fuelsnews 360 - q2 2013

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

2 0 1 2

J U L Y - S E P T E M B E R

The third quarter of 2012 brought continued instability as many of the world’s largest economies struggled to stimulate

growth and activity. Recent efforts by the U.S. and other countries to initiate stimulus programs, such as QE3 and

Operation Twist, are still unfolding and results are not yet measurable. This uncertainty leaves analysts scratching their

heads as to where the market will head in Q4.

A dramatic market jump following the July 4th holiday in the United States brought oil prices to nearly $100/bbl by

September. Higher prices were met with a decrease in demand, as U.S. oil demand dropped to its lowest level in over

four years. U.S. exports of ULSD and gasoline increased in the third quarter, with the majority of products going to Latin

America, Europe and Australia. Many countries around the world are finding new trade partners as oil embargoes on

Iran continue to tighten around the country’s refusal to halt nuclear weapon plans. The September attack on the U.S.

embassy in Libya furthered tensions throughout the Middle East and pressured prices upward.

Food prices also surged in Q3 as the Midwestern United States experienced the worst drought in more than fifty years.

Agricultural commodity prices rose sharply over the quarter on price rationing of extremely tight supply. A weaker U.S.

dollar will also continue to push crude prices higher.

With the U.S. presidential election just around the corner, all eyes are on Washington. Many analysts are waiting for

November to predict where the fuels market will go from here.

The too close to call U.S. election coupled with political unrest in the Middle East and unstable European financial

markets makes a realistic projection or “view forward” at this point difficult. However, the following report summarizes

the collective judgment of our supply team and industry analysts at large.

Q3 2012 Executive Summary

4 Overview

4 July 2012 through September 20125 Third Quarter Summary

6 International

6 Price Forward Thoughts7 Europe, Middle East, China8 Brazil, OPEC

9 Domestic

9 Economic Drivers; QE3,10 Economic Drivers; PPI, CPI, GDP 11 Fundamentals; U.S. Demand, Crude

Oil Inventories12 Fundamentals; U.S. Refinery Production,

Days of Supply13 Fundamentals; U.S. Refinery Inputs

Crude Oil Imports

14 Price Forward Thoughts

15 Commentaries; Andy and Sara16 Commentaries; Elizabeth and Dan 17 Commentaries; Hannah, Jorge and Scott

18 Regional View

18 PADD 1, A Northeast21 PADD 1, B Southeast23 PADD 2, Midwest25 PADD 3, Gulf Coast27 PADD 4, Rocky Mountains28 PADD 5, West Coast, AK and HI30 Canada

31 Alternative Products

31 Natural Gas33 Renewable Fuels

35 FUELSNews 360˚ Supply Team

FUELSNews 360°Quarterly Report Q3 2012

Index

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.

Following the July 4th holiday, the market took off like a rocket. Crude alone went from $83.75 to $99.00 before the end of September.

Overview

July 2012 through September 2012

4 © 2012 Mansfield Energy Corp.

Source: Bloomberg Finance L.P.

92.19

Third Quarter 2012

Overview

Third Quarter Summary

*Source: Bloomberg Finance L.P.


316.94

Summary, Third Quarter, 2012

Heating Oil (red), RBOB gas (green), Crude (white), and the DOW (purple) all increased over the quarter. Several market indicatorsshowed positive results including jobless claims and home sales. The domestic policies meant to stimulate the economy may have alsocontributed to positive feelings to the future. However, international conflicts raised supply concerns including the continued tensions in

the Middle East, all ultimately driving the market up higher throughout the quarter.

334.20

92.19

13437.13



The global economy continues to be in crisis mode, and as a result, manyof the biggest economies continue to struggle. Despite high speculation ofquantitative easing and stimulus strategies to spur economic growth, theharsh reality is that demand is extremely weak. As consumers andbusinesses are cautious on spending, fuel and food prices continue toincrease rapidly. Though there have been recent efforts by the U.S. andother countries to initiate stimulus programs, such as QE3 and OperationTwist, results are still unfolding and are not yet measurable. Thisuncertainty increases analysts' concerns as to where the market will headin Q4. Operation Twist was intended to lower long-term interest rates,thus stimulating growth by selling short-term bonds and utilizing thoseproceeds to buy back longer-term bonds.

Europe continues to seek solutions to their debt crisis and Asia’s economicgrowth continues to decline as countries cut back on Asian imports, whilethe chaos in the Middle East is far from over as Iran’s oil embargo is stillin effect and violence in Libya and Syria prevails. The following economiesand organizations were the most imperative to the oil industry, as theireconomic reports often resulted in market drivers during the last quarter.

International

Price Forward Thoughts

“ Though some countries, including the United States, introduced economic strategies like Operation Twist and QE3 to stimulate local economies, results are not yet measurable.”

Following a bailout in Spain and with Greece’s on-going struggles, numerous meetingsregarding the European debt crisis have been futile. In fact, the Eurozone’s weaknesseshave evolved over time and now affect their biggest and most important economy,Germany. Though Germany has managed to keep its head above the water thus far,recent economic reports suggest Germany is suffering from the regional recession. Despitetheir historical economic strength, weaknesses in the labor sector, the manufacturingsector and financial sector have finally caught up to them. During the next quarter, we willwatch for a Eurozone response to the introduction of QE3 by the United States tostimulate economic growth.

Europe

Middle East

After constant growth over the last ten years, China’s economy has slowed in 2012. Withan average growth rate of 10% over the last decade, the current economic crisis directlyimpacted the world’s second largest economy. In fact, despite projections for continuingthe 10% growth trend in 2012, China’s economy has actually grown at a 7.8% rate so farthis year. With analysts pointing out weak global demand for Chinese goods, a drop inmanufacturing rates and an increase in production prices, China’s energy consumptionlevels have also been affected by the global crisis and continue to underperform incomparison to prognostics made in early 2012.

China

Geopolitical conflicts in the Middle East made headlines throughout the third quarter of2012. After numerous warnings to cease their nuclear program and adhere to internationalpolicies, Iran’s financial and oil sanctions remain in effect, while on-going Libyan conflictsand the September attack on the U.S. embassy increased concerns about the instability ofthe region. Uncertainty over the continuing turmoil has exacerbated fears resulting insupply disruptions and possible military action.


