FUELSNews 360º - Q2 2017 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

Table of Contents FUELSNews 360° Quarterly Report Q2 2017 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.

Executive Summary

Overview 6

April through June 2017

Economy & Demand

Fundamentals

Fundamentals Summary

Production

Inventories

Refined Products

19 20

PADD 4, Northern Plains

PADD 5, West Coast, AK, & HI

Canada

PADD 1A & 1B, Northeast & Central Atlantic

Commentary: Amy Nguyen

Commentary: Nate Kovacevich

Alternative Fuels

Renewable Fuels

Commentary: Sara Bonario

Natural Gas

Commentary: Martin Trotter

Viewpoints 29

Commentary: Chris Carter

Regional Views 16

Regional Views continued

When Will Autonomous Vehicles Solve the Driver Shortage?

By Dan Kemeny

PADD 1C, East Coast

Commentary: Matthew Smith

PADD 2, Great Lakes

Commentary: Dan Luther

PADD 3, Gulf Coast

Women in Logistics

Natural Gas Procurement History, Current Practices, and Improvement Opportunities

By Nikki Booth

Part One By Tom Krizmanich

Commentary: Nate Kovacevich

FUELSNews 360˚ Supply Team

Q2 2017 Executive Summary After a quiet first quarter of the year, Q2 has seen a significant increase in market action, with markets rising and falling several times. The highlight of the quarter was OPEC’s announcement of a production cut extension, lengthening their deal through March 2018. The organization's lack of an exit strategy after March 2018 brought prompt crude prices from $51/bbl in May down to $42/bbl in June.

Hurricane season will surely add some volatility over the coming

The fundamentals of the quarter were decidedly bearish. Crude inventories failed to return even to their 2016 level, and both diesel and gasoline stocks remain far above their 2012-2015 range. Despite near-record levels of summer gasoline demand, U.S. production has grown quickly and helped mitigate upward price pressure. Rising production in Libya and Nigeria has also alleviated supply concerns.

remain high, and whether North American production will offset some

At the regional level, the battle for market share in Pennsylvania continues, with products flowing into Pittsburg both from Chicagoarea refiners as well as from East Coast refiners. Politicians are also considering selling up to one million barrels from the Northeast Gasoline Supply Reserve. Given these trends, Northeast consumers should enjoy relatively low prices compared to the rest of the country in the coming quarter. On the other side of the country, a project to expand crude transport capacity will nearly triple the amount of crude oil flowing through the Trans Mountain Pipeline from Canada to the Pacific Northwest. The project likely will not see completion until 2019, but could help benefit consumers in Washington and Oregon in the future. Looking towards Q3 2017, markets will be seeking clarity and direction. After floundering in Q2, many analysts expect fuel supplies to grow tighter in Q3, leading to dwindling inventories and higher prices in Q4. In May, the forward curve showed a large drop in fuel prices following the expiration of OPEC’s production deal; by the end of the quarter, the curve had switched to continuous month-overmonth gains, with forward expectations turning bullish.

quarter. Early season activity has been higher than usual, and weather forecasters expect 2017 to bring above-average storm activity.

Depending on the location of the storm, a strong hurricane could have a severe local or national impact on fuel prices.

As has been the case for nearly a year, OPEC will continue to dominate headlines in Q3. All eyes remain on whether compliance rates can or all of OPEC’s actions.

Overall, markets were strongly bearish as we ended Q2, but that may not necessarily translate into weakness in Q3. Inventories are falling, albeit slowly, and global economic growth (and accompanying fuel demand) appears to be gaining steam. Many factors—geopolitical,

fundamental, and economic—will be competing to push prices either higher or lower in Q3, making any accurate forecast difficult.

If the OPEC and Non-OPEC agreement holds and inventories begin falling rapidly, we may finally reach the supply/demand balance

analysts have been predicting for months. If not, North American shale supply could overwhelm the market and send crude prices crashing back down below $40/bbl. Whichever way the markets turn, it is certain to hit some bumps along the way.

This quarter, Tom Krizmanich provides the first in a three-part series on

natural gas procurement. This quarter’s article focuses on the history of the natural gas market, as well as an overview of how natural gas is

purchased and sold. Make sure to read FUELSNews 360° next quarter, where we’ll focus on sharing best-practices for natural gas

procurement teams, as well as key questions to ask your supplier to ensure you are receiving the best service to meet your needs.

We hope you enjoy this quarter’s issue of FUELSNews 360°. Please

feel free to email us at fuelsnews@mansfieldoil.com with feedback,

questions, or simply to request additional copies. Thanks for reading!

Overview April 2017 through June 2017 While the first quarter of the year came and went with relatively small price movements, the second quarter brought a higher degree of variability. Crude prices began the quarter just over $50/bbl, recovering from the latebreaking price drop in Q1.

As crude production in the U.S., Canada, Libya, and Nigeria continued to ramp upwards, prices continued their free fall. A surprise crude stock build in early June brought another major price drop of $2.50/bbl to the lows seen before the OPEC announcement.

Three news events pushed prices higher. Iraq announced they fully intended to meet product cut commitments, with OPEC confirming 98% compliance. Libya experienced severe instability, bringing production offline. Finally, unplanned maintenance on some North Sea Buzzard fields in Europe disrupted production. These three news events, all announced within days of each other, pushed prices higher to over $53/bbl by April 10.

The bear market lasted the remainder of the quarter. As summer gasoline demand was revised down in mid-June, prices fell to the $42-$43/bbl range. With prices at 2017 lows, the bears finally ran out of steam, allowing short-covering and bullish traders to bid the market back up to close the quarter at $45. â&#x20AC;˘

Prices began declining slowly following the high on April 10, then dropped nearly $2/bbl on April 19. Despite reported crude stock draws, gasoline inventories grew, signaling weak gasoline demand going into the summer season. While saber rattling from North Korea helped prop up prices temporarily, eventually the market dropped to $50 once again. Prices continued to stagnate for the remainder of April then fell precipitously when OPEC compliance reportedly fell to 90%. Libya also lifted force majeure in late April, bringing prices down to $46/bbl. May opened with prices in the $46-47 range, similar to the price leading up to the November OPEC meeting. OPEC was scheduled to announce more cuts on May 25, and the organization stuck to their playbook of talking up the market leading up to the announcement. Prices soared for three weeks, topping off at $51.50 the day before the announcement. This time, OPECâ&#x20AC;&#x2122;s play backfired. Rather than surging even higher following the 9-month cut extension, markets languished upon hearing that OPEC had not deepened the cuts. Prices immediately lost $2/bbl.

WTI Crude Oil Futures

Source: New York Mercantile Exchange (NYMEX)

ÂŠ 2017 Mansfield Energy Corp

Overview

Retail Prices Remain Stable

Consumers have been enjoying relatively low prices at the pump. Retail fuel prices have been mostly stable throughout Q2, with both gasoline and diesel prices falling softly throughout the quarter.

Retail gasoline prices fell 10 cents, ending Q2 at $2.26. For the whole year of 2017, prices have remained relatively stable in the $2.25-2.40 range nationally. In June, retail prices slipped below prices seen during the same week in 2016 for the first time this year. The Q2 average price of gasoline in 2016 was $2.25, rising to $2.38 in Q2 this year. Prices remain significantly below their historical 2012-2015 range.

Retail Gasoline Prices 5-Year Range

Source: Energy Information Administration (EIA)

Diesel prices were equally stable, shedding just 9 cents to end the quarter at $2.47. Prices throughout 2017 have remained between $2.45 and $2.60. Retail prices are still higher year-over-year compared to 2016 retail prices, but the difference narrowed during Q2. In Q2 2017, retail prices were $2.55 on average, compared to $2.31 this time last year. The national average retail diesel price for the last week of June, $2.47, was just 3 cents higher than the same week in 2016.

Retail Diesel Prices 5-Year Range

Source: Energy Information Administration (EIA)

ÂŠ 2017 Mansfield Energy Corp

Overview Given the volatility in underlying refined product NYMEX prices, one would expect retail prices to have fluctuated as dramatically. As the graphs show, however, retail prices remained flat. The lag between wholesale prices and retail prices has been called “Sticky Pump” by some in the industry.

