FUELSNews 360° - Q2 2020 Market Report

M A R K E T

N E W S

&

I N F O R M A T I O N

APRIL MAY JUNE Q2

2nd QUARTER

Table of Contents FUELSNews 360° Quarterly Report Q2 2020 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—to provide insight into upcoming challenges facing the energy supply chain.

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Executive Summary

Regional Views continued

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Overview

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April through June 2020

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Prices in Review

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Rack-to-Retail Spreads

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A Look Ahead

Global Economy US Economy

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Fuel Consumption

Mathew Smith

30 31

34

Alternative Fuels 34

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Crude Inventories Fuel Inventories

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Refinery Utilization

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Crude Production

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Hurricane Season

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Viewpoints 39

Hurricane Watch—How Storms Disrupt Fuel Supply Chains Noah Young

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FUELSNews 360˚ National Supply Team Contributors

PADD 1A, B & C East Coast Dan Luther

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Natural Gas Natural Gas Demand, Supply, Storage Martin Trotter

Regional Views 24

Renewables Renewable Diesel Is Here to Stay!

Sara Bonario

Fundamentals 17

PADD 5 West Coast Brent Fergeson

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PADD 4 Rocky Mountain Nate Kovacevich

Economy & Demand 13

PADD 3 Gulf Coast

PADD 2 Midwest Dan Luther

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Q2 2020 Executive Summary The second quarter of 2020 brought as much turmoil as the first. From negative oil prices to the deepest global depression in history, markets experienced unprecedented events in Q2 that will ripple through markets for years.

On the East Coast, fuel shippers attempted using the Colonial Pipeline as a storage unit, parking barrels on the pipeline rather than offloading them at terminals. Fees imposed by the pipeline company forced many shippers to rely on exports and maritime storage. Gabe Aucar explains on page 25.

Globally, demand fell an estimated 20 million barrels per day (MMbpd) at the worst points of Q2, causing oil prices to sink and inventories—both on land and at sea—to swell. The OPEC+ group of nations agreed to cutting production by a historic 9.7 MMbpd, but the magnitude of the demand loss overwhelmed any deal and sent prices into a nosedive.

Unlike coastal markets where suppliers can export excess product, Midwest markets are landlocked and do not enjoy as many fuel outlets. Several Midwestern markets saw wholesale gasoline prices fall below 20 cents per gallon, while diesel prices dipped below 50 cents. Flip to page 27 for more details.

Negative prices for WTI crude in late April were a wake-up call for markets, albeit a temporary one. Only WTI crude felt the extreme pressure of filling inventories, and prices quickly returned to positive territory.

After April, markets began the long, slow path towards recovery.

Oil prices reached $40/bbl in June, nearly a year ahead of the EIA’s April price forecast, but struggled to generate enough momentum to continue higher.

A litany of economic reports released amidst the pandemic helped provide direction to markets. Although early forecasts reflected demand destruction throughout 2020, the International Energy Agency shared a brighter outlook in their May report. Conversely, the International Monetary Fund in June revised their 2020 GDP growth forecast down to -4.9%.

The rollercoaster of news and data caused uncertainty, but recovery efforts helped steer prices towards higher ground.

Looking ahead, oil prices are likely to remain suppressed for several months – or even years. Lockdowns caused oil inventories around the world to set record numbers, and even with OPEC+ cutting output, stocks will take a long time to drain.

Regional Markets Several regions around the country experienced historically low fuel prices as crude prices plummeted. Refineries cut back their throughput, but not quickly enough to prevent gasoline and diesel inventories from setting their own records.

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Farther west, Rocky Mountain demand sprang back quickly, causing strong gasoline prices in May and June. With little supplies coming in, refiners lowering their utilization—and in one instance converting a refinery to a renewable diesel plant—helped balance markets quickly. For more, read about PADD 4 trends on page 30.

West Coast markets faced some of the heaviest pressure. Early in 2020, refinery shutdowns caused higher prices, but coronavirus and early lockdowns sent both gasoline and diesel prices screeching lower. While consumers would not get a reprieve from West Coast fuel taxes, they did enjoy wholesale prices below 50 cents per gallon. Brent Fergeson shares what to expect in Q3 on page 31.

Markets face a great deal of uncertainty. Crude production is offline, refiners still have not returned to full production, and many consumers remain under lockdown. As all three parts of the oil ecosystem return to normal, timing will be key. If production remains low well after demand returns, inventories will shrink, and markets may return to normal. Rapidly returning supply mixed with weak demand could bring prolonged low prices.

On top of all the uncertainty regarding oil prices, consumers are gearing up for a busy hurricane season this year. The US is expecting above-average storm activity, which could throw a wrench in the recovery plans of fleets on the East Coast and Gulf Coast. Read more about how hurricanes can impact fuel markets on page 39. •

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OVERVIEW April through June 2020

Q2 Market Summary

$1.2001 $1.1781

$39.27

25,813

Source: New York Mercantile Exchange (NYMEX)

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Overview

May – June 2020 WTI Crude Prices

Source: New York Mercantile Exchange (NYMEX)

April Coming into the new quarter, markets were in chaos. Oil demand was collapsing amid lockdowns, and supply was surging higher as Saudi Arabia and Russia waged a price war to recapture market share. As April began, OPEC and its allies realized the disastrous consequences of their price war and reversed course, reaching a historic 9.7 million barrel per day cut.

Despite what OPEC described as an “extraordinary” agreement, prices plunged. Although the agreement lasts far longer than the demand losses, the immediate cuts were insufficient to address massive short-term demand destruction. With US GDP expected to drop 25%-35% in the coming months and global GDP down at least 10% in Q2, oil demand was cratering.

Gasoline demand fell roughly 50%, and, despite stable diesel demand through mid-April, the entire oil complex felt the downward pressure.

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In its April report, the IMF reported that global Gross Domestic Product would shrink 3% in 2020, a number they would later revise even lower.

This forecast, the first since the coronavirus’ effects began taking center stage, compares to the January forecast of a 3.3% expansion. This contraction would mark the biggest decline since the Great Depression, far greater than the 0.1% global contraction in 2009 during the financial crisis.

On April 20, WTI Crude prices fell into negative territory for the first time in the crude futures market’s history as traders unloaded positions ahead of the May contract expiration. The historic $55.90/bbl drop (-305%) to $36.73 indicated that sellers would pay to give away their crude. But no other product had such a historic day, not even Brent Crude. The market

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Overview was most concerned with Cushing, OK crude storage rather than a broad oil glut. The June 2020 WTI Contract barely moved throughout the day, closing above positive $20/bbl.