However, despite the currentslowdown, the EIA points outthat China could become theworld’s largest liquid and oilimporter by 2013, representingan estimated 64% of total worlddemand. Currently, China rankssecond in both categories behindthe United States.

Source: EIA

Inflation rate forecasts for this year were recently increased to 5.2% in comparison to4.7% in June, as the increase in food prices and personal expenditures was evident in thethird quarter. With the economy moving at a slower pace than initially predicted, growthrates for 2012 have also been reduced during the third quarter from 2.5% to 1.6%.However, economic leaders expect the world’s second largest emerging market to showbetter results in the near future, with hints of positive metrics coming from economicreports like the Consumer Confidence Report and Retail Sales Report over the past twomonths.

Brazil

The Organization of the Petroleum Exporting Countries (OPEC) has shown interestingmetrics during the third quarter of 2012. OPEC, which currently supplies 40% of theworld’s oil, reported a surplus in production during July and August. After agreeing toproduction levels of 30 MB/d, July’s production levels reached 31.16 MB/d, while Augustlevels reached 31.41 MB/d. According to OPEC, the surplus in production is due to anincrease in production in Angola, Nigeria, Libya and Saudi Arabia, while Iraq retainedits position as the group’s second largest producer. Additionally, due to the current oilembargo, reports suggest Iran’s oil production decreased by 13,000 bbl/d to 2.77 MB/ddespite Iranian official reports reflecting a 3.75 MB/d output. However, due to the surgein crude oil prices over the third quarter, OPEC basket prices reflect a surge in prices, mostevident between July and August.

OPEC

OPECEstablished in 1965, consisting of12 member countries andheadquartered in Vienna; Goal oforganization is to ensure oil outputand prices remain stable globally.Currently, OPEC members include:Algeria, Angola, Ecuador, Iran,Iraq, Kuwait, Libya, Nigeria, Qatar,Saudi Arabia and Venezuela.

Source: OPEC

OPEC Basket Price


Domestic

EconomicDrivers

The U.S. continues to be proactive in finding a solution to the current global crisis. Withimportant sectors like housing, labor and manufacturing still struggling, the U.S.recognizes their economy remains weak and has considered numerous stimulusstrategies. As fuel prices continued their upward trend through the third quarter, so didfood prices. In fact, the Midwest drought affected the agricultural sector more thanexpected, causing a surge in corn prices, food prices, and ultimately fuel prices. As aresult, some of the following economic reports were directly affected and forced the U.S.Federal Reserve to unveil a new round of quantitative easing, QE3.

QE3QE3 is a $40 billion per month mortgage-backed securities buy-back program introducedby the U.S. Federal Reserve on September 13, 2012 to stimulate economic growth.Though it is uncertain whether QE3 will be successful, it is fair to say that the U.S.government is aware of the current crisis and is searching for a solution to the problem,with Operation Twist and QE3 expected to work side-by-side through the end of the year.However, because QE3 was introduced at the very end of the third quarter, some indexesand metrics will be slightly influenced by the stimulus plan.


QE3 is a $40 billion per monthmortgage-backed securities buy-back program introduced by theU.S. Federal Reserve onSeptember 13, 2012.


CPI Closely related to production prices, the Consumer Price Index increased duringthe third quarter of 2012. Once again, the difference maker seemed to be the increasein food and energy prices, as gas prices increased 9.0% during the month of August,while food prices increased by 0.2%, leaving consumers with less spending money intheir wallets. Mainly due to a surge in fuel and food prices, production prices reachedan astonishing 1.7% increase in August 2012 following a 0.3% in July, with foodprices increasing 0.9% and energy prices increasing 6.4%.

GDP Gross Domestic Product, the output of goods and services produced by laborand property, was revised by the U.S. Department of Commerce last quarter to reflectreduced expectations for growth during the third quarter. The second quarter’s RealGDP was reduced to 1.7% growth, while the third quarter’s expectations were reducedto 1.3% growth despite previous forecasts of 1.7% growth. The growth expectationsare unfavorable, especially in comparison to the last quarter of 2011 and this year’sfirst quarter, where GDP increased by 4.1% and 2.0%, respectively.

EconomicDrivers

Domestic

“Third quarter growth expectations are unfavorable, especially in comparison to the last quarter of 2011 and first quarter of 2012 where GDP increased by 4.1% and 2.0%, respectively.”

PPI Producer Price Index rose as production prices continued their upward trend duringthe third quarter of 2012. Mainly due to a surge in fuel and food prices, production pricesreached an astonishing 1.7% increase in August 2012 following a 0.3% increase in July,with food prices increasing 0.9% and energy prices increasing 6.4%.

Fundamentals

Source: U.S. Energy Information Administration based on Bloomberg, L.P.


U.S. DemandMainly due to the current economic crisis, crude oil demand reached the lowest levelsince September of 2008. In fact, oil demand dropped 2.7% to 18.062 MB/dduring the month of July, the peak of the summer driving season.

Crude Oil InventoriesAs shown on Graph 1, crude oil stocks remain above historical limits. In fact, despitethe usual downward production trend at the end of the summer, crude inventoriesreached 364.7 MB/d during the end of September, an estimated 28.4 MB/d above2011’s level.

Monthly U.S. Ending Stocks Excluding SPR of Crude Oil (Million Barrels)Graph 1

Fundamentals



U.S. Refinery Production As shown on Graph 2, U.S. crude production remains above the 5-year average. With domestic production still running at high levels, crudestocks remained above their historical levels in third quarter.

Crude Oil Domestic Production (Million Barrels)

Days of SupplyAs shown on Graph 3, the Days of Supply (DOS) average remained above the 5-year average. Despite the drop in August, the increase inDOS was mainly caused by the increase in production and crude oil imports.

Graph 2


Monthly U.S. Days of Supply Crude Oil Excluding SPR (Million Barrels)Graph 3

Fundamentals



U.S. Refinery Inputs As portrayed on Graph 4, refiner net input remained relatively constant during the third quarter of 2012. Compared to the yearly average of14.9 MB/d, the third quarter’s average was slightly elevated at 15.2 MB/d. However, in comparison to the 5-year average, refiner inputremains at a normal level.