Quarterly Average Diesel Rack-to-Retail Spreads

As wholesale fuel prices drop, retail stations tend to be slow to pass on the savings to consumers. Typically, competitive pressure requires retail stations to pass on the lower costs, but during periods of high volatility, many stations will simply leave prices as-is and capture the additional savings. Indeed, rack-to-retail (R2R) spreads, the difference between wholesale “rack” prices and retail prices, experienced high volatility this quarter. Rack-to-retail spreads this year were the highest Q2 levels experienced in the past five years, driven by falling wholesale prices. In fact, Q2 was in the top five highest quarters over the past 5 years for diesel R2R spreads. The highest R2R spreads were found in late 2014/early 2015, when crude prices plummeted from $100 to $40.

Sources: Oil Price Information Service (OPIS), and Energy Information Administration (EIA)

Gasoline spreads were somewhat less muted than diesel. The average rackto-retail spread in Q1 2017 was roughly $.25, rising to $.30 in Q2. Although it’s normal for gasoline rack-to-retail spreads to rise throughout the year before falling in the fall and early winter, this year has seen higher peaks than average, reaching highs of 38.4 cents in June.

Gasoline Rack-to-Retail Spreads

Sources: Oil Price Information Service (OPIS), and Energy Information Administration (EIA)

Diesel spreads were higher than gasoline spreads. Diesel R2R spreads reached a high of 47.5 cents in June. Average spreads rose from 33.8 cents in Q1 2017 to 38.6 cents in Q2, roughly a 5-cent difference. Both diesel and gasoline spreads saw high volatility, rising rapidly in April, falling in May, and rising again in June. •

Diesel Rack-to-Retail Spreads

Sources: Oil Price Information Service (OPIS), and Energy Information Administration (EIA)

IIIII II

Economy & Demand U.S. GDP Growth

IIII II I

IIIII II

The U.S. economy has been growing steadily, if not somewhat slowly, in Q2 2017. The final estimate of gross domestic product for Q1 was revised upward from 1.1% to 1.4% annualized growth, with a boost coming from consumer spending. Overall, the economy seems to be in a “not too hot, not too cool” pattern of medium, sustainable growth, at least for now. IIII II I

The Federal Reserve showed confidence in the growth by hiking interest rates in March and June, bringing rates to a range of 1%-1.25%. The Fed also announced a balance sheet reduction June that would tighten monetary supplies. These moves came as they revised predictions for 2017 GDP growth from 2.1% in March to 2.2% in June. Some have speculated that the Federal Reserve will continue ratcheting rates upwards until they reach a 3-4% range, providing more leverage to manipulate markets if a recession does emerge. If this is the case, interest rates will continue to rise over the next couple years, pushing the dollar higher and creating negative price pressure for oil prices.

Source U.S. Department of Commerce

Manufacturing, while more stable than this time last year, has not shown significant growth. President Trump has helped significantly improve consumer sentiment, but uncertainty surrounding taxes, trade, healthcare, and other economic policies has given businesses pause. As the market continues adjusting to a new administration in Washington, expect uncertainty to give way to market clarity and higher investments.

U.S. Unemployment Rate

Fuel demand this summer is expected to be higher than last year. The EIA forecasts that gasoline demand over the summer will be roughly twenty thousand barrels per day (kbpd) higher than last year, surpassing last year’s record 9.5 MMbpd demand. Diesel demand should be significantly higher than summer 2016 – 3.9 MMbpd, or 120 kbpd (3.2%) higher than last summer. Stronger economic growth and trade activity creates more goods to be shipped, raising diesel demand. Unemployment in the U.S. has remained low, reaching a 16year low of 4.3% in May before rising back to 4.4% in June. Unemployment gains were driven by the healthcare sector and professional services, while retail jobs have been a drag on employment. •

Source: Bureau of Labor Statistics

Economy & Demand

Consumer Sentiment Index

Consumer sentiment took a hit in Q2, though it remains at historically high levels. With unemployment at historic lows, many consumers feel confident about their economic future despite uncertainty about the long-term direction of the U.S. economy. The first half of 2017 saw the highest consumer sentiment levels of any half-year period since the year 2000. Consumer sentiment did fall to its lowest level since the Trump administration took office, but consumers remain relatively optimistic about their personal financial situations. In line with the sentiment, consumer spending has risen roughly 2.3% in 2017.

Crude vs. USD: 2016-Today

Source: University of Michigan

The U.S. Dollar has had a rough second quarter, shedding 4% of its value over the quarter to return to early 2016 levels. The dollar surged higher following Trumpâ&#x20AC;&#x2122;s election in November, but has since struggled to maintain strength. Strengthening foreign currencies have pushed the USD lower. After six months of crude prices and the USD tracking one another, the two indexes have once again resumed their negative correlation. OPEC had such a chokehold on the market, movement in the U.S. dollar had little effect on prices. Now that markets have lost their faith in OPEC as a market mover, prices are once again tracking more closely with macro fundamentals than headline events. â&#x20AC;˘

Source: NYMEX, ICE

ÂŠ 2017 Mansfield Energy Corp

Economy & Demand

Globally, economic growth has been growing at a slow, sustainable level around 3-3.5%. Confidence is growing in the Eurozone as Germany, Austria, and the Netherlands displayed impressive growth and Greece returned to positive growth. Chinaâ&#x20AC;&#x2122;s growth has been losing momentum in response to tightening monetary policy and a housing market slowdown, but analysts expect the nation to hit its national 6.5% growth target without problem. In June, the IMF revised its annual growth projection up to 6.7% from its April forecast of 6.6%. The World Bank indicated in its June report that global growth is on firmer ground, and that both industrial activity and global trade are increasing after weak growth for two years. Lower oil prices have generally been positive, driving increased consumer and business activity. The 11

organization projects global GDP growth to be 2.7% in 2017, growing to 2.9% in 2018-2019. OPEC pegs 2017 world oil demand at 96.38 MMbpd, unchanged from its previous estimate. That rate represents a 1.27 MMbpd build over 2016 demand. The organization believes GDP growth will be 3.4% in 2017, driving oil demand higher. Growth will be driven by India, which will recover from demonetization policies in the 2nd half of the year, along with Russia and Brazil. While oil demand was weak in the first half of the year, at 95.4 MMbpd, OPEC expects it to rise to 97.4 MMbpd in the second half of the year propelled by an active summer driving season in the U.S. as well as gains from India and China. Expect rising demand to draw down crude inventories, which remain far above historical averages. â&#x20AC;˘

ÂŠ 2017 Mansfield Energy Corp

Fundamentals

Crude Forward Curve

The second quarter of the year saw fundamentals turn firmly bearish with continued growth in production and a lower demand estimate for the first half year. Following the announcement of OPEC’s cut extension, price forecasts began to vary widely. While many major banks maintained a $60/bbl price forecast for 2018, others significantly dropped their expectations. For much of Q2, the crude oil forward curve showed backwardation (future prices were lower than current market prices) in 2018 as many traders worry that OPEC has no exit strategy for their current cuts. If production is unleashed once again in April 2018, prices could collapse below $40/bbl. As the quarter continued, prices fell. Prices dropped below $50 in mid-April, and by the end of Q2 prices had slipped so low that the backwardation gave way to a steadily rising forward curve. The market’s fear of OPEC’s lack of an exit strategy was overshadowed by expectations of an improving supply situation in the future.

Source: New York Mercantile Exchange (NYMEX)

CFTC Managed Money Net Long Position vs. Crude Prices

Managed money net long positions in NYMEX crude oil futures have fallen to their lowest level since August 2016, before the OPEC agreement. As Q2 progressed, hedge funds appeared less and less confident in supply/demand balance, and shortened their net length by over half. Net long positions had soared during Q1 despite relatively stable oil prices, as OPEC leaders engaged with hedge fund managers to show their commitment to ending the supply glut. Net length reached ten-year highs as the market expected prices to rise significantly, but quickly fell back in line when prices dropped in late Q1.

Source: CFTC

At the time, crude inventories were expected to grow slowly during winter’s low demand, then fall rapidly in the face of the summer driving season. Although summer fuel demand forecasts were high, late-winter and spring demand fell below expectations, taking with them the hope that inventories would be depleted.