To close April, prices remained weak as the world ran out of storage. Reuters reported that South Korea had run out of commercial storage space for oil. All of the 38 MMbbls of onshore commercial capacity owned by state-run companies had been rented out. Some sources have estimated that global oil storage capacity stood at 85% full. The only remaining alternative for some countries was floating storage or ship-borne storage.

In the US, oil producers also nearly ran out of space to store oil. The Energy Department finalized contracts that had been announced earlier in the month for companies to rent around 23 MMbbls of oil storage capacity in the Strategic Petroleum Reserve (SPR). In April, 1.1 MMbbls were delivered to the SPR for storage by US companies.

May As May began, the EIA reported that refineries were producing above-average quantities of diesel while cutting gasoline and jet fuel output.

Refineries can optimize their output to a limited degree based on market prices, but there are constraints on how much they can change.

Crude typically yields twice as much gasoline as diesel fuel, but refineries tested the limits of maximum diesel capacity, avoiding gasoline production at all costs due to sharply lower gasoline demand. Refinery yields of distillates rose to 40% of all refinery output, marking the highest level on record. While optimized flows are a recurring market feature, the massive change in product yields shows that refineries have more flexibility than previously thought to increase distillate output.

In mid-May, Baker Hughes data revealed that US rig counts had officially fallen to the lowest point since data collection began in 1975. Rig counts are a leading indicator of future production – fewer rigs mean fewer new wells being tapped, which will show up in production data over the coming months. US rigs fell to a historically low 374 rigs and kept dropping. The rig count rout makes it clear that US producers suffered amidst the coronavirus-induced price collapse. During the 2015-16 OPEC price war, rig counts fell as low as 404 rigs. On the other hand, rigs are now roughly 30% more productive than they were in 2016 thanks to technology improvements, so even a record-low rig count can sustain more production than in the past.

Also in mid-May, the IEA lowered its forecast for global crude stockpiles for the second half of the year, while revealing that May production fell 12 MMbpd compared to April, bringing global production to the lowest level in nine years. Given weak oil prices, 2020 year-end US production is forecast to fall 2.8 MMbpd year-over-year. Regarding demand, the Q2 demand forecast increased a noteworthy 3.2 MMbpd to 79.3 MMbpd, though that’s still a huge break from normal demand, which surpassed 100 MMbpd in recent years. Full-year 2020 demand is projected to be 8.6 MMbpd below 2019, compared to April’s reported 9.3 MMbpd deficit.

By late May, the Chinese economy, once the centerpiece of the COVID-19 debacle, was

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back in focus, with Beijing abandoning its 2020 GDP forecast while unveiling a $500 billion stimulus program. Official data shows the Chinese economy contracting by -6.8% in Q1 2020, the first official decline reported since 1976. Last year, Chinese GDP growth was +6.1%, its slowest growth in almost thirty years.

Chinese-US relations dragged down markets as May came to a close. President Trump threatened to end Hong Kong’s special status, up-ending the special economic and trading relationship the city has enjoyed with the US since 1992. Later, Trump followed through on this threat and revoked the special status, causing friction between the US and China and endangering the Phase 1 trade deal.

Overview

June The National Bureau of Economic Research’s Business Cycle Dating Committee announced in June that the US officially entered a recession in February. This decline is the first since 2009, when the last recession ended, and marks the end of the longest expansion —128 months—in US history. Although the label comes as no surprise, it highlights the severe contraction in GDP occurring in the US and around the world. The World Bank reported that the global economy will contract by 5.2% this year, the deepest recession since World War II. Additionally, the group points out that developing economies could contract by 2.5%, their first contraction in over 60 years. The world is struggling to overcome the massive hurdle presented by COVID-19.

In its June oil report, the IEA forecast oil demand at 91.7 MMbpd in 2020, citing higher than expected consumption during the lockdowns. The forecast is 500 kbpd higher than its estimate in May’s report.

However, the agency cautioned that a drop in airplane travel due to the coronavirus means the world will not return to pre-pandemic demand levels before 2022.

In mid-June, WTI crude began trading above $40/bbl once again. The gains came, not from any concrete change, but rather from improving confidence in the reopening economy. June 22 marked the first time WTI crude has closed above $40/bbl since March 6. Gasoline demand helped lead the rally, with the market moving into a backwardated structure, which incentivizes producers to draw from inventory rather than accumulate more product. Summer gasoline season in the US typically lifts the entire petroleum market, and analysts are beginning to see a slow return to normal high seasonal demand. Summer demand typically trends in the 9-10 MMbpd range, but economic closures sent demand to just 5 MMbpd. Gasoline consumption ended the quarter at nearly 8 MMbpd in the US—still below average, but closer to normal levels.

As June ended, the IMF said in its World Economic Outlook update that the COVID-19 pandemic had a more negative impact on H1 2020 activity than anticipated, and the recovery is projected to be more gradual than previously forecast. The IMF now estimates a contraction of -4.9% in global GDP in 2020, which is lower than

the -3% fall it predicted in April. Looking at country forecasts, the United States is expected to contract by 8% this year. The IMF had previously estimated a contraction of -5.9%.

The recovery is threatened by the possibility of another round of shutdowns as global COVID-19 cases topped 10 million to close the quarter. Within the US, infections climbed in 32 states over the last half of June with California, Texas, and Florida leading the way.

Some states are beginning to roll back reopening plans to slow the acceleration of infections. A possible second wave of lockdown measures is spooking markets. •

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Overview

Prices in Review

Quarterly Diesel Prices

The first quarter of the year enjoyed high prices for the first two months, which kept the quarterly average price higher. In contrast, amidst negative oil prices and lockdowns worldwide, second-quarter prices were far lower.

Crude oil prices averaged a paltry $28/bbl in the second quarter of the year, less than half of the average price of crude barrels in Q4 2019. The price was also one of the lowest quarterly averages in decades. Prolonged depressed prices had a devastating impact on oil production in the US and other market economies around the world.

Beginning Q2 at just $20 per barrel, prices fell to a historic low of -$37.63 before rallying to end the quarter at a high of $40 in late June. Overall, the quarter saw an $80 spread from low to high, an unheard of 200% spread for a single quarter.

Quarterly WTI Crude Prices

Source: Energy Information Administration (EIA)

Gasoline prices fell faster than diesel, but they also rallied faster.

Beginning the quarter at a measly $.55, prices moved up and down, hitting a low of 51 cents on April 21 before rising steadily to a peak of $1.30 on June 22. The 80 cent range represents a huge swing, and consumers who locked in their fuel prices near the bottom were quite happy with their quick gains.