U.S. Weekly Refiner Net Inputs of Crude Oil (Million Barrels)

Crude ImportsAs the U.S. continues to produce more, the reduction in imports is more evident over time. As seen on Graph 5, out of the third quarter,imports in July and August remained low in comparison to the 5-year average. As for September, imports increased due to supply disruptionscaused by Hurricane Isaac.

Graph 4


Monthly U.S. Crude Oil Imports Excluding SPR (Million Barrels)Graph 5

Price Forward Thoughts

Bloomberg’s collection of analysts’ predictions for crude prices is listed below. The pie chart represents quarterly projections and the table displays data by quarter for the next four quarters.

WTI – Crude

NAT GAS – Henry HUB

BullishBearishNeutral


For the short-term, my thought is that we are range-bound while we listen to thepolitical garble both domestically and internationally. If I had to pick any direction inthe short-term, I would say we have a better chance of being lower during the nextquarter, but as we enter the winter months we may make some of that ground backif the weather is especially cold. Domestically, the U.S. economy appears to behanging on better than the European economy, which can be a drag for oursituation. U.S. jobless claims began to slow, but I think it’s important to note thatmany individuals have just readjusted their lifestyles to survive on less given theyhave exhausted their unemployment benefits. In short, I believe we are in a ratherseasonal range-bound transition for now barring any major events.

Andy’s Answer

FUELSNews 360˚ Commentaries


BEAR

With the Presidential election looming, I remain market neutral for the remainder of2012. The slightly weaker dollar hit a four-month low against the Euro and encouragedcommodity buying. In fact, the Commodity Futures Trading Commission (CFTC) justreleased numbers stating that historically there has never been more money on the buyside of oil at this time of the year. Even as the Federal Reserve made a decision on athird round of quantitative easing, speculative dollars continued to bet on higher crudeprices. Protests and continued violence in the Middle East supports concerns and givesthe market a bullish tendency. Further, both the U.S. and Israel are in full agreement onpreventing Iran from obtaining a nuclear weapon. All of these issues could point towardhigher prices.

However, slow economic growth continues to plague the U.S. Consumer spendingstalled in August and according to the S&P 500 Index, business activity unexpectedlycontracted in September. As for Europe and the Euro, unemployment amongst 17nations was 11.4% in August, and the European Central Bank said they expect the Euro-area economy to shrink .4% in 2012. In addition, a Bloomberg survey stated that 46%of analysts (13 of 28) forecast that crude will decrease in the short-term. Finally, NorthDakota and Texas moved U.S. crude production to the highest level in 25 years. All ofthis push and pull between speculative money, geo-politics, economic factors, and supplymake it difficult to be married to a bullish or bearish position.

Sara’s Synopsis

BULL

FUELSNews 360̊ Commentaries

Despite overall weak fundamentals for oil, quantitative easing from federal governments anda tight supply side will dictate higher prices through the end of the year. From the FinancialTimes article The Fed, Quantitative Easing and Oil Prices by Javier Blas:

I recently sat down with a senior official from a medium-sized OPEC country, with decades of experience in the oil market, who offered an interesting point of view about the role of the Fed in setting oil prices. He explained that his country already has significant foreign exchange reserves, mostly invested in low yielding U.S. treasuries, and current oil prices were high enough to both meet budgetary needs and further inflate the reserves.

“I know the U.S. and the Europeans would like us to increase production,” he told me. “But what is the point? We would earn more money; money we do not need. And U.S.

interest rates are so low that we earn nothing from our extra production. It is better for us to keep production unchanged and keep the money underground.”

That is an interesting take on federal government’s financial “easing” and its effect on oilsupply. As Blas goes on to explain, “In short, the opportunity cost of not producing oil hasfallen dramatically. Thus, policy makers feel little pressure to increase production to lower oilprices.” With prompt month WTI closing at $92.19 per bbl and Brent crude settling at$112.39 per bbl on September 28th, in the moderate to long-term, I am bullish.

Dan’s Dissertation


Over the next quarter, I feel the market will decline - especially gas, by looking atbackwardation. But, if you look at what the market did on the last day of the September,futures were at one point up 40 cents per gallon, further showing that the market can doanything. The market can go either way over the next few months, particularly with the wintermonths approaching and an increased demand on diesel. I think overall the market will bebullish over most of the next quarter, but will decline rapidly at the end of the year. All of thiscould quickly change if the winter months are far warmer again this year as it was last year,which is currently being predicted again.

Elizabeth’s Exchange BEAR

FUELSNews 360̊ Commentaries

Although Canada’s economy has weathered the world economic crisis significantly better thanEurope and the U.S., they continue to be plagued with slow growth. Canadian housing prices,with the exception of the overheated Vancouver market, continue to edge up, supported byrecord low interest rates, and relatively solid employment numbers. The Composite House PriceIndex, which measures price changes for repeat sales of single-family homes, was up in July by4.8% from a year earlier. The Canadian unemployment rate has hovered between 7.2% and7.3% for the past 3 months. The gaps in the Canadian economy tend to be very regional, withWestern Canada in particular and oil rich Alberta showing significant strength, whilemanufacturing-based Eastern Canada has struggled with higher unemployment and a highCanadian dollar.

The Canadian economy, due to its size and place in the world order, tends to be affected bywhat is happening in other markets, particularly in its largest trading partner, the United States.However, “slow and steady wins the race,” whereby the prediction for growth remains, justunder 2% for the remainder of 2012 and 2013, at 1.8% and 1.9%, respectively.

Scott’s Sixth Sense


With the futures market holding speculative net long positions and the Euro continuing tofalter, I think we’re going to have a difficult time supporting these levels, let alone taking ithigher. Barring any incendiary news out of the Mideast, I’m slightly bearish for fourth quarterand anticipate crude finding some support between $80-85.

