheniere Energy and Exxon Mobil would possess a distinct advantage overgroups just now preparing to break ground, as both companies already gained conditional export approval.

At the end of the quarter, the House passed a bill aimed at expediting administrative approval of LNG export facilities. If approved, the billwould hold U.S. Department of Energy administrators to a 30-day deadline following a site’s environmental review. Legislators allude toeconomic opportunities in Asian markets as well as the geopolitical impact of shipping domestically-produced gas into areas of Europethreatened by Russia’s conflict with Ukraine. Without their chokehold on natural gas supplies, Russia would lose much of its bargainingpower, likely forcing a compromise.


Transportation & Logistics

Total freight hauled inApril climbed for the thirdstraight month —adding0.4 percent— as thenation continued itsrebound from an

unseasonably cold winter. The April index fell two-tenths of apoint short of all-time highs, illustrating the industry’s steadyrecovery following the recession. Activity was up 4.8 percentsince April of last year, 24.1 percent since April of 2009, butonly 6.4 percent in the last 10 years, accentuating how far theindustry had fallen following the financial crisis. Much of the 10-year gains were made in the past 12 months, however,boding well for the momentum of the transportation industry.

The Federal Motor CarrierSafety Administration,with help from VirginiaTech’s TransportationInstitute, published astudy correlating the use

of electronic hours-of-service recorders (EHSRs) to crashes andhours-of-service (HOS) violations. Analyzing data gathered over15.6 billion miles from 11 small, medium, and large carriers,researchers determined those with EHSRs enjoyed an 11.7-percent reduction in their overall crash rates, including a5.1-percent reduction in preventable crashes. Furthermore, thoseusing EHSRs were 51 percent less likely to receive citations forHOS violations.

HOS regulations recentlymade headlines afteractor/comedian TracyMorgan was criticallyinjured on the New JerseyTurnpike when a fatigued

tractor driver struck the actor’s limo bus at a high speed. As staterepresentatives debate the merits of extending drivers’ eligible workhours, two New Jersey democrats urged senators to halt increases asfurther studies are conducted. Their proposed amendment to theexisting HOS regulations failed to advance to the Senate floor;however, after Senate majority and minority leaders disagreed on the vote threshold.

Now, imagine 51,000 truckdrivers idling for an entireworking year. According to theAmerican TransportationResearch Institute (ATRI)’s Aprilreport, that was the reality last

year. Congestion along the nation’s roughly 50,000 miles ofinterstate highway cheated carriers out of over 141 million hours andmore than $9.2 billion in operational expenses last year. Nearly 20 percent of that total was lost on California roadways. Gleanedfrom proprietary financial statements and anonymous GPS trackingdata, the Institute determined congestion cost carriers an average of$0.0340 for each mile driven last year.

Finally, in response to concernssurrounding the growingnumber of rail cars crisscrossingthe nation with highly-volatileBakken crude oil, the federalDepartment of Transportation

announced in early May an emergency order requiring carriers toprovide the State Emergency Response Commissions (SERC) of eachstate they pass through advance written notification of the trains’volume, frequency, and county-by-county movements. Effective inearly June, the order only impacts carriers hauling a million gallons or more —roughly 35 cars. Affected carriers responded withconfidentiality agreements which would limit the audience toemergency response team members involved in planning.


Source: GreenMarkets

U.S. Gulf Coast NOLA Urea(Avg Dollars per Short Ton Granular Urea, FOB New Orleans)

FN360o

Diesel Exhaust Fluid (DEF)Near-term Outlook North American urea followed a similar year-over-yearsupply/demand and pricing pattern through the first half ofcalendar year 2014. The cost per short ton of prilled ureaFOB New Orleans (referenced as “NOLA” herein) ran up$125 from a bottom of $285 in October ‘13, to a peak of$410 in March ‘14. NOLA has since retreated $70 andstabilized through the spring planting season.

As illustrated at right, urea prices firmed-up in June as strongdemand drove granular urea prices higher, erasing pricedeclines in May.

In the short-term, barges loaded and ready to ship earned as high as $395/ST in late June. However, forward curveindicates a softening in Q3 and further softening into Q4 withthe NOLA Q4 forward curve dipping to $300/ST. China’sexport window opens July 1, freeing Chinese producers ofthe 15% export tariff. The flood of Chinese and other foreignprilled urea expected to hit the domestic North Americanmarket between August and September supports a softeningforward curve and should temper prices. Barring anyworldwide ammonia plant and urea supply disruptions, weexpect to see Q3/Q4 urea price declines as Chinese prill hitsthe market and agricultural demand softens off its usualspring planting highs.

Source: GreenMarkets

U.S. Gulf Coast NOLA Barge Urea (Dolars per Short Ton)

FN360o

since the start of Q2

Over the next three years, we expect supply to remain tight as demand for DEF-grade urea continues to grow, while domestic supply remainsessentially flat. After that, expect the longer-term domestic supply shortfall to alleviate beginning in 2017 when new ammonia plants and plantexpansions come on line from Koch, CF Industries, Agrium, Yara/BASF, and others. The annual cyclical cost curve will continue with some gradual increase in year-over-year urea and DEF supply cost, barring any major disruptions or anomalies in the world ammonia and urea markets.