In Q2, gasoline averaged $.94, slightly below diesel’s average level. In Q1, gasoline averaged 20 cents below diesel, so the 4 cent difference certainly highlights gasoline’s strong recovery. •

Quarterly Gasoline Prices Source: Energy Information Administration (EIA)

Consumers enjoyed a strongly reduced average diesel price in the second quarter. Like crude, diesel averaged nearly half of Q4 2019 levels in Q2, averaging $0.98. Diesel prices gradually stair-stepped lower in 2020, falling by roughly 50 cents each quarter. Expect a strong rebound in Q3, though prices likely will not soon recapture the $1.54 average set in Q1.

Diesel began Q2 at $.93, below its average price, and saw prices fall as low as $.61 in late April as markets panicked that storage would run out.

In late June, prices rose to $1.20, a range of 60 cents for the quarter.

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Source: Energy Information Administration (EIA)

Overview

Rack-to-Retail Spreads

Gasoline Rack-to-Retail Spreads

At the retail level, fuel prices certainly moved lower in response to the COVID-19 pandemic, but they moved much slower than wholesale fuel prices. Gasoline rackto-retail spreads exploded in March 2020, climbing as high as $1/gal in late March before recovering in April.

By June, spreads had generally improved to normal levels, with gasoline spreads closer to 30–40 cents.

From top to bottom, wholesale gasoline prices fell from $1.50 to just $.50, a 66% drop. In contrast, retail prices fell only 70 cents (36%) from $1.92 to $1.22.

Diesel rack-to-retail spreads also surged in Q2, taking far longer to even out. Most of April and May were spent above 80 cent spreads, meaning retail fuel buyers were paying an 80 cent premium over bulk diesel or mobile fueling prices.

Source: Energy Information Administration (EIA)

Diesel Rack-to-Retail Spreads

During the peak of the pandemic, wholesale diesel prices fell 55%, while retail diesel prices fell just 21%.

Retail stations were slow to pass on lower wholesale prices to customers, recouping higher fuel margins while in-store sales fell to near-zero. •

Source: Energy Information Administration (EIA)

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Overview

At what price do you expect the majority of producers in the U.S. to restart horizontal shut-in wells?

A Look Ahead

Percent of Respondents

Source: Federal Reserve Bank, Dallas and Energy Information Administration (EIA)

While some supply may come back in the near future, many producers expect that the US will never return to pre-COVID production levels.

Roughly 40% expect depressed production rates to last until 2022 or later, while 41% expect production to surpass pre-COVID levels sometime in the next 18 months.

Looking ahead, there is sure to be a long path to total oil market recovery.

Inventories rose sharply, which will take months or years to consume. In the near-term, oil executives have some confidence that oil markets will end the year close to current levels.

The Dallas Federal Reserve released its quarterly energy survey in June, which revealed several interesting statistics regarding the future of energy markets. Roughly 75% of oil and gas executives expect crude oil to end the year above $40/bbl, with several forecasting $50+/bbl crude. The average forecast across 164 oil and gas firms was $42.11, up $2/bbl from May’s survey which asked the same question.

When do you expect U.S. drilling and completions activity to return to pre-COVID-19 levels?

Percent of Respondents

What do you expect the WTI crude oil price to be at the end of 2020?

Percent Reporting

2020:Q3

2020:Q4

2021:Q1

2021:Q2

2021:Q3

2021:Q4

2022–

Never

Source: Federal Reserve Bank, Dallas and Energy Information Administration (EIA)

Dollars per Barrel Source: Federal Reserve Bank, Dallas and Energy Information Administration (EIA)

Along with higher prices, executives are optimistic about the opportunity to restart production. Thirty percent of executives believe that restarting will begin with crude in the $36-40/bbl range, while 19% believe even lower prices are sufficient. Still, 51% feel that higher crude prices (above $40) will be necessary to bring back horizontal wells that have been shut-in.

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The survey ends with a sunny disposition; 95% of firms asked indicated they expect to remain solvent throughout the crisis, while just 5% expect solvency issues. This despite a solid majority expecting oil consumption to remain below pre-COVID levels until 2022.

The oil industry has been through many booms and busts in the past, and this will eventually be treated as another hiccup in the rearview mirror. While inventories, production challenges, and demand slowdowns may create short-term headwinds, oil markets are sure to recover eventually and resume their pattern of booms and busts. •

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ECONOMY & DEMAND

Global Economy Economic volatility was a dominant headline throughout Q2, as many nations struggled to balance health restrictions with economic growth.

How countries balance these two factors will determine the extent of the economic and health consequences globally.

The pandemic was by no means the only factor impacting global growth. After a decade of prosperity, many economists began calling for an economic slowdown as early as last year. Years of expansion naturally lead to contraction as businesses and governments overextend themselves, requiring periods of consolidation before growth can resume. For instance, in the US, recessions tend to occur every 5-10 years, lasting for ten months on average.

While a decline was imminent, COVID-19 became the catalyst that shifted global markets from growth to decline. Economic agencies now expect 2020 to be the worst economic environment since the Great Depression. The IMF projects -4.9% GDP growth this year, revising its April forecast downward by an additional -1.9 percentage points. Even after ambitious 5.4% growth in 2021, global markets will end next year roughly 6% behind the January 2020 GDP forecast.

In its June outlook, the World Bank notes the effect that lower oil prices will have on the global economy. Historically, rapid price drops have been a boon for growth worldwide, jump-

starting consumer activity and making industrial goods cheaper. Although far from a panacea, low oil prices are generally considered a positive factor for economic growth.

This time, however, falling oil prices will not be an effective cure for the cratering economy.

First, because of the health restrictions in place, businesses cannot resume even if their costs have fallen. Second, oil-exporting countries already depleted much of their reserves during the 2014-16 price collapse, reducing their firepower for weathering this economic storm.

Starved of critical oil revenues, oil-exporting countries are now forced to either cut social services or increase taxes on their citizens. •

US Economy Closer to home, the situation seems as bleak as anywhere. The US quickly became the forefront of the pandemic, which put additional strain on US businesses. Shutdowns around the country dampened consumer activity and forced layoffs across many sectors, from airlines to oil fields.

As layoffs mounted, unemployment skyrocketed. Unemployment exploded in April to 14.7%, and the recovery has not been quick. By the end of the quarter, despite many states reopening their businesses, unemployment had only fallen to 11.1%—still higher than the highest point of the 2009 Global Financial Crisis.

For many on unemployment, economic stimulus measures helped prevent more dire economic impacts. The government increased unemployment payments by $600/week, providing aid to those without a job and even raising incomes for a minority of participants.

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Economy & Demand

US Unemployment Rate With unemployment rocketing higher and businesses closed, economic activity ground to a halt. US GDP growth in the second quarter is estimated to be -34.7% as of July, though the precise number will remain in flux for the next few months.