Hannah’s Hunch

Looking back, some of my predictions for the third quarter were fairly accurate. As I projected,the global economic crisis is still far from over, while the conflict between Iran and the UnitedNations did in fact escalate to multiple sanctions against Iran. As for the fourth quarter of2012, I see the market being slightly bullish, at least until the dust settles. In my opinion, themarket continues to be susceptible to geopolitical events and economics, with the Middle Eastconflict intensifying every day and with the world’s largest economies underperforming during2012. However, I will be interested to see how the U.S. dollar performs in comparison toother currencies. With the Fed’s recent adoption of QE3, the dollar is expected to gainstrength over Q4, which would cause downward pressure on energy prices. For this reason, I expect crude prices to remain volatile, but ultimately slightly more bullish in the long-term.

Jorge Pradilla’sPredictions

BEAR

BULL

BULL

Regional View

Petroleum Administration for Defense Districts

The Northeast PADD has been a very busy area during the last quarter. Sunoco and the Carlyle Groupcompleted the formation of a joint venture known as Philadelphia Energy Solutions (PES). This jointventure will operate the Philadelphia refinery which is able to process 330,000 bbl/d of crude into amultitude of refined products. The Carlyle Group in the joint venture will hold controlling interest andwill also oversee all day-to-day operations of not only the joint venture, but also for the refinery. Sunocowill retain a 33% non-operating minority interest. A formal ceremony was held on September 19th thatwas attended by elected officials, labor and business leaders, and hundreds of refinery employees.Through this joint venture, 850 employees were able to keep their jobs. Pennsylvania will invest alarge amount of money to make upgrades needed to the refinery for environmental gains and to beable to use other non-imported fuels.

PADD 1 A Northeast


Although the merger of Sunoco and Energy Transfer Partners will be finalized by the end of theyear, most oil traders were split into two teams until mid-September. PES will not only have therefinery workers, but also 32 employees that will transfer from Sunoco’s trading and supplyteam. PES traders will trade for the Philadelphia refinery while other employees who werepreviously Sunoco traders will not trade under the name ETP/Sunoco. These employees willtrade for Sunoco branded retail. Both of the companies will post daily prices at the rack forjobbers in the market.

PADD 1 A Northeast

Delta Airlines, slightly behind schedule, began the restart of its newly bought refinery in Trainer,PA. They originally stated that the refinery would be up and running by the end of September,however this has not changed the mindset of any Northeast traders in terms of playing it safe.Traders want to see the Phillips 66 refinery selling products from the Trainer refinery. Phillips 66has an off-take agreement with Delta to off-sell products from the refinery. The refinery isexpected to increase the daily total of available barrels in the Northeast by 80,000 bbl/d ofgasoline and 30,000 bbl/d of diesel. Jet fuels will also be of key importance to this refinery forDelta. They are hoping to have 50,000 bbl/d of jet fuels production.

Lukoil retailers in New Jersey and Pennsylvania have been in a large battle this quarter with TheNew Jersey Gasoline C-Store Automotive Association. The Association would like to implementzone pricing. Lukoil retailers feel this is unfair for their branded wholesale fuel supply contracts.Around mid-September, the gasoline chain raised their prices at the pump to $8/gal in protest.There are 30 stores from New Jersey and another 27 from Pennsylvania that were involved inthe protest. The stores claim that the pricing terms that were agreed upon by the Associationwould ultimately harm both retailers and consumers and would lead to increased prices at thepump. Consumers complained that the stores were price gouging, however anyone whoinadvertently purchased fuel without being aware of the price was refunded the difference.

“The refinery is expected to increase the daily total of available barrels in the Northeast by 80,000 bbl/d of gasoline and 30,000 bbl/d of diesel.”

Source: U.S. Energy Information Administration


New England Weekly Gasoline PricesPADD 1 A Northeast

A huge gasoline disruption occurred in the Northeast this quarter when barges set to loadwere not able to due to dock congestion, according to the shipper of the fuel. Other partiesstated that this was really not the case, but could not prove otherwise. Many terminals ranout of gas, including terminals owned by Gulf, Magellan and Sunoco. Among other issues,the Irving refinery in Saint John went down for repairs. This refinery is responsible forsupplying a large portion of gas to the New England market. These problems caused tradersto scramble for prompt barrels, ultimately leading to price increases.

Over the next few weeks, winterized diesel will be moving into all markets in the Northeast.Now is the time to perform routine maintenance on all trucks or machinery utilizing diesel. Auseful tip: check the fuel filter and water separator, as condensation can form from the heatof the engine cooling down when the engine is turned off. Check regularly for this issue, andchange filters when needed. Also, check the owner’s manual for the vehicle or machinery tosee any other precautions the manufacturer might suggest.


PADD 1 B Southeast

The Southeast PADD began the quarter with a huge scare from Hurricane Isaac. At first, itwas speculated to hit the southern portion of Florida. Then, meteorologists thought it wasgoing to hit Tampa, resulting in the closure of the Port of Tampa for several days while Tampasaw flooding during the Republican National Convention. The Florida Panhandle wasspared, though many terminals shut down in anticipation of the hurricane. Many barges weredelayed and the hurricane caused disruptions for days all along the Florida Panhandle.Carriers were trying to catch up for at least a week from terminal outages and flooding fromlarge rain storms brought by the hurricane’s aftermath. While Isaac was making landfallaround Louisiana, large amounts of rain flooded Memphis causing terminal outages frombarges being unable to travel north on the Mississippi River. The hurricane, along with otherissues, caused a rally with Gulf Coast basis values seeing ULSD at much higher than normalvalues, well above +1000, and at one point trading at +1250.

Did you know?RVP stands for Reid VaporPressure and is a measurementof the absolute vapor pressureexerted by gasoline. During thesummer, RVP is controlled atlower levels to reduceemissions.


After many days of trouble following the hurricane, especially during the last week of the LowRVP season, the EPA released a waiver for the LRVP gas. The waiver covered Alabama,Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.This was not a complete waiver, but one that stated if you cannot find LRVP gas, you coulddeliver HRVP gas in its place. This waiver was placed in effect on September 4th and willremain in effect until the end of the Low RVP season.

Hurricane Isaac Track

Source: National Oceanic and Atmospheric Administration

PADD 1 B Southeast

Glencore and Western formed a joint venture where they will sell fuels in the Southeast andMid-Atlantic. They are specifically targeting the Savannah, GA market where they can takeover the Epic terminal, which has not been operational, yet has the capacity to hold 450,000barrels. Currently, all rack suppliers buy bulk from Colonial and resell the product. Westernwill be the rack marketer for the joint venture while Glencore will provide global sourcing,supply, trading and all risk management services. This joint venture will be the first truecompetition this area has seen since Marathon several years ago. They will try to use anoccasional arb of buying European fuels instead of Gulf Coast based fuels in order to have acompetitive advantage.