A significant demand-led wild card will be the engine-tuning strategies of heavy-duty engine manufacturers attempting to meet 2016+ CAFÉ fuelefficiency requirements. There is a tradeoff between fuel efficiency and NOX emissions, namely that fuel efficiency gains can be achieved at theexpense of increased NOX emissions. However, this trade off can be solved with increased DEF dosing, which could create a potentiallysubstantive future step-up demand for urea and DEF.

DEF Longer-term Outlook(2016+)


Fuel TaxesThe sum of city, state, and federal taxes in cents per gallon

56.40¢ / Gallon

47.40¢ / Gallon

47.40¢ - 56.40¢

51.35¢ / Gallon

40.40¢ / Gallon

40.40¢ - 51.35¢

Diesel Taxes – Effective July 1st, 2014

Gasoline Taxes – Effective July 1st, 2014

56.40¢ / Gallon

47.40¢ / Gallon

47.40¢ - 56.40¢

51.35¢ / Gallon

40.40¢ / Gallon

40.40¢ - 51.35¢


Mansfield’s National Supply Team

Andy Milton VP of Supply & DistributionAndy heads the supply group for Mansfield and during his tenure the company has grown from 1.3 billion gallons toover 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuel supply business from truckdispatch, analytics, and index pricing to hedging and bulk purchasing. Prior to Mansfield, Andy worked at RaceTracPetroleum. Andy’s expertise in purchasing via pipeline, vessel, and the coordination via futures and options forhedging purchases enables him to successfully lead a team of experienced and motivated supply personnel atMansfield. Andy’s team handles a wide geographic area of all 50 states and Canada, including all gasoline products,ULSD, kerosene, Heating Oil, biodiesel, Ethanol, and Natural Gas. Andy’s education began at Young Harris Collegeand later at Georgia Southern University where he received a BS in Sports Management.

Mansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel,renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to managetoday’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield todeliver geographic based supply solutions by more efficiently managing market specific refining, shipping and terminal/assets.

Dan Luther Manager of Supply & DistributionDan is responsible for purchasing, hedging, and the distribution of natural gas and renewable fuels. Before joiningMansfield, Dan was Director of Operations at Aska Energy and also worked at RaceTrac Petroleum, where he helpedmanage all barge, rail, and truck fuel deliveries before assuming ethanol trading responsibilities, includingpurchasing product to fulfill RaceTrac’s demand while trading product across other U.S. markets. Dan holds a BSBAin Supply Chain Management and Marketing from Ohio State University and is currently working towards his MBAat Georgia Tech.

Evan Smiles Northeast Supply SupervisorEvan began his career with Mansfield as an intern in the supply department back in the winter of 2011,assisting in the Southeast region. Evan quickly advanced into the role of Northeast Supply OptimizationAnalyst and currently holds the position of Northeast Supply Supervisor, handling various tasks includingsupply bids, day deal purchasing, long haul analysis, contract negotiations/fulfillment and supplyoptimization. Evan earned a BS in Sports Management and BBA in Finance from the University of Georgia.

Jessica Phillips Renewable Supply & Distribution SupervisorJessica is based out of Houston, TX and is responsible for nationwide purchasing, hedging, and thedistribution of renewable fuels. Joining the Mansfield team in 2009, she has held multiple titles over theyears: Contracts Coordinator, Regional Supply Analyst, Senior Strategic Supply Analyst, and as of late,Renewables Supply Supervisor. Jessica has a strong background in refined products scheduling, contracts,optimization and market analysis and is driven to continue to expand her knowledge in renewable andalternative fuels.

Nate Kovacevich Senior Supply ManagerBefore joining the company, Nate worked for Yocum Oil Company as a Senior Trader where hisresponsibilities included managing the company's refined product and renewable fuels procurement,handling all hedging related activities, and providing risk management tools and strategies to help customersmitigate volatility and price risk. Nate previously worked for FCStone, where he performed commodityresearch and analysis for customers with agricultural and petroleum related risk, devised and implementedrisk management programs and strategies, and executed futures and option orders on all the majorexchanges as well as any OTC related transactions. Nate earned his BA in Entrepreneurship and Economicsfrom the University of St. Thomas


Evan Poole Supply Support ManagerEvan started his career with Mansfield analyzing purchasing strategies and index behavior throughoutthe US and Canada. He’s the resident expert in Canadian refined products and serves in an advisorycapacity to the Canadian Supply team. Evan holds an MBA concentrated in Managerial Leadership fromPiedmont College.

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 and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to managetoday’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield todeliver geographic based supply solutions by more efficiently managing market specific refining, shipping and terminal/assets.

Chris Carter Southeast Supply ManagerChris serves as the Southeast Supply Manager responsible for refined product purchases including contracts,day deals and rack purchases. The Southeast region covers Florida, Georgia, Mississippi, Alabama,Tennessee, South Carolina, North Carolina, Virginia and Maryland. His responsibilities also include supplycontracts and current bids. Chris manages pipeline shipments of gas and diesel on the Colonial, Plantationand Central Florida Pipelines. Chris joined Mansfield in 2009 as a Supply Optimization Analyst and earnedhis BA in Business Management from North Georgia College and State University.


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Mansfield Energy Corp.

www.mansfieldoil.com

www.fuelsnews.com

678.450.2000

1025 Airport Pkwy SW

Gainesville, GA 30501

United States of America

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

©2014 Mansfield Energy Corp.

FUELSNews 360°MARKET NEWS & INFORMAT ION

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* 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 2014. All rights reserved.

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