Fundamentals

World Supply/Demand Balance

Source: Energy Information Administration (EIA)

Despite the bearish fundamentals for the first half of the year, supply/demand balance should return in the second half of the year. The EIA’s latest Short-Term Energy Outlook, published in June, revised its supply/demand statistics to lean slightly more bullish. While the first quarter saw diminished numbers, the remainder of the year is forecast to have stronger demand. Supply and demand should be nearly in line through the end of 2017. Of course, should demand fall off due to economic threats on the horizon, or if the OPEC deal falls apart as many expect to happen by the end of the year, the balance could easily tip towards inventory surpluses once again. Already, oversupply is expected to return as soon as early 2018. Even if all goes well and supply and demand come into balance, global oil inventories would end 2018 virtually unchanged. OPEC’s stated goal for their cuts is to return inventories to their five-year averages; at this rate, actualizing that goal seems unlikely. •

Production

International Rig Counts

Oil production worldwide showed continued strength in Q2. Rig counts in the U.S. posted week-over-week gains for twenty-three weeks in a row before the report on June 30 showed a decline of one rig. Overall, rig counts have grown by 43% in 2017, and grew 12.5% in Q2, ending the first half of 2017 at 940. Rig counts should not be confused with production; rig counts in the Middle East have been mostly stable over the past three years despite fluctuating production rates. However, the increase in U.S. production clearly signals a commitment from U.S. producers to continue ramping up U.S. production. • Source: Baker Hughes

Fundamentals U.S. production rose steadily throughout Q2, reaching a peak of 9,350 kbpd for the week ended June 16. Production data released June 23 showed the largest drop in production experienced since July 2016 – a 100 kbpd drop. Despite this decline, the quarter ended on a high note.

U.S. Crude Production

Although the growth was steady, it was not particularly rapid – production grew just 1.6% over the course of the quarter, or 150 kbpd. By comparison, production grew by 250 kbpd in Q1 and by 320 kbpd in Q4 2016. The apparent slowing of demand corresponds with a decline in crude prices. Prices in Q4 2016 were in the mid-$50 range following the announcement of OPEC’s productions cuts, while Q1 2017 saw low-$50 prices as compliance rates remained high. As the market has turned away from OPEC compliance as an indicator of global production, prices have declined, reducing incentives to continue drilling new wells. •

Inventories

Source: Energy Information Administration (EIA)

While inventories are nowhere near their five-year averages, they are slowly trending downwards relative to last year. Crude oil inventories remain at five-year seasonal highs, with 2017 Q2 inventories averaging 3% higher than 2016 Q2 inventories. Still, there are some positive trends.

While inventories peaked early and are now falling, they remain above 2016 levels, and far above five-year averages. Since peaking in late-March, diesel stocks have been drawn down by 2.2 million barrels on average each week in Q2. At that rate, the market would need over a year (56 weeks) to reach historical averages around 385 million barrels—and that’s assuming no stock builds during that time, a highly improbable scenario.

Crude stocks tend to increase from January through May, then fall until October when inventories receive a slight boost. Over the past five years, inventories have continued increasing until at least late April (or even May/June); this year the peak came the last week of March.

Internationally, inventories are in a similar position. OECD stocks for crude oil remain roughly 200 million barrels above five-year averages and refined products are roughly 50 million barrels above average. OPEC has their work cut out for them if they hope to reduce inventories back to historical averages. •

U.S. Crude Inventories 5-Yr Range

Source: Energy Information Administration (EIA)

OECD Crude and Refined Product Inventories

Source: OPEC Monthly Oil Market Report

Refined Products

3:2:1 Crack Spreads Mirror 2016

Refined product fundamentals have mostly tracked 2016 levels. While crude inventories (and crude prices) this year have been above 2016 levels, refined product inventories have remained near 2016 levels. Diesel and gasoline inventories have both remained in line with 2016 trends, showing steady declines followed by a gradual levelling off. While above historical averages, refined product markets are at least in charted territory.

Diesel Inventories 5-Yr Range

Source: New York Mercantile Exchange (NYMEX)

While most refined product fundamentals have closely tracked 2016 levels, U.S. refinery inputs have reached all-time highs. Refinery inputs, a measure of the crude oil going into refineries, peaked in May at over 17.5 million barrels per day, 1.5 mbpd higher than 5-year averages and .5 mbpd above last year’s level.

Source: Energy Information Administration (EIA)

Gasoline Inventories 5-Yr Range

Given that U.S. production is approaching all-time highs, the high refinery input levels should be no surprise. The second quarter saw the highest levels since the EIA began recording input data in 1990. The U.S. has an abundance of oil, and refiners are taking advantage of relatively cheap local crude prices compared to international Brent crude prices. Producers must find ways to accommodate increased crude output, either by selling to domestic refiners or exporting unfinished crude products to be refined elsewhere. The surge in refiner inputs helps explain why refined product inventories have remained mostly level in Q2, despite falling crude inventories. As U.S. crude and refined product exports continue to rise, refiners have relied on domestic crude stocks to meet domestic refined product demand. •

U.S. Refinery Inputs Reach All-Time High Source: Energy Information Administration (EIA)

Refiner margins have also been nearly identical to 2016 levels. The 3:2:1 crack spread, representing a refiner’s profit margin from converting three barrels of crude into two barrels of gasoline and one barrel of diesel, have closely tracked 2016 trends. Crack spreads measure a refiner’s incentive to convert crude oil to refined products – for 2017, the incentive appears to be roughly in line with historical averages of $17/bbl profits. Crack spreads can make visible disruptions in downstream markets that may not show up in crude prices. For the first half of 2017, the 3:2:1 spread reflects relatively steady refined products supply, pushed higher in March simply by expensive summer gasoline requirements. 15

Source: Energy Information Administration (EIA)

PADD 1

East Coast PADD1A & 1B Northeast & Central Atlantic

Regional Views OUTLOOK:

Bearish

Chris Carter, Supply Manager See his bio, Page 34

PADD 1A and 1B Outlook

As Chicago and Philadelphia refiners continue to fight for market share, consumers will benefit from lower regional prices. Philly refiners will also continue to push product into coastal markets as market values present opportunities. With the addition of imports into the costal markets, we will continue to see lower prices during the summer months. PADD 1B and 1A will continue to see an oversupplied market in both ULSD and Gas in Q3 2017. •

Refinery War Continues in Pennsylvania “With the addition of

imports into the costal markets, we will continue to see lower prices during the summer months. “

As the proposed reversal of the Laurel Pipeline between Pittsburg to Altoona progresses, refiners in Chicago and Philadelphia are fighting for market share in Central and West Pennsylvania. Buckeye Partners’ proposed reversal of product flow has East Coast refiners concerned that the entire pipeline will eventually be reversed. If the pipeline reversal continues, Midwest refiners would be able to compete with East Coast refiners by moving product into Philadelphia and the entire East Coast network.

If Midwest refined products begin flooding the Northeast market, the Northeast could become oversupplied, reducing the need to import product from the Gulf Coast and Europe and putting pressure on the price spread between New York Harbor and the Gulf Coast. When that spread narrows, so will the market that has been created for Colonial Pipeline line space. A few experts have suggested that Colonial’s Line 2, the diesel line, will go off allocation by end of 2017, making it cheaper and easier for suppliers to reach Southeast terminals. The oversupply in the Northeast may also impact imports from Europe; one report expects it to reduce European refined product imports by as much as 23%. Consumers along the entire East Coast are likely to benefit from Laurel’s pipeline reversal. The full impact of the potential line reversal is currently unknown. However, Pennsylvania consumers are certain to benefit from lower prices as suppliers continue to fight for the market share over the next 6-12 months. •

Regional Views

Pittsburgh Continues to Fight to Remove Low RVP Requirement

Pennsylvania’s Department of Environmental Protection is reviewing the public comments received earlier this year for potentially removing the low RVP requirement of 7.8 lb gas for Pittsburgh and surrounding markets. The agency has not yet given a time table, since the political process can be lengthy. The agency said they received eleven comments; ten of the comments supported the requirement change. The change could come as early as summer 2018; however, most believe it will be 2019 before it goes into effect. •

Proposed EPA Budget Could Shut Down Northeast Gasoline Supply Reserve

President Trump’s proposed 2018 budget cuts the EPA’s fiscal year budget by 31%, to $5.6 billon. This is $2.6 billion less than budgeted for 2017. The Northeast Gasoline Supply Reserve is one program potentially on the chopping block. The reserve was created after Hurricane Sandy in 2012, which resulted in widespread supply issues in the Northeast as it caused major damage to refineries and left terminals closed due to flooding and power outages. In June 2014, the emergency stock was created to have a one-million-barrel reserve in the Northeast. The goal was to have product to help the Northeast for a few days in the event of another super storm. The reserves are kept in three different locations, 700,000 barrels in New York Harbor, 200,000 barrels in Boston and 100,000 barrels in South Portland, Maine. The proposed budget from the White House would quickly liquidate the gasoline reserves even though the storage tanks are leased through fiscal year 2019. The future of the NGSR is still unclear; however, Northeast residents will be paying close attention to how this could impact them if another super storm hits the Northeast markets. Consumers will benefit in the short term from abundant supply. For companies operating in the Northeast, maintaining sufficient supply during emergency situations will be more important than ever. • 17