Prices increased along the East Coast due to the February closing of the Hovensa refinerylocated in St. Croix. U.S. Virgin Islands. Governor John P. de Jongh requested a meetingwith the joint owners of the facility, PDVSA and Hess, where the governor stated that thebest use for the facility would be as an open profitable refinery. They feel that if certainupgrades were made, this might be possible. The governor has yet to receive a response,though this would greatly increase the available barrels along the East Coast and would helpkeep costs down.

Source: Caribbean Journal

“The Epic terminal has the capacity to hold 450,000 barrels. Currently, all rack suppliers buy bulk from Colonial and resell the product.”

While the rest of the country felt the sting of the recession in the form of unemployment andpoor business performance, the Bakken Shale Play brought new life to the northern part ofPADD 2, boasting an outstanding 97% employment rate.

PADD 2 Midwest

Spotlight: The Bakken Formation

“As of 2012, North Dakota is second only to Texas in oil production, with an incredible portion of its reserves still untapped.”


The Bakken Formation was deposited in the more central and deeper portion of the Williston Basin

The Bakken formation, located in Eastern Montana and Western North Dakota, was named for a North Dakota farmer, Henry Bakken, whoowned the land where the first well was discovered in the area in 1951. Despite the number of years since the discovery, most of the oilreserves were unattainable ten years ago when the advent of new technologies in horizontal and hydraulic fracturing made drilling possible.Due to these developments, as of 2012, North Dakota is second only to Texas in oil production, with an incredible portion of its reserves stilluntapped. While the U.S. Geological Survey estimates the total amount of Bakken crude to be around 4.3 billion barrels, other surveys placethe number as high as 24 billion barrels.

While this means tremendous boosts for both the local economies and a surge in area diesel demand, the real news surrounds what thismeans for the U.S. on a large scale as a traditional net importer of crude oil. This also changes the focus for many domestic refiners, as theland-locked Bakken crude can present a discount to WTI crude at times for local refineries to lock in additional profit. As discussed in theinaugural issue of FUELSNews360°, Gulf Coast refined products have traded at a premium to Chicago—an anomaly—due to arbitrageopportunities with cheaper crudes available. While we initially mentioned West Canadian Sour as the main source, discounts in Bakken (notas heavy as WCS) can also lend a hand to this inversion.

It should be noted that the Bakken formation improves connectivity with the coasts, but this arbitrage may cease if production does not meetestimates. Despite Bakken being discounted for most of 2012—as much as $25 under WTI—we close Q3’12 with Bakken spot crudeprices $4 over WTI. This disparity is predominantly due to new rail connections and supply agreements with Tesoro Anacortes and Irving St.John in Quebec, coming at the same time as the region misses production growth estimates.

Source: USGS

PADD 2 Midwest

Chicago Biodiesel Blending

The spread between WCS and WTI also inspired some local refineries to upgrade in order to process theheavier feedstock. BP Whiting in Indiana underwent work over the past year on each of the crude units,with the last of the work completed in August. Conoco Wood River in Illinois also completed an upgradewhich increased capacity and allowed for processing of the heavier crudes.

At the beginning of 2012, biodiesel was deeply discounted, coming in nearly 30 cents under diesel costsdue to the value of the RIN ($1.5400 as of 01/03/12). As the year continues, however, the RIN valuehas seen a dramatic drop and blend economics at the spot level are not as attractive as they once were. Wefinish Q3’12 with a 2012 biodiesel RIN value of only $0.7650 – nearly half the premium it fetched at thebeginning of the year. This decrease in value has made biodiesel more expensive than diesel and now theblend economics are negative, without looking at the tax benefit. End-users with contracted supply of thediscounted product cost are still reaping the benefits on both sides of the equation, though many buyersmay still find value in Illinois when the tax exemption outweighs the negatives of product premium.


Refinery Issues

PADD 2 has seen some relatively volatile production swings in the midst of Q3’12, with 10 individualrefineries experiencing one or more unplanned upsets. Most noteworthy of these is also the most recent; onthe last day of the quarter, there was an explosion at CVR Energy’s refinery in Wynnewood, OK. Theexplosion killed one person and injured another. The Group Three region should expect additional tightness,as the explosion at the 70,000 bbl/d refinery comes at a time when the market is already short.

316.94

0.7650

96.9492.19



PADD 3 Gulf Coast

Perhaps the most noteworthy item in Q3’12 for PADD 3 was the havoc wreaked byHurricane Isaac. The fourth hurricane of the 2012 Atlantic hurricane season, Isaac developedfrom a tropical wave on August 21st and strengthened to a tropical storm later the same day.Initially projected to be a strong Category 2 hurricane that would hit Florida, Isaac’s passingover Hispaniola and Cuba slowed the system from developing into a hurricane until just beforeit made landfall on August 28th.


A Category I hurricane, Isaac hit New Orleans on the 7th anniversary of Katrina.While thankfully Isaac was nowhere near Katrina in terms of destruction ofproperty or lives, there were certainly plenty of supply issues to deal with in itswake. A total of over 1 MB/d of production shut down in the Gulf Coast, eitherin preparation for or as a result of the hurricane. With the area alreadyexperiencing shortages, Gulf Coast product premiums surged and wholesaleracks reacted as flooding and wind damages made some areas truly impossibleto reach by truck. Less than a month later, all units were back up and runningand no lasting mechanical effects were cited.

“Thankfully, Hurricane Issac was nowhere near Katrina in terms of destruction of property or lives, but there were still plenty of supply issues to deal with in its aftermath.”

14846.00


PADD 3 Gulf Coast

Keystone Pipeline Update

In 2010, the Keystone Pipeline System, a natural gas pipeline initially originating inSaskatchewan, was converted to a crude oil pipe with the intent of delivering Canadian crude oil to the U.S. into the Gulf Coast. Owned solely by TransCanada, the Keystone Pipeline founditself in the middle of a multitude of debates surrounding the proposed Keystone XL and GulfCoast projects.