Source: US Bureau of Labor Statistics

With such a massive drop, expect a strong rebound in Q3 as the economy gets back on track. Still, the net result will be an economy well behind where it was initially projected to be early in the year. Much of the economic activity lost during Q2 will never be recovered – consumers will not increase their eating out, and business travelers won’t fly more to make up for lost time. Markets may take years to recover to pre-COVID trends, if they ever do.

US GDP Growth

*Estimate Source: US Bureau of Labor Statistics

Consumer sentiment hit its lowest point in April, falling to eight-year lows, but sentiment has slowly begun climbing once again as states reopen.

Given high unemployment levels, it’s unsurprising to see the suppressed sentiment. Spurred by the pandemic, many fear for their lives, their livelihoods, and their homes.

A natural reaction to economic fear is to reduce spending, which places further strain on the economy and causes more unemployment. Still, consumer sentiment remains higher than 2008-2011 levels. Consumers seem to see the light at the end of the tunnel, knowing that lockdowns will eventually end and regular business activity can return. •

Index of Consumer Sentiment

Source: University of Michigan

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Economy & Demand

Fuel Consumption Unsurprisingly, the economic decline had a profound impact on fuel demand and prices. The World Bank estimates that, historically, a 1% decrease in US GDP causes fuel prices to fall 13%, while a 1% downward change in Chinese GDP growth causes a 10% drop.

As the economy closed, planes were grounded, and public transport shut down. Global fuel consumption fell as low as 20% below pre-COVID levels, bottoming at 79.4 MMbpd in April.

Although demand is forecast to quickly return to 100 MMbpd in 2021, many question whether it will ever surpass pre-COVID levels and continue rising. Some have speculated that Peak Oil Demand will arrive before economic conditions recover, resulting in a permanent plateau for consumption.

Overall, demand is expected to decline by 8.1 MMbpd on average in 2020, bounding higher by 7.0 MMbpd in 2021.

World Liquid Fuels Consumption

Components of Annual Change

OECD nations, made up of 37 of the world’s largest economies, led the way down during the pandemic as they shed 4.7 MMbpd of demand, but it is nonOECD nations who will lead the recovery. The EIA expects that OECD countries will only increase 2021 demand by 3.0 MMbpd. By contrast, non-OECD countries lost 3.4 MMbpd, but will gain 4.0 MMbpd next year.

As economies develop, their energy intensity declines, and they diversify their energy feedstocks.

While highly developed economies decrease their dependence on oil, developing economies will see a growing middle class, who will buy cars and consume goods hauled from far away. While recovery seems like a distant future, countries will eventually begin to see progress, and developing countries will see a continued reduction in poverty.

The US’s fuel demand will fall in line with other OECD countries. In April, US fuel demand fell to just 14.7 MMbpd, its lowest level since the EIA began keeping records in 1990. After this sharp drop in overall liquid petroleum demand, the US will recover most, but not all, of its consumption.

Source: Energy Information Administration (EIA), Short-term Energy Outlook, July 2020

US Liquid Fuels Product Supplied (Consumption)

Components of Annual Change

Fuel demand will fall 2.1 MMbpd this year, while 1.6 MMbpd will return next year. Across the dominant fuel products – gasoline, diesel, and jet fuel – 2020 demand losses are expected to outpace 2021 gains.

While some products may continue recovering into 2022, they could instead plateau before declining in the future as alternative fuel sources (electricity, CNG, etc) gain popularity among transportation modes. • Source: Energy Information Administration (EIA), Short-Term Energy Outlook, May 2020

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F U N D A M E N TA L S

The second quarter of 2020 brought a good deal of volatility. The worst impacts of COVID-19 spanned the end of Q1 into Q2, meaning Q2 was a mixture of rapidly falling demand mixed with hints of recovery.

World Liquid Fuels Production and Consumption Balance

Globally, demand cratered in early Q2, but the situation steadily improved in May and June.

The EIA estimates that global demand bottomed in April at 79.4 MMbpd, 22% below December 2019 levels. In contrast, June saw estimated demand volumes of 89.5 MMbpd, and the outlook continues to improve into 2021.

On the flip-side of the equation, the historic OPEC+ supply agreement was not enough to prevent massive crude oil inventory builds in Q1 and Q2. Still, the long-term nature of the deal should steadily whittle down burgeoning storage tanks. With inventories so full, estimates show that floating crude storage swelled to 180 MMbbls in April, and refined products hit 75 MMbbls. Normalized prices have begun draining inventories, and IHS Markit estimates that “just” 150 MMbbls of crude and 50 MMbbls of refined products sat in global floating storage to end the quarter.

Source: Energy Information Administration (EIA), Short-Term Energy Outlook, July, 2020

Markets are a function of both supply and demand. Low demand would not be an issue if supplies immediately synced to lower levels. But falling demand far outpaced supply cuts in Q2, keeping heavy pressure on oil markets. The EIA estimates that the net inventory build in Q2 amounted to 7.9 MMbpd.

Adding in the previous quarter’s 5.5 MMbpd build, the total build in the first half of 2020 was roughly 1.2 billion barrels.

Drawing down those global inventories will take time, which is why virtually all market forecasts point to low oil prices for the foreseeable future, steadily climbing higher as normalized demand slowly drains inventories. • 16

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Fundamentals

Fuel Demand Fuel demand has been at the forefront of the petroleum markets’ focus for the past few months. Gasoline and jet fuel both saw demand nearly cut in half in April, while diesel saw roughly a 25% drop.

Gasoline demand rebounded near pre-COVID levels near the end of June, though the recovery is far from complete. Most summers see gasoline demand tiptoe around the 10 MMbpd level, while the highest demand rating in June 2020 came in at just 8.6 MMbpd.

Diesel saw demand turn higher early during the pandemic, as consumers rushed to stockpile essential goods ahead of potential lockdowns. While diesel did not experience the same huge drop seen by gasoline, its recovery

Petroleum Product Demand has also been less clear. Total diesel consumption has jumped up and down from week to week, making it harder to predict when normal demand will return.

Source: Energy Information Administration (EIA)

Jet fuel demand is a tricky factor that could stay suppressed for quite some time. While businesses can take necessary health precautions to get drivers back on the road, airlines have a more difficult task ahead. It’s hard to maintain social distancing when cramming passengers into small seats with little room between. As consumers opt for cheaper, close-to-home vacations and businesses adopt digital conferencing, jet fuel’s prospects may take years to reach normal – if they ever do. •

Inventories Even if the economy leaps forward and demand surges higher, the overhang of inventories will ensure prices remain low for the foreseeable future. In early June, crude inventories reached a record high level of 538 million barrels (MMbbls) on June 5, rising in subsequent weeks to set a new record high of 540.7 MMbbls.