PADD 1

East Coast PADD1C

Lower Atlantic

Regional Views OUTLOOK:

Bearish

Matthew Smith, Supply Supervisor See his bio, page 34

PADD 1C Outlook

Looking at Q3 in PADD 1C, I am bearish about refined product prices. With a combination of plentiful supply and high refinery utilization in the Gulf Coast, consumers should continue seeing lower prices at the wholesale and retail level. During the next few months, the most substantial impact to refined product prices will be the threat of an Atlantic hurricane, although with the length of product in the market one would have to make quite an impact to severely impact pricing. •

Revised 2017 Hurricane Season Forecast

In FUELSNews 360° Q1 magazine, I wrote that the Colorado State University’s 2017 Hurricane Season Forecast reported a modest hurricane season with six to eight hurricanes, with two to three being major storms. Since their preliminary report, they have since published an updated forecast with a below average hurricane season in 2017. Both Colorado State and Accuweather cite that an impact from El Niño conditions during the season should limit the development of storms.

On the contrary, in late May the National Oceanic Atmospheric Administration (NOAA) reported the Atlantic could see another above-average hurricane season in 2017. The NOAA admits they are bullish in comparison to Colorado State University’s report, forecasting a seventy percent chance of eleven to seventeen named storms with five to nine being major storms. When storms make landfall, they have a substantial impact on refinery, marine, terminal, and logistics operations. Typically, demand spikes prior to a storm making landfall followed by lower demand during and in the immediate aftermath. For this reason, developments in the Atlantic are closely monitored throughout the 2017 season. •

“With a combination of

plentiful supply and high refinery utilization in the Gulf Coast, consumers should continue seeing lower prices at the wholesale and retail level.

“

Middle Tennessee Area Low RVP Relaxation

The EPA made its final ruling in early June to relax the federal Reid Vapor Pressure requirement in Davidson, Rutherford, Sumner, Williamson, and Wilson counties (middle Tennessee) to 9.0 lb gasoline year-round. The relaxation came at the beginning of the LRVP season, leaving some suppliers with higher priced LRVP fuel in tanks in Nashville or product along the Colonial pipeline that will need to be diverted. According to OPIS, refiners and retailers are relieved to be out from under the economic strain accompanied by 7.8 lb requirements. The relaxation should offer end users relatively lower gasoline prices during the summer driving season. With the relief in Nashville, it leaves the only LRVP requirement along the Colonial Pipeline in thirteen counties surrounding Atlanta. This could prove to be a challenge for suppliers in Atlanta as they are the only end users of this specialty product. • 18

PADD 2 Great Lakes

“ Diesel buyers will be

particularly hard hit given the concentration of maintenance on distillate producing units and the seasonal uptick in demand. “

Regional Views

Dan Luther, Senior Supply Manager

OUTLOOK:

Bullish

See his bio, page 34

PADD 2 Outlook

Given the Chicago-area refinery maintenance, buyers in the Midwest should expect a volatile end of the third quarter with prices likely rising vs. NYMEX futures. Diesel buyers will be particularly hard hit given the concentration of maintenance on distillate producing units and the seasonal uptick in demand. •

Looking Ahead to a Busy Third Quarter Refinery Maintenance Schedule in Chicago

Two major Chicago-area refiners are scheduled to undergo maintenance on diesel producing units in the third quarter, just ahead of harvest season demand increasing for diesel fuel. In mid-August, Exxon plans to shut the main distillate hydrotreater at their Joliet, IL refinery. The work should take about 4-5 weeks to complete. Soon after, in early September, Citgo plans to shut diesel production for approximately thirty days at their Lemont, IL refinery while maintenance is completed on the unit. These two shutdowns will severely decrease diesel supply into the Chicago trading hub just ahead of the fall agricultural harvest which typically causes a significant spike in regional diesel demand. With demand outpacing supply, diesel buyers may experience volatile pricing at the end of the third quarter. •

The End of ‘Summer Spec’ Gasoline in Southwestern Ohio In early April, the Ohio EPA received approval from the U.S. EPA to remove Ohio’s low Reid Vapor Pressure (RVP) fuel requirements in the Cincinnati and Dayton areas. Low RVP gasoline was implemented in the region a decade ago to meet national ambient air quality standards. However, the cleaner burning grade of gasoline is more costly for refiners to make, and, due to its boutique nature, less refiners produced the spec. Accordingly, fuel prices in Cincinnati and Dayton historically ran about 12 cents on average higher during the summer than in neighboring Columbus and Cleveland. That cost area motorists around $44 million annually. Per the Ohio EPA, ozone levels in Cincinnati for an eighthour period have gone from around 136 parts per billion in 1976 to just 72 parts per billion in 2016. This means the region was in attainment, meeting all six air quality goals set by the U.S. EPA. However, the debate remains whether the improvements in regional air quality justify the change in gasoline spec; for instance, the American Lung Association State of Air 2017 report gave three Cincinnati counties an “F” for levels of ozone pollution.

Historical Regular Gasoline Prices–Cincinnati and Dayton

But one thing is certain for area fuel buyers—prices will be lower for the standard RVP fuel than the more stringent spec, translating into savings this summer driving season. •

Source: Oil Price Information Service (OPIS)

PADD 3 Gulf Coast

“ Looking forward to the third quarter, both gasoline and diesel prices should continue recovering, but upside should be limited as the shale boom keeps a lid on crude oil prices. “

Regional Views OUTLOOK:

Bullish

Nate Kovacevich, Sr. Supply Manager See his bio, page 34

PADD 3 Outlook

Gulf Coast refined product markets ended the second quarter on a slightly positive note, bouncing off multi-month lows, as summer and the heart of hurricane season looms. Looking forward to the third quarter, both gasoline and diesel prices should continue recovering, but upside should be limited as the shale boom keeps a lid on crude oil prices.

As always, hurricane season holds the potential to bring price spikes and increased volatility in the coming months. Forecasts call for a more active hurricane season, posing uncertainty and potential upside risk for Gulf Coast refiners. West Texas diesel prices remain elevated, but are well off the highs seen in February and March. Expect prices to stay relatively strong for the rest of the year, driven by stronger diesel demand and exports to Mexico. •

Valero Expanding into Mexico with $200 Million Investment

Valero has been positioning itself, along with its seven Gulf Coast refineries, to participate in Mexico’s liberalized fuel market. The refinery is considering rail, tanker, and barge channels to supply a market that averages nearly 1.2 million barrels per day of gasoline and diesel demand. The company plans to spend $200 million building new fuel storage totaling 1.6 million barrels of capacity at three locations across the border. Valero will compete directly with Pemex to supply gas stations in Mexico. Although pipelines are the cheapest form of transportation for refined products, Valero has discarded that option in favor of alternatives due to security concerns around theft at pipeline facilities and infrastructure. Valero’s foray into Mexican supply is not surprising; several refineries who sell in Texas and New Mexico have been aligning themselves over the last few months to export into Mexico. It will be interesting to see how these actions will impact prices in the Southwest U.S., especially if an unplanned supply event occurs and causes tightness in the region.