Currently serving as a pipeline between Canada and Wood River with an extension line intoCushing, OK, the expansion plans include two separate projects: the Keystone XL, which wouldcreate American crude origins in Baker, MT and Cushing, OK, and the Gulf Coast project, whichwould provide connectivity to Gulf Coast refineries. The expansion is slated to cost about $7billion, but continues to fight opposition from environmentalists and politicians. In November2011, President Obama delayed making a decision on the Keystone XL project until at least2013, pending further environmental review.

However, the Keystone Gulf Coast project was approved on March 22, 2012, and constructionbegan on time in June. The completion date is expected to be middle to late 2013 and willallow for the transport of crude oil from Cushing, OK to Gulf Coast refineries.

“The Keystone XL expansion is slated to cost about $7 billion, but continues to encounter opposition from environmentalists and politicians alike.”



PADD 4 Rocky Mountains

It is turnaround season in the Rockies. Most notably, Suncor Energy’s Commerce City, COrefinery is scheduled for maintenance in mid-October. Unfortunately, the refinery was struckby lightning the last week of September shutting down operations for several days. This act ofnature will most likely stress turnaround reserves and further impact supply in Colorado andsurrounding areas during fourth quarter. In addition, HollyFrontier’s refinery in Cheyenne,WY has been undergoing planned maintenance since September.

Further north, Calumet Specialty Products Partners will purchase Montana Refining inGreat Falls, MT from Connacher Oil and Gas. Calumet is purchasing the 9,800 bbl/drefinery for $120 million, excluding the value of inventory. The refinery’s access to cheaperCanadian heavy crude helped maintain its profitability in recent years and made it appealingto investors.

PADD 4 inventories, as reported by the Department of Energy at the end of September, showbuilds across the board from a year ago. Gasoline stocks in PADD 4 were at 6.708 MB at theend of the quarter compared to 5.522 MB this same time last year. Distillate stocks werereported at 3.489 MB compared to 2.533 MB a year ago.

In the retail world, the EIA reported the average retail price for gasoline in PADD 4 duringSeptember was $3.770/gal compared to $3.6330 a year ago. The average retail price inSeptember for diesel was $4.2360/gal compared to $3.8880/gal just one year ago.

PADD 5 West CoastAK, HI

During the third quarter of 2012, the West Coast lost another diesel rack supplier. Cosmo Oil,Japan’s third largest refiner, shut down its diesel rack supply business after five years in themarket. However, Mercuria Energy Group announced it will be entering the West Coastsupply market. As you can see from the charts below, volatility in the market continued toplague both new and old suppliers. Gasoline regularly saw swings in basis of $.10/gal withas much as $.25/gal in one day in mid-September. These volatile swings did not take intoaccount the further impact of the NYMEX futures related contract.


In refinery news, all eyes turned to Richmond, CA where Chevron’s facility caught fire onAugust 6th. This 245,000 bbl/d San Francisco refinery is the 3rd largest in CA. The explosioncould be felt and the fire and plume of smoke could be seen from miles away. The impact toCalifornia markets could be seen and felt as well, and the crude unit may be shut down for upto six months.

West Coast Gasoline Basis West Coast ULSD Basis

“The explosion, at Chevron's Richmond, CA refinery, could be felt and the fire and plume of smoke could be seen from miles away. It goes without saying that the impact to California markets could be felt and seen as well.”

PADD 5 West CoastAK, HI

BP and Tesoro reached an agreement for BP to sell its Carson, CA refinery and terminalassets to Tesoro for 2.5 billion. The deal is said to also include the branding rights to the ARCOname in northern California, Oregon and Washington. BP also announced plans to buildnew rail lines into its Cherry Point refinery in Washington to gain access to Bakken crude.The project will allow crude deliveries from the Bakken region into the refinery, as well asmove diesel out of the refinery. Completion of the project is expected in 2014.

HollyFrontier is expecting to increase its products delivery volume into UNEV Pipeline to32,000 bbl/d this winter, compared to an average of 13,000 bbl/d earlier this year. Thisshould decrease some of Las Vegas’ dependency on West Coast Supply. Phillips 66 Borger,TX refinery is undergoing maintenance to be completed by the end of November. A full plantoutage is expected for approximately one month. The Borger refinery is a key supplier ofproducts into New Mexico.

PADD 5 inventories, as reported by the Department of Energy at the end of September,show a decline from a year ago. Gasoline stocks in PADD 5 were at 26.431 MB at the end ofthe quarter compared to 28.533 MB this same time last year. Distillate stocks were flat andreported at 12.768 MB compared to 12.490 MB a year ago.

As for retail, the EIA reported the average retail price for gasoline in PADD 5 for Septemberwas $4.1700/gal compared to $3.9250 a year ago. The average retail price in Septemberfor diesel was $4.3920/gal compared to $3.9720/gal a year ago.

Finally, there is much discussion surrounding the implementation of California Assembly Bill32 or CARB’s Greenhouse Gas Emissions (GHG) programs. Assembly Bill 32 requires that by2020, California’s greenhouse gas emissions be reduced to 1990 levels with the firstcompliance period beginning on January 1, 2013. One of its programs in particular, the LowCarbon Fuels Standard (LCFS) program, is under attack. Numerous reports conclude thatLCFS is not achievable or feasible as currently framed. The most important issue is whetheralternative fuel manufacturers can create enough fuel to match market demand and stillcomply with the LCFS standards and timelines without significantly increasing the state’s fuelprices. In addition, there is further concern that LCFS will drive petroleum supply out of thestate because of the cost refiners will have to assume as a result of GHG requirements. Areduction in refining capacity in California could further impact fuel prices.


“PADD 5 inventories, as reported by the Department of Energy at the end of September, show a decline from a year ago.”


CANADA The Canadian economy expanded by 1.8% between April and June, according to StatisticsCanada. The number was just slightly above the consensus forecast and just below the Bankof Canada’s projection of 1.9% for the semester, where Canada posted the strongesteconomic growth among G7 countries.