The previous record came in March 2017, a seasonal peak before summer demand whittled down crude inventories. In contrast, this year’s peak occurs at a time when stocks would typically decline, suggesting it will take even longer to return to normal. Inventories are on track to end June roughly 30 MMbbls above the highest end of the five-year range.

Crude Stocks 5-Year Range

Source: Energy Information Administration (EIA)

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Fundamentals

Diesel Inventories 5-Yr Range

Fuel inventories followed a path similar to that of crude inventories, though different products moved out of sync at various parts of the quarter.

Diesel stocks, which entered Q2 below the five-year average, rocketed upwards with unprecedented speed during the quarter. From trough to peak, markets saw 53 million barrels—2.2 billion gallons—added within just a few weeks.

At the close of Q2, inventories were hovering close to their multi-year highs, struggling to wind down after such rapid gains. Inventories peaked in early June at 175 MMbbls, and they moved less than 1 MMbbl lower in subsequent weeks. In contrast, inventory levels in the second quarter are typically closer to 140 MMbbls.

Unlike diesel inventories, gasoline was already setting record-high levels to begin the year, but January’s peak was no match for April’s COVIDinduced gains. Well before diesel inventories swelled, gasoline rocketed up to a record high of 263.2 MMbbls. Gasoline hit its peak on April 17; in comparison, diesel inventories did not max out until June 5.

Source: Energy Information Administration (EIA)

Gasoline inventories are slowly moving towards normal, coming off the April record. By the end of the quarter, inventories were down to just 256 MMbbls. Still, stocks remain roughly 20 MMbbls above historically average June levels and likely will remain high for a long time. •

Gasoline Inventories 5-Yr Range

Source: Energy Information Administration (EIA)

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Fundamentals

Refinery Utilization

US Refinery Utilization

Source: Energy Information Administration (EIA)

Q2 Refinery Utilization by PADD

Markets are closely watching refinery utilization, both as an indicator of crude oil demand and as a gauge for fuel inventories. Fuel inventories struggled to wind down all the inventory gains experienced early in the quarter, and later falling inventories were only made possible by a steep cut in refinery activity.

Source: Energy Information Administration (EIA)

Refinery Net Production of Petroleum Products

If refiners had resumed their 90%-95% utilization rates typical of this time of year, fuel inventories would have gone screaming higher.

Falling below 70% utilization in April and May, refiners are slowly bringing activity back to normal, but production barely hit 75% by the end of Q2.

Across the country, different regions showed widely varying utilization rates. The East Coast (PADD 1) was by far the hardest hit by COVID-19, with Q2 refinery utilization falling to just 48%. In part, the closed PES refinery contributed to low utilization even before COVID hit. The West Coast, the first to close as the pandemic spread, also struggled with significantly dampened refinery usage.

Across all regions, utilization improved towards the end of the quarter.

For the last week of the quarter, two regions (the Midwest and Rocky Mountain regions) had rebounded by over ten percentage points.

The other three areas, however, are taking longer to bring production back online.

Refineries tend to be fairly consistent in the ratio of products they produce, though they do have some flexibility to increase output of one product while decreasing another. Extreme difference in gasoline, diesel, and jet demand forced refineries to test the limits of their ability to optimize output streams.

Source: Energy Information Administration (EIA)

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Because refiners modified their output ratios, falling utilization did not bring across-the-board drops in refined product output. While total gasoline and jet fuel output fell rapidly, total diesel production in the US actually rose above pre-COVID levels. This helps explain why diesel inventories rose so quickly, despite demand remaining strong in the early days of the crisis. •

© 2020 Mansfield Energy Corp

Fundamentals

Crude Production

US Rig Count

Extreme oil price volatility wreaked havoc on producers around the world, causing radical changes for oil production trends. In early April, OPEC+ agreed to historic 9.7 MMbpd production cuts, helping turn the tide for oil price direction.

But OPEC and their allies were not the only nations to reduce their output.

The impact on US producers cannot be overlooked. Oil rigs fell to record low levels in 2020, with combined oil and gas rigs hitting just 253 rigs to end Q2. That includes just 180 oil rigs and 71 natural gas rigs – compared to 1,600 oil rigs and over 350 natural gas rigs prior to the OPEC price war. While rigs never recovered from their 2015 highs, the combined total surpassed 1,000 rigs in late 2018 when prices were soaring.

COVID-19 decimated producers in US shale basins, particularly in the Permian Basin. In the Permian, the 500 rigs deployed in late 2018 were reduced to a meager 125 during the COVID crisis.

Incredibly low oil prices made drilling uneconomical, forcing producers to tap the breaks on new well completions.

Source: Baker Hughes

Crude Production vs. Rig Count

While rig counts fell by a staggering 75% from pre-COVID levels, production declined just 20% in the US. US crude production maxed out at 13.1 MMbpd in March but shrank back to 11.0 MMbpd. The drop reverses two years of hardearned production gains.

It’s important to remember that rig counts are merely a leading indicator of oil production. Rigs are used to drill new wells, not maintain existing wells. Most wells active before the COVID-19 pandemic continued operations, generally at a much lower cost per barrel than new wells.

Technological gains have also helped separate new wells drilled from oil production; rigs have been in decline since 2018, even as crude production climbed to new record highs.

Source: Baker Hughes and Energy Information Administration (EIA)

Ultimately, historically high production levels cannot continue with such paltry rig activity. Shale wells are well known for having poor longevity because their output declines rapidly over time.

A well producing a hundred barrels per day initially may produce only 50 barrels after a year.

Until the rig count rebounds, weekly production stats will continue declining slowly as active wells age. As always, watch rig counts as a leading indicator of future production, but don’t assume that more production will come immediately once rig counts rise. •

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Fundamentals

Hurricane Season After the twists and turns that 2020 has already brought for fuel markets, it seems like cruel irony that NOAA is calling for another above-average hurricane season. The government weather agency expects 13-19 named storms this season, including 3-6 major hurricanes. If the forecast proves true, 2020 will become the fifth consecutive year of “above-average” activity, making one question whether “average” will ever return.

The busy year follows 2019’s relatively calm hurricane season for the continental US. Last year saw 18 total storms, including three major storms. Hurricane Maria wreaked havoc on Puerto Rico and other Caribbean islands, and Hurricane Dorian was so strong that it scraped Canada. Yet virtually no major storms hit the continental US, making the year a breeze for most fuel suppliers.

For fleets that enjoyed last year’s calm, emergency planning in 2020 will be particularly important. Among the steps that fleets should take for this hurricane season:

1. Define your Emergency Fuel Plan Having a plan is critical to ensure that operations continue unaffected.

The plan should include emergency contact information for fuel suppliers, operational advisory for sites, and fuel ordering protocols.