Ultimately, exports from U.S. refineries to Mexico will cause a reduction in supply, which could potentially contribute to higher prices and more volatility in the U.S. Gulf Coast. •

Saudi Aramco to Spend $30 Billion on Motiva Following Shell Breakup On May 1, Motiva officially became a Saudi Aramco subsidiary after the breakup of a 19-year partnership with Shell. With the breakup, Motiva Enterprises retained the largest U.S. refinery in Port Arthur, which refines more than 600,000 barrels of crude oil each day. Saudi Aramco plans to spend $12 billion to expand refining capacity at the Port Arthur refinery as well as extend the plant’s operations in the petrochemical sector. An additional $18 billion worth of investments is expected across Motiva’s assets and infrastructure by 2023. The expansion of Port Arthur will help protect Saudi Arabian crude from U.S. oil shale producers who are increasingly grabbing market share from global crude oil exporters. In addition, Saudi Aramco is looking at purchasing other Gulf Coast refineries to expand refining capacity in the U.S., which would further cement their presence despite the growth of oil production in North America. • 20

Regional Views

PADD 4

Northern Plains

OUTLOOK:

Bearish

Amy Nguyen, Supply Supervisor See her bio, page 34

PADD 4 Outlook

Product prices in most of the PADD 4 region will increase versus the NYMEX as the seasonally slow first quarter gives way to higher second quarter demand. The exception will be the Salt Lake City area, which, due to pipeline disruption, experienced an increase in diesel and gas prices. In that city, buyers can expect values to ease with the pipeline’s restart. •

Group 3 Basis

“Product prices in most

of the PADD 4 region will increase versus the NYMEX as the seasonally slow first quarter gives way to higher second quarter demand.“

Source: New York Mercantile Exchange (NYMEX)

In May, Tesoro joined with EP Energy Corporation to fund oil and natural gas development in Utah’s Uinita Basin. The deal forms a drilling joint venture between the two companies to operate 60 wells in support of EP Energy’s Altamont program, which has already drilled 18 wells in the Uinta Basin since last year.

Tesoro and EP Energy Corporation Enter Joint Venture to Improve PADD 4 Supply

The companies also signed a Crude Oil Supply Agreement in which Tesoro will purchase all oil produced from the drilling. As Tesoro has expanded its Salt Lake City refinery, the deal will ensure continued supply of crude oil to the refinery and will enhance the company’s presence in the Rockies. EP Energy also benefits as the deal adds additional wells and high return drilling opportunities for EP Energy in the region. As the region dealt with multiple refinery shut downs and maintenance last quarter, the addition of new wells and oil supply opportunities is a welcome sight for consumers as the increased production should ease some of the supply tightness in the region. •

Utah’s Uinita Basin

PADD 5

West Coast, AK, & HI

Regional Views OUTLOOK:

Bullish

Amy Nguyen, Supply Supervisor See her bio, page 34

PADD 5 Outlook

With summer travel comes summer gasoline demand, a trend from which PADD 5 certainly is not immune; however, relatively abundant supply is mitigating most of the upward price pressure. Refinery turnarounds, including Tesoro’s Golden Eagle refinery and PBF’s Torrance refinery, towards the end of Q2 put slight pressure on basis, which will continue in early Q3. California consumers will see a noticeable increase in fuel costs in July as California raises its excise tax. •

“ California consumers will see a

noticeable increase in fuel costs in July as California raises its excise tax. “

California

Despite President Trump’s announcement that the U.S. will withdraw from the Paris Climate Agreement, California has no plans to lighten its stance on climate control. The state plans to push back on any efforts by Washington to weaken automobile emission standards and the commitments under the Paris Agreement. California has been leading the charge in pollution and climate control in the nation for years. California Governor Jerry Brown has even met with environmental ministers of other countries to sign global pacts to lower greenhouse gases. While California has passed multiple policies to sustain and protect the environment, gas and diesel prices within the state have increased. A UC Berkeley economist estimated that Californians pay an extra 15 cents per gallon due to these climate change policies.

California Governor Jerry Brown

Policies such as California’s cap and trade program require fuel wholesalers to purchase emissions allowances to generate carbon.

Pacific Northwest

Kinder Morgan on Tuesday said its Canadian subsidiary completed its initial public offering, raising $1.3 billion to expand the Trans Mountain pipeline. The pipeline, which stretches over 700 miles from the Western Canadian Sedimentary Basin in Alberta to the Northwest, currently delivers 300k barrels of crude oil each day. A portion of the oil is transported to a marine terminal in British Columbia, which in turn is exported to Tacoma, Washington and other locations in California. However, most of the oil is diverted to the Puget Sound Pipeline, which accounts for almost a quarter of all crude oil delivered to Washington. The expansion of the pipeline would almost triple the capacity to 890k barrels each day. The project has been in the works for years and was approved by Canadian Prime Minister Justin Trudeau last November. Work on the pipeline is scheduled to start in September of this year and is estimated to be complete by late 2019. As the expansion of the Tran Mountain pipeline isn’t going to be completed until 2 years from now, I still expect gasoline and diesel prices to remain high in the coming months. The pipeline’s expansion will certainly create more supply down the road and potentially decrease regional fuel prices. • 31 22

Furthermore, fuel producers must purchase a separate type of allowance to comply with the state’s low carbon fuel standard. These requirements increase production costs, resulting in higher gas and diesel markups at the pump. With the U.S. withdrawal from the Paris accord, it would be fair to assume that the price of oil within the U.S. could drop as crude oil drilling could potentially increase throughout the country. On the other hand, I don’t expect California oil prices to follow suit. Governor Brown has already publicly stated that California will continue to lead the world in climate change policy. Thus, California should not be seeing any increase in drilling sites or lesser restrictions that could lower productions costs. Going forward, I expect California will continue to have the highest gas and diesel prices in the country while prices in other states could potentially fall. •

Canada

Regional Views

Nate Kovacevich, Sr. Supply Manager See his bio, page 34

“ Moving crude from Canada to the Gulf Coast will likely cause constraints on pipelines, forcing barrels into more expensive and accident-prone rail transportation to alleviate the pressure. “

Canadian Production Rebounds, Crude Likely Headed to U.S. Gulf Coast

As high oil prices have boosted production of heavy oil from Western Canada’s oil sands, producers are looking for refiners with the capacity to take more product. The Canadian Energy Research Institute is forecasting crude oil production to rise by 595,000 barrels per day this year and another 203,000 barrels per day in 2018. Over the last five to ten years, many Canadian barrels found a home in the U.S. Midwest as refineries invested in capacity to handle the heavier northern crude. Now, refineries in the Midwest have run out of spare capacity, creating the need for an alternative to handle rising supply. The likely beneficiary of this predicament will be U.S. Gulf Coast refineries, which are already configured to handle heavy crude like the Canadian tar sands crude. Moving crude from Canada to the Gulf Coast will likely cause constraints on pipelines, forcing barrels into more expensive and accident-prone rail transportation to alleviate the pressure. Fortunately, these changes do not put us in unchartered territory—crude imports into the Gulf Coast from Canada have fallen from their 2010 peak of 2.4 million barrels per day down to just 200,000 barrels in 2016. As the differential between Canadian crude and WTI continues to widen, producers will be incentivized to rail barrels south to compete with alternative sources. •

Canada to Open Its First Refinery in Decades

In 2012, Canada approved funding for the country’s first refinery since 1984. At the time, a diesel shortage was wreaking havoc. Canada’s petroleum sector was growing rapidly amid $100/barrel crude prices, and more diesel was necessary to fuel the drilling equipment.

Five years later, Alberta is emerging from a recession and diesel demand has dropped far below 2012 levels. The surplus of diesel produced by Alberta’s current refineries has increased by 45% over the last three years. The new Sturgeon refinery in Alberta will come online in late 2017, adding 40,000 barrels of diesel per day to the surplus. Canadians now hope that a recovering oil sands sector will revitalize the economy, creating more diesel demand. Alternatively, Canadian refiners could export excess barrels to the U.S. until Canada can soak up the barrels internally. Time will tell whether the new refinery will yield a return on its original nine billion-dollar price tag. The timing of the plant coming online will certainly make for a difficult first twelve months of operation. • 23

Alternative Fuels

Renewable Fuels

Sara Bonario, Supply Director See her bio, page 34

Making America Great May Not Make Her Green The Trump Campaign promised American Greatness. Tax reform was a big part of that promise. As Americans await the unveiling of an extensive tax reform package, U.S. biodiesel producers, blenders, and traders are left with more uncertainty than ever about the future of the $1/gallon federal Blender’s Tax Credit (BTC), which was available on domestic and imported biodiesel gallons and expired on December 31, 2016.

It’s not unusual to have the Blender’s Tax Credit (BTC) extended midway through the year. This was the case in 2014 and 2015. Market participants agree, however, that the presence of the BTC for the full calendar year of 2016 allowed domestic producers and importers to dramatically increase the supply of biodiesel for blending in the U.S. The increased supply reduced the cost of biodiesel for blenders, supporting discretionary blending.1

Year-on-Year Comparison of Monthly Net Biodiesel Imports

Source: Energy Information Administration (EIA)

Without the tax credit in place for 2017, domestic producers have faced negative margins resulting in run rate reductions relative to the same periods in 2016. Higher production costs have been passed along to blenders and consumers; many producers have chosen not to share the tax credit should one be implemented retroactively, as has been the case in years past.