The majority of Canada’s growth came from robust business investment, with companiesinvesting in new equipment and building inventories. Investment in the housing sector wasunusually weak, rising by less than 2% annualized. As foreshadowed in earlier retail reports,Canadian consumers checked their spending, with demand growing by a mere 0.3% in thesecond quarter. The resistance came from exports, which edged up by only 0.2%, far slowerthan imports, which soared 1.6%.

“With over 174 billion barrels of proven crude oil, Canada holds the world’s third largest reserves after Saudi Arabia and Venezuela.”

Contributions to percentchange in real gross domestic product,

second quarter, 21012

With over 174 billion barrels of proven crude oil reserves, Canada holds the world’s thirdlargest reserves after Saudi Arabia and Venezuela. As well, Canada ranked as the sixthlargest crude oil producing country in the world, with combined production of over 3 MB/d ofcrude oil, bitumen, upgraded light oil and condensate.

Canada’s Contribution to U.S. PADD

Source: Statistics Canada

Source: Canada National Energy Board

Alternative Products

Natural Gas After being decimated in early 2012 due to high production and reduced demand, natural gasprices were largely dictated in the third quarter by inventory injection data. The natural gasinjection (or refill) season traditionally runs from April 1 through October 31, where sizeablenet positive injections occur in preparation for the high demand winter season. Prompt monthNYMEX natural gas futures opened the quarter at $2.8240 per MMBtu and traded up to$3.2140 on July 30th via steady reports that showed lagging stock builds. But shortly after,as an indication of the choppy trade over the last several months, on August 2nd the EnergyDepartment reported a larger than expected build in inventory – 28 Bcf compared to analystestimates of 23 Bcf. NYMEX natural gas for September delivery slid $.2510 on that day, or7.92%, to close at $2.92. This was the biggest decline in prompt month natural gas futuressince 2009. At the time, Brad Florer, a trader at Kottke Associates said, “The higher thanexpected storage number is giving the market an excuse to sell off. We had a major rally overthe past several weeks and it was a bit overdone.”

Despite some larger than expected weekly increases in stockpiles, the quarter experiencedinventory builds lower than usual. In fact, net gains since April of this year are 34% below thefive-year average.

Source: NOAA’s National Climatic Data Center

Natural Gas Injections (Bcf)

“The higher than expected storage number is giving the market an excuse to sell off. We had a major rally over the past several weeks and it was a bit overdone.”– Brad Florer, Kottke Associates


Source: U.S. Department of Energy

Natural Gas Supporting lower injection data, the U.S. gas rig count declined sharply in the third quarter asmany E&P companies shifted assets from natural gas drilling to more profitable oil exploration.In the last week of third quarter, oilfield services company Baker Hughes reported that activegas rigs decreased 19 from the prior week to 435 overall. That is a drop of 153 rigs over thequarter and is 52.9% less than the active gas rigs from the year prior. Conversely, oil rigsincreased by eight on the week to 1,410 and are 1/3 higher year-over-year.

Source: Bloomberg Financial L.P.

Active Drilling Rigs for Natural Gas & Oil in the U.S.

“Baker Hughes reported that active gas rigs decreased 19 from the prior week to 435 overall. That is a drop of 153 rigs over the quarter and is 52.9% less than the active gas rigs from the year prior.”


Several large exploration and production (E&P) companies reaffirmed claims thatnatural gas prices were unsustainably cheap. Most notably, Exxon Mobil, whostated earlier in the year they were unaffected by low values, changed their stance.Rex Tillerson, Exxon’s CEO said, “We are all losing our shirts today. We’re makingno money. It’s all in the red.” Mr. Tillerson went on to say that most of theindustry had “grossly underestimated” the pace of the U.S. shale boom.

23.539

1848.00

1410.00

435.00

Natural Gas But even growth in shale projects was affected according to data from the PennsylvaniaDepartment of Environmental Protection (DEP). Permits and drilling activity sharplydeclined in Pennsylvania over recent months. For instance, in July, operators drilled 2.5horizontal natural gas wells each day which is half the wells started per day in 2011 anddown from just over 4 wells per day in the first quarter of 2012.

Daily Natural Gas Well Starts in Pennsylvania (yearly average)

Source: EIA


“Pennsylvania is home to the Marcellus Shale, one of the nation’s largest, which is estimated to have 141 trillion cubic feet of recoverable resources.”

RenewableFuels

Record Midwest heat in June and July sparked the worst drought in the U.S. since 1956,causing widespread crop damage that some insurers estimate will reach $20 billon. As aresult, agricultural commodity prices rose sharply over the quarter on price rationing ofextremely tight supplies. Both corn and soybean futures saw all-time, intraday highs trade forthe most active contracts – corn for December delivery touched $8.49 per bushel on August10th while soybeans for November delivery reached $17.1275 per bushel on August 21st.Underscoring the situation, corn supplies in the U.S. are dropping below last year’s domesticusage for only the third time in half a century. As reported by Bloomberg, corn production thisyear plus inventories before the harvest will reach 11.872 billion bushels, less than the12.33 billion bushels consumed or exported last year. Only twice since 1960 has supplyfailed to exceed usage from the previous year, the last of which being in 1996.

While prices for both commodities are well off record highs to finish the third quarter, USDAdata released September 28th sent corn prices surging again, lifting soybean prices as well.The report showed that corn stockpiles in the U.S., the world’s biggest grower and exporter,totaled 988 million bushels as of September 21st, down 12% from 1.128 billion bushels ayear earlier. CBOT corn for December delivery raised the 40-cent limit to settle at $7.5625 perbushel while soybeans for November delivery rose 1.93% to close at $16.01 per bushel.

With the spike in grain prices over the summer, pressure grew from livestock and poultry groups todeclare a waiver of the Renewable Fuels Standard (RFS2), specifically the corn ethanol mandate. Sixstate governors sent formal requests to the Environmental Protection Agency claiming economic harmto their state’s economy due to the renewable requirement. Arkansas Gov. Mike Beebe (D) and NorthCarolina Gov. Beverly Perdue (D) were the first to send formal notices citing drought concerns, followedby New Mexico Gov. Susana Martinez (R), Georgia Gov. Nathan Deal (R), Texas Gov. Rick Perry (R), andVirginia Gov. Bob McDonnell (R). Gov. McDonnell stated, “The imposition of a 15.2 billion gallonrenewable fuels standard in 2012, coupled with the prospect of greater than 16.5 billion gallon standardin 2013, causes economic harm to the Commonwealth’s livestock and poultry producing regions.”