2. Ensure Adequate Site Fuel Storage When a storm is on track, make sure sites have adequate fuel on-site.

Some companies divert fueling to retail stations or truck stops ahead of a storm to conserve.

This year, the season has already seen some early activity. Tropical Storm Cristobal became the earliest 3rd named storm on record when it formed in the Gulf of Mexico on June 1.

Typically, the third named storm does not form until August 13—two and a half months later.

3. Ensure At-Risk Tanks have Watertight Seal Caps Water contamination can be a huge challenge after the storm has passed. Validate that all at-risk tanks are sealed to prevent water from spilling into tanks. • Also read “Hurricane Watch—How Storms Disrupt Fuel Supply Chain.” by Noah Young, page 39.

2019-20 Hurricane Season

Source: NASA, National Hurricane Center

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© 2020 Mansfield Energy Corp

REGIONAL VIEWS Gabe Aucar, Senior Supply Manager See his bio, page 42

PADD 1A, B & C East Coast

Overview Cash markets appear to be getting stronger, and demand destruction in gasoline and diesel is recovering. Given where future months are pricing, the market seems to be anticipating more strength in both price and demand for the 3rd quarter. The amount of under- or oversupply in both Gulf Coast and NY Harbor markets will depend on the continuation of the demand recovery and how quickly refiners can bring back refinery utilization to meet that increase in demand.

Unfortunately, refiners are currently bleeding cash; certain refiners have even closed their doors. Additionally, the 3:2:1 crack for the GC and NY are at all-time lows. The 3:2:1 crack spread approximates the product yield at a typical US refinery: for every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel. If the crack is low, then refineries don’t make money. If low crack spreads persist, markets may even see a supply crunch once demand works through all the excess barrels currently in storage. •

Regional 3:2:1 Crack Spreads

Source: CME Group

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Contango Prompts Utilization of In-Pipe Storage A shortage of storage space and a deepening contango has encouraged New York Harbor gasoline traders to treat the Colonial Pipeline as storage. When prices are in a contango structure, in which future prices are higher than current prices, traders have an incentive to put fuel into storage and wait for higher future prices. A sharp fall in demand on the Atlantic coast followed the wide-spread COVID-19 stay-at-home orders. As a result, New York Harbor RBOB (gasoline) prices hit their lowest level since 2003.

Prompt market lows helped shift the forward curve into a contango for the next six months, incentivizing fuel storage into winter 2020. Instead of delivering product off the pipeline into tank farms at normal delivery points in the NYH area, some shippers are electing to leave fuel in the pipe, rendering the pipe as storage. Colonial Pipeline cycles scheduled for delivery into New York Harbor are still carrying the maximum amount of Gulf Coast gasoline to points as far north as Greensboro, North Carolina — but no further. To combat this approach, the Colonial Pipeline has warned shippers to ensure fuel deliveries and instituted demurrage fees for non-deliveries. •

New Fees Force Shippers to Make Tough Decision The Colonial Pipeline added new fees including a demurrage of 25¢ per barrel, per day for barrels with no assigned destination, starting three days ahead of arrival. Shippers will lose future shipping rights on the pipeline if they do not pay the fees within fifteen days. Colonial instituted these fees in response to rising inventory levels at terminals along the pipeline. The company ultimately loses revenue from pipeline rates (known as tariffs) if the flow rate must be slowed to accommodate stranded barrels. They have held auctions on those barrels, and until now, the volumes have been insignificant.

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Stranded barrels occur when shippers send fuel along the Colonial Pipeline speculatively and are unable to sell it before it arrives. Auctions of excess fuel are rare, as temporary storage exists at terminals along the pipeline and demand is generally high enough to keep fuel moving out of storage. But as temporary storage inventories rise and demand uncertainty increases, both the pipeline and its customers face mounting pressure.

Shippers may decide to risk those new tariffs as the glut of diesel in the Gulf Coast balloons without better

© 2020 Mansfield Energy Corp

domestic arbitrage economics. As travel restrictions stemming from the COVID-19 pandemic rapidly diminished gasoline and jet fuel demand beginning in early March, refineries focused on maximizing diesel output. A wide arbitrage to ship diesel to the Atlantic Coast throughout most of March and April led to heavy movement of diesel from the Gulf Coast towards the Colonial Pipeline’s end in Linden, New Jersey. After the pipeline became full (“allocated”), more expensive maritime Jones Act vessels were temporarily engaged in April to move excess diesel from the Gulf Coast to the Atlantic Coast. •

Regional Views

Rising Gasoline Imports in NYH After being cut in half during April and May, Atlantic Coast gasoline imports returned to normal in the latter half of Q2.

Most of these imports came from India rather than Europe, which is typically the largest arbitrage shipper of gasoline to New York Harbor.

pace of demand recovery, it could take months to work through all the fuel in floating storage as well as in onshore tanks. Despite three consecutive weeks of draws, New York Harbor gasoline stocks were still 21.6% above year-ago levels. If overall demand expectations remain low, refinery run cuts will likely continue, and the New York Harbor market may not be able to sustain current import levels. •

Approximately 2 million barrels of Indian blending components arrived in New York throughout May, dwarfing the 350,000 barrels that arrived in April. These Indian cargoes include gasoline and alkylate and originate from Sikka, India, where private-sector refiner Reliance operates the exportoriented 1.36 million barrel per day Jamnagar refinery.

Reliance was one of the few Indian refiners that did not cut production in March.

PADD 1 Gasoline Imports

Brazil also ramped up exports to New York Harbor. Brazilian state-owned Petrobras raised refinery runs to around 66% in mid-May, up from 52% in mid-April. Petrobras has been steadily raising refinery runs to produce more LPG and, in the process, more gasoline. This has increased exports from the country, with some product aimed at New York.

While gasoline consumption continues to trend higher from April's low, the overall demand drop could cap the rebound in incoming cargos as storage levels remain high. At the current

Source: Energy Information Administration (EIA)

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Regional Views

Dan Luther, Director, Supply Optimization See his bio, page 42

PADD 2 Midwest

Overview While negative WTI crude oil grabbed headlines during the second quarter, there were plenty of staggering refined product settlements in PADD 2. However, those eye-popping lows seem a thing of the past as midcontinent cash values followed futures higher and basis strengthened.

On the diesel front, the rebound in demand continues to lag. Additionally, the plummet in jet fuel demand could push excess jet refinery production into the ULSD pool, leading to more supply. But refinery cutbacks on poor production margins may be enough to keep days of supply down and regional basis from plunging.