U.S. Monthly Biodiesel Production 2015–2017

Source: Energy Information Administration (EIA), Form EIA-22M Biodiesel Monthly Survey

12016 Tax credit was in place prior to the year commencing.

2014 & 2015 tax credit was retroactive.

Alternative Fuels In some areas of the country, the cost of biodiesel has risen to be equal to or more expensive than ULSD #2 on-road diesel, and discretionary blending in non-mandated areas has slowed, further depressing demand for domestic production. As fewer gallons are produced and sold, the available pool of Renewable Identification Numbers (RINs) is reduced.

Interestingly, RIN values were mostly stagnant in May and April, and grew only moderately in June. If one believes the market is rational and efficient, then something else must be at work. With demand increasing and supply decreasing, RINs prices should have risen earlier, and with more force.

Current domestic production of biodiesel is not enough to meet increasing Renewable Volume Obligations (RVO) under the Renewable Fuels Standard (RFS) set by the Environmental Protection Agency. Obligated parties must either blend renewable fuels or purchase RINs to meet their obligation, which will be difficult given the shortage of biodiesel.

Could it be that the markets believe President Trump and his head of EPA, Scott Pruitt, will lead us to be less green by reducing, significantly altering, or revoking the RFS that has been in place since 2005? Only time will tell.

Biodiesel RIN Values

Source: Oil Price Information Administration (OPIS)

Anti-Dumping Measures Filed Against Argentina and Indonesia Biodiesel

Adding to the market’s uncertainty regarding tax credits, the National Biodiesel Board (NBB) filed an anti-dumping and countervailing petition with the U.S. International Trade Commission on March 23, 2017. The petition argues that Argentinian and Indonesian producers are selling their fuel in the U.S. below their own production cost, thus violating international trade laws. A similar petition was filed and upheld successfully in the European Union (EU) in November 2013.

Biodiesel Net Imports, 2014–17

Biodiesel imports into the U.S. have been growing over time, with most of the gallons originating in Argentina and Indonesia. These foreign gallons arrive as B100 and are blended domestically to B99, allowing them to be subsidized by the $1/gallon tax credit. Market participants are mixed on whether the complaint filed by the NBB will help or hurt efforts to persuade Congress to restore the $1/gal credit. Some have asked Congress to change the credit from a blender’s credit to a producer’s credit, excluding imported biodiesel gallons.

Source: Energy Information Administration (EIA)

Anti-dumping duties on Argentine and Indonesian biodiesel should allow domestic producers to continue raising prices as supply dwindles. While higher prices will continue making incremental blending costprohibitive, it should at least help domestic producers remain competitive until blending economics once again turn in their favor.

Alternative Fuels

Natural Gas

Martin Trotter, Pricing & Structuring Analyst See his bio, page 34

Cash Prices

Natural gas cash prices opened Q2 just south of $3.10/dt before falling nearly 10 cents by month end. A spike in mid-May cash prices briefly created a state of backwardation, where cash prices exceeded Henry Hub prompt month prices. Lack of summer cooling demand in early June drove market volatility. Prices bottomed out at $2.83 in the first full week of June, only to rebound above the $3.05 mark and fall once again by 20 cents to close the quarter. •

Forward Prices

Calendar year 2018 prices averaged around $3.06/dt over Q2. After peaking at nearly $3.11 in mid-May, prices fell to a low of $2.95 by late June, ending the quarter just above the $3.00 mark. Cal ’19 failed to see the mid-quarter boost demonstrated by Cal ’18, peaking in late April and steadily declining for the remainder of the quarter. The outer years performed similarly to Cal ‘19, failing to break the $2.94 threshold. •

NG Forward Calendar Year Strip Prices

Source: New York Mercantile Exchange (NYMEX)

Alternative Fuels

Natural Gas

Natural Gas Fundamentals

SUPPLY:

U.S. Approves First Floating LNG Liquefaction Facility Exports to Non-FTA Countries

On June 1, the Department of Energy granted approval to Delfin LLC’s offshore liquefaction facility to export liquefied natural gas to countries with whom the U.S. does not have a free trade agreement. The approval, the first of its kind, appears to foreshadow a steady increase in U.S.-supplied LNG exports. The decision allows for the export of up to 1.8 billion cubic feet of LNG, doubling the export capacity of the facility. Since 2014, Delfin has exported only to countries operating with free trade agreements with the U.S. In March, the U.S. Coast Guard and the Maritime Administration of the Department of Transportation, the two entities governing offshore energy projects, granted approval to move forward, though the on-shore production component of Delfin’s operation in Cameron Parish still requires approval from the Federal Energy and Regulatory Committee. •

DEMAND: The 2014 decentralization of Mexico’s national energy company, Petróleos Mexicanos (PEMEX), continues to galvanize Mexico’s energy sector. CENAGAS, the heir to Mexico’s nationally integrated transportation and storage system, conducted Mexico’s first natural gas pipeline capacity open season. The process, which pipeline owners use to gauge market interest and demand, allows potential shippers to place bids on nonbinding agreements, which helps to determine whether a project should proceed, go on hold, or be cancelled. The May 8 auction garnered interest to the tune of 3.6 bcf/day, with CENAGAS offering only 2.2 bcf/d of allocation. Big winners included additional capacity for PEMEX, ENGIE Mexico, and ArcellorMittal. Previously, 4.1 bcf/d were reserved amongst PEMEX, Mexico’s Federal Electricity Commission, and an assortment of Mexico’s independent power producers. Additional subscribers include Shell Trading, Grupo Alpha and a myriad of natural gas marketers and retailers. U.S.-supplied injection points received substantial interest, supporting growing demand in Mexico. Suppliers hope to use cheaper U.S.-borne natural gas to sell into the burgeoning Mexican market. •

Source:Delfin LLC

CENEGAS Allocations of Non-Reserved Natural Gas Pipeline Capacity (MMcf/d) Others, 338 Grupo Alpha, 104 Shell Trading Mexico, 140 ArcelorMittal, 153 ENGIE México, 159 Source: Energy Information Administration (EIA) , CENEGAS

Pemex Transfrormaci én Industrial, 1,323

Alternative Fuels

Natural Gas

U.S. Working Natural Gas in Storage

STORAGE: Year-to-date, 2017 has been the second warmest year globally on record, with moderate Q1 temperatures reducing the need for nat gas inventory draws. The close of May brought storage inventory levels to 2.52 tcf. Modest injections through the first couple of weeks of June pushed stockpiles to roughly 9% over the 5-year average, though still behind inventory builds from this time last year. As a whole, Q2 has seen total injections of 719 bcf over the term. This includes injections in the first week of April, which saw a slight decrease compared with the same period last year. Injections for the quarter surpassed last year’s Q2 injections, and a lack of summer cooling demand will likely lead to continued inventory builds in the near future. •

Source: EIA Short-Term Energy Outlook, July 2017

Viewpoints When Will Autonomous Vehicles Solve the Driver Shortage?

Stop me if you’ve heard this one: The trucking industry is facing a driver shortage! The driver shortage is likely the most talked about and largest challenge many carriers face, yet the solution may still be a decade away—a solution that seemed farfetched just a decade ago. Of course, I’m talking about autonomous vehicles. But, before we get into the future, let’s get back to the issue of the lack of drivers. I was encouraged to learn that, in Q3 2016, the industry saw a 2% decline in turnover and brought the overall number to the lowest rate since 2011. I was then horrified to learn that this decline brought the number down to 81%! What I originally thought was a notable decline quickly seemed trivial. Current numbers show the shortage to be anywhere from 20-50K drivers. Several reasons have been cited as pushing new applicants away from truck driving. As Logistics Management Group News Editor Jeff Berman calls it, the “Millennial Effect” has had a significant impact. Millennials would rather be doing something “cooler” than driving a truck for a living. Additionally, The Wall Street Journal recently reported that new drivers are increasingly opting to become independent carriers or owner-operators rather than driving for other companies. Drug and alcohol testing are yet another barrier for new drivers. The ATA recently sent a letter to the Department of Health and Human Services calling for expedited release of guidelines to test hair samples, rather than urinalysis, for mandatory testing when hiring truck drivers. Hair testing is more effective than urinalysis, the current federally required test, in preventing drug users from gaining truck driving jobs.