Source: Bloomberg Finance, L.P.

RenewableFuels

2012 Historical, December Corn and Nov Soybeans


Even though the EPA has the power to suspend the mandate if it causes severe environmental or economic harm, that claim has beenhistorically difficult to prove. In fact, this is Gov. Perry’s second request for a repeal following his April 2008 appeal that was denied. TheEPA has set a relatively high threshold, stating their waiver authority as having “to determine that the implementation of the mandate itselfwould severely harm the economy; it is not enough to determine that implementation of RFS would contribute to such harm.” Thus, manyanalysts believe the agency will contend that it is the drought causing the rise in grain prices, not solely the RFS. Per regulations, the EPAhas 90 days from the original requests to issue a final ruling; that date will fall after the worst of the drought is over and after NovemberPresidential election.

In response to the livestock and poultry farmers’ contentions, ethanol industry groups maintained no waiver is necessary given the RFSbuilt-in flexibility. Growth Energy, an industry trade group, said they are confident the EPA will come to the conclusion that the “waiver isunnecessary and will not have any substantial effects on the price of corn or how the free market operates.” Beyond corn-based ethanol,some advanced ethanol producers are worried waiving the mandate would hurt investment in a burgeoning industry. And recently, insupport of the ethanol and agricultural industries, Minnesota Gov. Mark Dayton (D) affirmed his support for the RFS stating it should not bechanged. He stated, “The RFS sends a strong signal to investors at home and around the world of America’s commitment to renewablefuels. Backing away from the RFS would create uncertainty about long-term U.S. energy policy, with lingering, negative impacts.”

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Mansfield’s National Supply Team

Andy Milton VP of Supply & DistributionAndy Milton heads the supply group for Mansfield and during his tenure the company has grown from 1.3billion gallons to over 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuelsupply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Prior toMansfield, Andy worked at RaceTrac Petroleum. Andy’s expertise in purchasing via pipeline, vessel, andthe coordination via futures and options for hedging purchases enables him to successfully lead a team ofexperienced and motivated supply personnel at Mansfield. Andy’s team handles a wide geographic areaof 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 College and later at Georgia SouthernUniversity where he received a BS in Sports Management.

Sara Hordinksi VP of Western US SupplySara Hordinski’s extensive background in supply and trading, futures hedging and rack marketing, bringsa unique perspective to Mansfield’s supply department. Although new to Mansfield’s supply department,Sara has more than twenty-five years’ experience in the oil & has refined products industry. She hasmarketed refined products throughout much of the United States by pipeline, truck, and rail. In addition,she worked with numerous suppliers, refiners, jobbers, c-store owners, and distributors nationwide todevelop competitive contract pricing and hedging programs individual to their needs.

Mansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging totrading of fuel, renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledgethat is required to manage today’s complex national fuel supply chain. Although they work as a national team, each member’sregional focus enables Mansfield to deliver geographic based supply solutions by more efficiently managing market specific

refining, shipping and terminal/assets.


Elizabeth Brooks Manager of Supply & DistributionElizabeth Brooks serves as the East Coast Supply Manager where she is responsible for purchasing,hedging, and the distribution of all gas and diesel supply on the East Coast. She is also responsible for alltrading activities on the East Coast as well as all contracts, and daily rack purchases. At Mansfield, shedeveloped an optimization group that helps the purchasing of all loads across the country. Elizabethgraduated from North Georgia College with a BA in Accounting and prior to Mansfield, she worked in theaccounting field as a Staff Accountant.

Dan Luther Manager of Supply & DistributionDan Luther is responsible for purchasing, hedging, and the distribution of natural gas and renewablefuels. Before joining Mansfield, Dan was Director of Operations at Aska Energy and also worked atRaceTrac Petroleum, where he helped manage all barge, rail, and truck fuel deliveries before assumingethanol trading responsibilities, including purchasing product to fulfill RaceTrac’s demand while tradingproduct across other U.S. markets. Dan holds a BSBA in Supply Chain Management and Marketing fromOhio State University and is currently working towards his MBA at Georgia Tech.

Hannah Hauman Manager of Supply & DistributionHannah Hauman serves as the Midcontinent Supply Manager, based out of Houston, TX. Hannahmanages all refined products trading, supply distribution, contracts and daily rack purchases. In addition,Hannah manages Mansfield’s fixed price shorts nationwide. Prior to joining Mansfield, Hannah workedfor Marathon Petroleum Company, RaceTrac Petroleum, and Atlas Oil Company in a wide variety offunctions ranging from truck dispatch to speculative futures trading. Hannah holds a BS in BusinessManagement from The University of Findlay and is currently pursuing her graduate degree at theUniversity of Houston.

Jorge Pradilla Supply Risk SupervisorJorge Pradilla started at Mansfield as an intern where he assisted with tracking supplier postings andmarket analytics. Jorge progressed to become a supply risk supervisor focusing on Mansfield’s futuresand clearport activities including reconciliation, broker dealings and trade executions. Jorge oversees thecompany’s hedging portfolio as well as tracks liabilities, fixed price contracts and analyzes markettrends. Jorge also authors the FUELSNews Daily. Born in Colombia, Jorge holds a BS in Marketing fromPiedmont College and an MBA in Managerial Leadership.


Scott Van Berkel Director of Canadian OperationsScott recently joined Mansfield after a 32 year career with Shell Canada Ltd. Scott’s broad expertisespans a variety of areas including marketing, sales, logistics and customer service. Scott held numerousmanagement positions with both Shell Canada and their parent company Royal Dutch Shell. Scott’sextensive knowledge of the Canadian market coupled with his experience working in the Commercial,Industrial and Retail businesses makes him an invaluable asset to the supply team. Scott holds a BS inAgricultural Economics from the University of Manitoba.

Mansfield Energy Corp.

www.mansfieldoil.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.

©2012 Mansfield Energy Corp.

FUELSNews 360°MARKET NEWS & INFORMAT ION

fuelsnews 360 - q2 2013

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