Gas demand showed increasing strength to end the quarter with liftings in the Midwest reportedly up 45% from the COVID-19 low point at the beginning of April.

For the third quarter, expect strong midcontinent refined product prices, relative to NYMEX futures, barring any “second wave” COVID-19 concerns. •

Midwest Refined Products Can’t Escape the Corona-crisis The story in the Midwest was no different from the rest of the country as COVID-19 shelter-in-place restrictions rocked fuel demand. What is unique for refiners in the central part of the country is the limited outlets for fuel compared to other parts of the U.S., particularly those with waterborne access.

Consequently, stranded Midwest refined products caused days of supply to balloon and prices to plummet as producers scrambled to correct the imbalance.

Gasoline consumption was precipitously hit, with many retailers reporting 50% demand destruction vs pre-pandemic levels. Implied gasoline demand fell to lows not seen since the 1960’s. As a result, in April, the EIA reported PADD 2 total gasoline stocks breached 60 million barrels; April inventory levels have not exceeded that threshold since the early 1990’s.

Days of supply as measured by liftings on the Magellan Central Pipeline system reached a historic high of nearly 65 days in mid-April. For perspective, the recent five-year seasonal high for this period was roughly 42 days in 2018. •

Midwest Fuel Markets Reach Record Low Prices

Upper Great Plains CBOB Statewide Average Low Rack

Not surprisingly, as gasoline days of supply marched higher, regional pricing headed lower.

In early April, wholesale trading of CBOB in the Chicago market saw an all-time low below 17 cents per gallon, while Group 3 regular gas settled just below 20 cents per gallon. In both instances, the settlements represented all-time lows since reporting services began tracking these products.

Gasoline pricing at local terminal racks followed suit as buyers saw values not seen since before the Arab Oil Embargo of the 1970’s. At the nadir, regular gas could be bought in certain North Dakota markets for less than a dime, while sub-25 cpg pricing was common across the Great Lakes and Great Plains. •

Source: Oil Price Information Service (OPIS)

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Regional Views

Midcon Diesel Inventories Rise Midcontinent diesel demand wasn’t hit as abruptly as gasoline, but a consistent decrease lingered through much of Q2, causing supply to exceed demand. PADD 2 diesel stocks rose steadily from mid-April through the end of the quarter to far exceed the 5-year max inventory level.

PADD 2 Stocks of Distillate Fuel Oil

Source: Energy Information Administration (EIA)

Days of supply, as measured on the Magellan Central System, were in the normal five-year range for much of the quarter until breaking higher in late May. At the end of that month, they hit a high of 61 days of supply after ending April around 30 days of supply.

Extremely high days of supply led to depressed values with wholesale Chicago ULSD dropping below 50 cents per gallon and Group 3 ULSD dipping to a low of around 60 cents. In late March, Chicago diesel traded more than 30 cents below front month NYMEX ULSD futures, illustrating the oversupply in the region.

2020 Midcon Wholesale Diesel Pricing

Enbridge Pipeline Shuts Source: Oil Price Information Service (OPIS)

Incentivized by the extreme contango of the forward curve, barrels moved into storage, further adding to inventory levels. Into April, many refiners reduced output, some by 40% or more, to match the demand drop. This eventually stabilized prices and reduced the supply overhang at many local terminal markets.

As travel restrictions and lockdowns eased, pricing for both gasoline and diesel in the Midwest followed respective NYMEX prices higher to end the quarter. •

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Enbridge Pipeline’s crude line from Canada into Michigan was ordered to shut due to integrity concerns affecting an underwater portion of the line that runs from the Michigan Upper Peninsula into the rest of the state. This pipeline is a big supplier of crude to Marathon’s Detroit refinery and both Toledo refineries (PBF and BP/Husky). A large majority of crude at those refineries are fed by the Enbridge line, meaning supplies could come under sharp pressure in Q3.

Detroit and Toledo will be the hardest hit markets, but parts of Eastern/Central Michigan and Ohio will be impacted as well. As economic demand, and resulting fuel demand, rise in these areas, local supplies could be affected. Late in the quarter, a judge ruled that one segment of the pipeline could reopen, but the other half of the 540-kbpd pipeline must remain closed. •

© 2020 Mansfield Energy Corp

Regional Views

Matthew Smith, Manager, Supply Optimization See his bio, page 42

PADD 3 Gulf Coast

Overview After the rapid decrease in Gulf Coast origin cash numbers in late Q1, Gulf Coast diesel found a bottom in late April with a steady strengthening week over week even amongst declining demand. Despite the one-two punch of COVID-19’s impact on demand and the lower crude valuation due to the Saudi Arabia/Russia price war, PADD 3 refiners adjusted refinery utilization to minimize the risk of over-supply.

Looking ahead as the United States and other parts of the world re-open their economies, keep watch as fluctuating export and import capacity in PADD 3 upset the balance of local supply and consumption. Large changes in cargoes coming and going could cause a volatile basis value. For this reason, I’m bullish on Gulf Coast basis going into Q3. Did I mention it’s also hurricane season? •

PADD 3 Refinery Utilization If you’re a Procurement Manager responsible for the annual vehicle purchasing from companies like Chevrolet, Ford or Toyota, one variable you might consider is the utilization of the manufacturing line. If manufacturing utilization dips from 95% to 70%, you might be bullish forward vehicle pricing and instead explore options to mitigate the potential price increase.

Looking ahead to Q3, watch refinery utilization in relation to demand. Will these two metrics grow at the same rate? If refining utilization lags, we have a large buffer of fuel inventories to consume until refineries catch up. •

PADD 3 Refinery Utilization

Refinery utilization is a similar measurement of refined product production that impacts regional and local markets. The higher it operates, the more refined product is being pushed in the marketplace (local or global). As PADD 3 is the largest US refinery base, refinery utilization is a leading indicator of potential supply/demand imbalances in future days. Variances to five-year average, low and high, often impact which way NYMEX trades.

In the historic Q2 of 2020, PADD 3’s refinery utilization nosedived to an average of 70%, well below the five-year average of 92%. One might assume higher prices are in the future with less output of refined products. As Leo Corso would say, “Not so fast my friend.” A perfect storm of demand impact led by COVID19 and the crude oil gluttony started by OPEC members Russia and Saudi Arabia required refineries to generate less output with shrinking demand consumption numbers.

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Source: Energy Information Administration (EIA)

© 2020 Mansfield Energy Corp

Regional Views

Nate Kovacevich, Senior Supply Manager See his bio, page 42

PADD 4 Rocky Mountain

Overview While gasoline demand recovered nicely in early June, diesel demand remained relatively stagnant; businesses have taken a little bit longer to get back to pre-COVID levels.