Goodyear Highway Hero

The awards, recognizing individuals who demonstrated heroism during highway accidents, were announced this quarter. Chris Baker and Tim Freiburger were the runners up. Mr. Baker put out a car fire allowing the passenger to escape, then helped to pull the unconscious driver out to safety. Mr. Freiburger witnessed a car flip into a creek and come to rest upside down. He broke the glass to help remove 3 children and their mother. The winner of the award, David Webb, pulled up next to a swerving dump truck and noticed the driver hunched over. He chased down the truck, brought it to a stop, then pulled out the driver and did CPR until help arrived. These three are true heroes!

While Budweiser may not raise the same safety concerns as hazardous materials transportation companies must consider, those involved with the development and ultimate utilization of the technology are aiming for safety on par with the airline industry. According to Transportation Secretary Elaine Chao, these developments in technology have the “potential to improve safety on our roads.” Citing that 94% of traffic crashes are due to human error, she went on to say that “automated technology has the potential to help eliminate human error and reduce crashes and fatalities.” Self-driving cars are expected to dominate the roads as early as 2030, with the technology seeing rapid growth as early as 2021. Self-driving cars will lay the technological groundwork for autonomous trucks, which will quickly grow in market share. While early autonomous trucks will still require a pilot to handle unique situations, eventually truck drivers will become an anachronism. As the trucking industry collectively deals with the driver shortage, numerous factors will cause driver scarcity to accelerate. With no prospects in sight for a sudden flock of new truck driving candidates, trucking companies are increasingly looking to autonomous vehicles to provide relief. Given the rapid investments from engine manufacturers and technology companies, they may not have long to wait. •

Is the answer autonomous vehicles? Self-driving trucks have moved from a question of “if” to a matter of “when,” and it’s not as far off as you may think. Mercedes, Apple, Microsoft, Lyft, GM, Google, and Tesla are all developing prototypes, and an autonomous vehicle controlled by Otto (a division of Uber) hauled a load of 2,000 cases of Budweiser 120 miles through Coors’ Colorado backyard in October of last year. 29

By Dan Kemeny, Sr. Logistics Analyst

Dan Kemeny Senior LTL Logistics Manager Dan Kemeny leads Mansfield’s LTL department in Denver. His responsibilities include overseeing the logistics and billing for all of Mansfield’s fleet fueling and tank wagon deliveries. Prior to his current role, he spent time handling Mansfield’s FTL and DEF transportation and regional operations.

Viewpoints

Women in Logistics

By Nikki Booth, Carrier Relations Manager

For over 200 years, women have made significant contributions to the growth and progress of the logistics and supply chain industries in the United States. Abigail Smith Adams, wife of the 2nd U.S. President, John Adams, wrote in 1777 that women "will not hold ourselves bound by any laws in which we have no voice." Her words marked the beginning of a revolution for women in America to have a voice in their personal and professional lives. Despite the incredible rise of women in the business world, the logistics and supply chain sectors remains male dominated. According to SCM World, female employees currently make up about 20% of the supply chain workforce. According to the U.S. Bureau of Labor & Statistics, after World War II, less than one-third of American women were in the U.S. workforce. Since then, women have attained higher levels of education and employment; today, 40 percent of women in the labor force hold college degrees. Almost 60 percent of women are part of the American workforce, yet compensation for women is only 83% of their male counterparts. The logistics and supply chain industry is more complex than simply moving goods from one place to another—productivity and efficiency are essential. A company’s profitability relies on its supply chain, which can be a significant and overlooked opportunity in business. In 2015, research published by McKinsey & Company found that companies in the top 25% for gender diversity are 15% more likely to have financial returns above their respective national industry medians. Historically, people didn’t begin their careers in logistics or supply chain; these careers began after individuals had learned their industry and worked their way up the corporate ladder. In recent years, however, universities have started offering logistics and supply chain courses in their curriculum. As baby boomers start retiring from traditional logistics and supply chain roles, companies must find ways to replace retirees and expand their workforce with new opportunities and ideas. In 2016, the American Petroleum Institute released a forward-looking study regarding female and minority employment in the oil, natural gas, and petrochemical industries. This study focused on the U.S. demographic and labor market trends that will create future job opportunities for minorities and women in the industry. Women are projected to fill more than 290,000 job opportunities through 2035, making up 16% of the total in the petroleum industry. The implications from this study are significant and can be expanded to include logistics and supply chain altogether. Attracting, retaining, and cultivating the best available talent is crucial for companies as the demographics in America change. Employees seek companies with pro-development policies and well-paying career opportunities. For employers, hiring for diversity is vital. Women represent necessary and available talent pools that will help meet future workforce demands.

Research conducted by SCM World, a Gartner Company, found that the natural skillsets of women differ from those of men in a way that is advantageous for supply chain management. Most women have a strong desire to be successful. Women excel in attention to detail, time management, quick and accurate character judgement, decision-making, and multitasking. Women in supply chain and logistics positions can bring focus to the bigger picture of a company’s supply chain by assessing, analyzing, and executing strategic planning. Women also tend to have stronger social networking skills, an asset in business development and client relationships. Compared to male counterparts, women are under-utilized, specifically in the logistics and supply chain sectors, which are fundamental segments of the U.S. and world economies. Increasing diversity in these sectors by recruiting and cultivating more female talent is vital for companies pursuing competitiveness in the marketplace. Men and women alike have made great contributions in supply chain and logistics management. Promoting a healthy balance that builds on the strengths of talented women and men is a strategy that’s proven to help companies succeed in the marketplace. As part of that approach, companies must recognize that women can be equally as successful as their male counterparts, if given the opportunity to succeed. •

Women are generally underestimated and underpaid because of oldfashioned misconceptions; being a woman is perceived to equate with having additional responsibilities, such as marriage and motherhood. This antiquated thought process prolongs the prejudice that women are less devoted to their careers than men, leading some employers to consider female leaders a “riskier” option. 30

Nikki A. Booth Carrier Relations Manager Nikki manages the strategic direction of Mansfield’s full truck load network across the U.S. and Canada. Her team works closely with fuel transport companies to handle freight procurement, address logistical concerns, and identify cost-saving solutions. Nikki has been with Mansfield since 2007 and has over 14 years of experience in supply chain management, with 11 years focused on energy transportation and logistics.

Viewpoints By Tom Krizmanich, Director, Business Development, Mansfield Power & Gas

Natural Gas Procurement History, Current Practices, and Improvement Opportunities In this three-part series, FUELSNews 360° will be looking at the history of the natural gas market, analyzing current best practices, and suggesting ways that fuel buyers and nat gas buyers can learn from each other. Be sure to check out next quarter’s issue, where we’ll share some best practices for natural gas procurement teams.

Introduction

Each of the major fossil fuels – coal, oil, and natural gas – have had a tremendous impact on the American energy landscape. Natural gas has grown to be one of the most important energy sources, surpassing coal as the preeminent power source and slowly encroaching on oil’s monopoly of the transportation industry. As demand has grown, purchasing complexity has also multiplied. Often, complexity creates smoke and mirrors, allowing suppliers to hide unnecessary costs in the litany of legitimate utility and regulatory fees. To understand the market and effectively obtain the best prices, consumers must be extremely well-informed and well-versed in how the market operates, including understanding both historical dynamics and current trends.

Historical Overview – How we got here

Natural gas was discovered millennia ago through “burning springs”— areas where lightning had struck a natural gas leak, causing a perpetual flame. In the 1700s, Europeans began building small pipelines to transport gas from one area to another. By the mid-1800s, natural gas was being used in many cities to fuel street lamps. Even at this early stage, state and local governments realized the natural monopolistic characteristics of the natural gas market and deemed natural gas distribution to be of the public interest, justifying regulation. 31

Following the invention of the Bunsen burner, natural gas began to be used in a litany of ways, from heating to electricity production. As demand grew, regulations morphed from local and state control to interstate pipelines. These evolving rules, put in place to protect consumers from monopoly pricing, would later come full circle to harm consumers during natural gas shortages.

In the mid-1950’s, the Supreme Court ruled that natural gas producers selling gas into interstate pipelines fell under the classification of “natural gas companies.” The ruling meant that wellhead prices, the price of gas sold by the producer, could be regulated federally. Each producer would need to participate in the traditional cost-of-service rate-making process to determine their rates, rather than being priced with the market. New interstate transmission pipelines and an increase in natural gas producers created a backlog of entities requiring reviews. To eliminate the back log, regulatory agencies shifted from individual producer prices to geography-based rates; however, the federal government underestimated the time and level of difficulty needed to set regional rates. Natural Gas Industry Definitions Supply: The physical commodity. Supply is deregulated to create competitive pricing based on the economic principle of supply and demand. Companies that produce natural gas make their supply available through competitive wholesale markets. Transmission: The transportation of natural gas supply from its source (e.g., natural gas wells) to the utility’s city gate. Transmission is regulated by the government to ensure the reliable delivery of energy. Distribution: The delivery of natural gas from the utility’s city-gate to your business or home via pipelines. Distribution is also regulated by government agencies.

Viewpoints By 1974, the government realized geographic pricing would not work and adopted national price ceilings. These price ceilings were far less than the market value of the natural gas being sold, leading to the disastrous supply shortages in the 1970’s. Artificially low price ceilings created a surge in demand, but did not incentivize natural gas producers to invest their money in exploration and drilling for new natural gas reserves.

In 1993, all remaining NGPA price regulations were slated to be eliminated, allowing the market to determine the price of natural gas at the wellhead.

During the oil embargo of the 1970’s, natural gas became the fuel of choice. Increased usage and limited drilling created an environment of high prices. Because the government could only regulate wellhead prices for producers shipping on interstate pipelines, producers began selling their product exclusively to intrastate markets, which were relatively free of regulation. Consumers in these states were awash in natural gas, but consumers in non-producing states suffered.

Deregulated Natural Gas Market.

The federal government realized something needed to be done. In 1977, Congress passed the Natural Gas Policy Act (NGPA), which created FERC (Federal Energy Regulatory Commission) and had three main goals:

Transportation Services Market

1. Create a single national natural gas market 2. Equalize supply with demand 3. Allow market forces to establish the wellhead price of natural gas

Where are we today?

By 1985, FERC passed FERC Order No. 436, which had numerous immediate effects: • Pipelines began offering transportation service directly to all customers • Consumers realized cost savings, as they could purchase natural gas directly from producers at lower costs and pay for pipeline transportation separately • Pipeline customers realized cost savings, since the spot market prices of natural gas were much lower than the prices offered for natural gas by the pipelines (due to the long term ‘take-or-pay’ contracts that the pipelines were bound under) • The payments necessary under these ‘take-or-pay’ contracts increased for pipelines, as few customers were willing to purchase higher priced gas from the pipelines • Pipelines and producers were often forced into litigation to resolve issues surrounding ‘take-or-pay’ contracts FERC Order No. 436 also had several long-term effects, including: • Transportation became the primary function of pipelines, rather than offering bundled merchant service • A variety of purchasing and transportation patterns and practices emerged due to the availability of choices for end users • New pricing patterns emerged, known as ‘netback’ pricing. A reasonable price was set at the point of consumption, and that price, minus the cost of transportation and distribution, gave the ‘ netback’ price to the producer at the wellhead The movement towards allowing pipeline customers to choose their natural gas supplier and their transportation arrangements became known as “open access.” Order No. 436 became generally known as the Open Access Order. 32

Since the mid-1990’s, consumers have had the ability to choose their own retail natural gas supplier. Each Local Distribution Company (LDC) throughout the U.S. has put parameters in place for allowing larger commercial and industrial customers to purchase their natural gas supply and transportation, from the upstream producers to the LDC’s city-gate or delivery point. Utilities outline the parameters in their commission-approved tariffs, which apply to consumers meeting the minimum annual volumes to qualify. Each utility in each state has its own requirements to be eligible for transportation services and/or purchasing gas supply through a thirdparty marketer, rather than the utility. Many states have now implemented a natural gas customer choice program allowing all natural gas users, from residential to larger commercial and industrial users, to purchase their natural gas supply competitively through a marketer. The marketer purchases natural gas from other sources and arranges for the delivery of this gas to the natural gas utility. The utility is responsible for moving the gas through its distribution pipes to homes or businesses. When consumers switch natural gas suppliers, they are changing the company that supplies the gas to their local gas utility—they are not switching to different physical gas lines. The natural gas lines that run down the street and into homes and businesses are still owned and operated by your local natural gas distribution company. The rates for that distribution service are regulated by each state’s Public Utility Commission. Natural gas has undergone a major transformation over the past 100 years. Today, natural gas supply is an open market in most states, despite the heavy FERC and state regulations on transportation services. Next quarter, we’ll be discussing the natural gas procurement process, providing a helpful framework for companies selecting natural gas suppliers. •

Mansfield’s National Supply Team Contributors 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 manage today’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield to deliver geographic-based supply solutions by more efficiently managing market-specific refining, shipping, and terminal/assets.

Andy Milton

Keith Crunk

Andy heads the supply group for Mansfield. During his tenure, the company has grown from 1.3 billion gallons to over 2.5 billion gallons per year. His industry experience spans all aspects of the fuel supply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Andy’s expertise in purchasing via pipeline, vessel, and the coordination via futures and options for hedging purchases enables him to successfully lead a team of experienced and motivated supply personnel at Mansfield. His 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. •

Keith Crunk is responsible for managing supply purchases for contracted customers in various markets, long-term physical and financial hedging, pipeline and storage asset management, and pipeline scheduling. Keith has over a decade of experience with analytics and forecasting in the power and gas industry. •

Senior VP of Supply & Distribution

Power & Gas Supply Manager

Martin Trotter

Pricing & Structuring Analyst

Martin is responsible for handling natural gas and electricity pricing, deal flow, and analytics for Mansfield’s Power & Gas division. Before his current role, he served as the Sales Analytics Supervisor and held various roles on the Risk & Analysis Team. •

Dan Luther

Senior Supply Manager

Dan is responsible for refined products supply and hedging in Mansfield’s region running from Texas north to Chicago. Before joining Mansfield, Dan managed barge, rail, and truck fuel deliveries as well as ethanol trading responsibilities across the U.S. •

Sara Bonario Supply Director

Nate Kovacevich Senior Supply Manager

Before joining the company, Nate worked as a Senior Trader, where his responsibilities included managing refined product and renewable fuels procurement, handling all hedging-related activities, and providing risk management tools and strategies. He performed commodity research and analysis for customers with agricultural- and petroleum-related risk, devised and implemented risk management programs, and executed futures and option orders on all the major exchanges. •

Chris Carter Supply Manager

Chris is responsible for refined product purchases, including contracts, day deals, and rack purchases in the Northeastern United States. His responsibilities also include supply contracts and current bids. Chris joined Mansfield in 2009 as a Supply Optimization Analyst. •

Sara manages the team responsible for procurement and optimization of all refined fuels for Mansfield’s Great Lakes, Central, and Western regions. She is also responsible for nationwide purchasing, hedging, and distribution of renewable fuels. Sara has an extensive supply and trading background, with over 25 years of experience in the oil industry. •

Matthew Smith

Supply Optimization Supervisor

Matthew is responsible for the procurement of refined products in the Southeast United States, as well as pricing, supply optimization, and risk management. Matthew also manages pipeline shipments of gas and diesel on the Colonial, Plantation, and Central Florida Pipelines. Matthew started his career with Mansfield in 2013 as a Logistics Analyst, and in 2016 transitioned to the Supply Department. •

Alan Apthorp

Amy Nguyen

Market Intelligence Analyst

Supply Optimization Supervisor

Amy is responsible for both refined product purchasing for contract customers and bulk pipeline movements within California, Oregon, Washington, Idaho, Nevada, and Arizona. She is also responsible for scheduling, hedging, supply bids, and other optimization efforts throughout the West Coast. Amy joined Mansfield in 2014 as an optimization analyst. •

Alan is responsible for content editing, research, and data analysis and visualization at Mansfield, and is an editor for FUELSNews Daily and FUELSNews 360°. He also works with Mansfield’s product marketing team to analyze trends to generate valuable insight for Mansfield’s customers. Alan joined Mansfield in 2015, and has served both as a customer relationship manager and as a supply scheduler with Mansfield’s Power & Gas division. •

Download Our App Android Market

* 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 2017. All rights reserved. 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 are provided 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.

FUELSNews 360° M A RKE T N EW S & IN FORMATION

Mansfield Energy Corp www.mansfield.energy www.fuelsnews.com 678.450.2000 1025 Airport Pkwy SW Gainesville, GA 30501 United States of America

Innovation • Integrity • Excellence • Conscientiousness • Personal Ser vice