Gasoline demand appears to be making a V-shaped recovery, whereas diesel is appears more U-shaped as demand has gone sideways. Diesel demand should pick up when more states are able to reopen. •

Gasoline Pump Prices Higher on Stronger Demand, Reduced Supplies Gasoline prices in the Mountain region moved decidedly higher in May as PADD 4 refineries ran at 70% capacity and inventories switched over from winter-grade to LRVP. Furthermore, an uptick in gasoline demand occurred as economies throughout the region started to re-open. Gasoline consumers who had spent the better half of March and April sheltering in place decided to stretch their legs and get in their cars to visit the natural beauty of the Rockies. A combination of reduced supplies and increased demand caused gasoline prices in PADD 4 to outpace the rest of the country. •

HollyFrontier Plans to Convert Cheyenne Refinery to Renewable Diesel Plant One of the bigger refining players in the Mountain region has decided to convert its lone PADD 4 refining asset located in Cheyenne, Wyoming into a renewable diesel plant. The move is expected to commence in July 2020, with the plant being finished at some point during the first half of 2022.

The nation’s growing appetite for renewable diesel, especially in California which has a number of renewable energy incentive programs, creates an opportunity for HollyFrontier to tap into this demand. The uncertainty surrounding coronavirus, as well as the company’s loss of a federal exemption for biofuel blends, factored into the company’s decision to change course with the 52,000 bpd Cheyenne refinery.

HollyFrontier expects to spend $125-$175 million to repurpose the refinery into a plant that can produce 90 million gallons of renewable diesel each year. The announcement, as well as the July start date for the conversion process, was a surprise to the marketplace. The loss of fuel output should keep prices elevated throughout the summer, until the marketplace figures out a way to backfill that supply in the future. • 30

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Regional Views

Brent Fergeson Supply Director See his bio, page 42

PADD 5 West Coast

Overview

In the last edition of FN360°, we talked about how the first two months of 2020 started out with volatile pricing.

However, the volatility was to the upside, and we witnessed prices spike. An LA area refinery fire, several turnarounds up and down the West Coast, and a switch to low RVP gasoline contributed to the turmoil.

supplied market and record setting demand destruction at the same time. The result was a negative gasoline crack spread and LA gasoline spot prices that went below $.50/gallon in April. •

Since then, we have witnessed several unplanned and unprecedented events that have reversed the direction of West Coast refined fuel prices. The OPEC+ supply war and the onset of the COVID-19 pandemic caused an over

CARBOB Gasoline Crack

CARB ULSD Crack

Source: U.S. Energy Information Administration, (EIA)

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Regional Views

PADD 5 Gasoline Stocks Resilient Despite Low Demand

PADD 5 Gasoline Inventories 2012-19 Range & Average

Gasoline took the worst of the damage as California declared a shelter in place mandate on March 19th, shutting down much of the business-driven economy throughout the state.

The result has been 4.7 million unemployment claims and a sizable decrease in daily commuter traffic. The retail gasoline sector reported as much as a 55% drop in gasoline demand since California’s March 19th shelter in place order.

PADD 5 total gasoline stocks had been falling during the first part of the year but leveled off in late May after a large spike earlier in the month. Refineries started pulling back utilization rates in response to the weak demand. Utilization fell below the 60% mark, compared to typical rates in the 92% to 95% range heading into peak driving season. This reduction has allowed for gasoline inventories to avoid what otherwise could have been sizeable inventory builds and levels.

Source: U.S. Energy Information Administration, (EIA)

LA CARB Gasoline vs. NYMEX RBOB

LA cash gasoline prices dropped below 35 cents per gallon in early April before climbing back up above $1.20 in June. •

Source: U.S. Oil Price Information Service (OPIS)

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Regional Views

PADD 5 Distillate Inventories 2012-19 Range & Average

Source: U.S. Energy Information Administration, (EIA)

LA CARB Diesel vs. NYMEX ULSD

PADD 5 Diesel Trends PADD 5 total distillate stocks have been steadily inching up since April. Total PADD 5 distillate inventories climbed to near all-time highs of 15 MMbbls in late April before pulling back and are still just above 14 MMbbls, 2 MMbbls more than this time last year. Diesel demand initially spiked in early April due to panic buying in the retail sector along with a dramatic increase in demand for medical supplies throughout the West.

A consistent pullback in refinery production has contributed to more stable diesel inventory levels. Markets witnessed LA cash prices steadily climbing from the 60 cent lows in late April back up above $1.10 per gallon. Netbacks still look weak for the Bay Area, where they have been negative for much of the last few months. LA-area netbacks have been hit or miss depending on the city. •

Source: U.S. Oil Price Information Service (OPIS)

Pacific Northwest Basis Levels

Pacific Northwest Price Trends The PNW has witnessed cash prices closely tied to the LA and Bay Area levels. EPA ULSD cash prices reached a low just above 60 cents per gallon in late April before climbing back above a dollar in late May. Diesel basis levels remained weak through most of April but improved significantly throughout May. PNW cash gasoline weekly average prices dropped into the low 40 cent range before climbing back into the $1.28 range in early June. Gasoline basis went into negative values in late March and remained that way through most of April, before making a strong comeback in May into positive territory. •

Source: U.S. Oil Price Information Service (OPIS)

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A LT E R N AT I V E F U E L S Sara Bonario, Supply Director See her bio, page 42

RENEWABLES

Renewable Diesel Is Here to Stay!

Renewable diesel is a drop-in replacement for petroleum diesel, composed of hydrocarbon chains that are indistinguishable from petroleum diesel. For this reason, renewable diesel can be blended with petroleum diesel without limitation and can be stored and transported in the same infrastructure and equipment as petroleum diesel without any modification. Renewable diesel is 100% renewable, sustainable, and suitable for all weather conditions.

Renewable diesel production capacity in the United States is set to more than double in 2020 and continue growing by more than 600% by the end of 2024.

US Renewable Diesel Capacity Growth

Source: ADI-Analytics

Projects currently underway include expanding a facility in Paramount, California and bringing Marathon’s Dickinson, ND facility online.

The latter facility is a retrofitted refinery converted to produce renewable diesel and should transport its first gallons by rail into California by Q4 2020.

Location

Company

Capacity (kbpd)

Start Year

Paramount, CA

World Energy

20

2020

Dickinson, ND

Marathon Petroleum

12

2020

Las Vegas, NV

Ryze Renewables & Phillips 66

8

2020

Hull, IA

ReadiFuels

2

2020

Port Westward, OR

NEXT Renewable Fuels

39

2021

Norco, LA

Diamond Green Diesel (expansion)

26

2021

Reno, NV

Ryze Renewables & Phillips 66

4

2021

Artesia, NM

HollyFrontier

8

2022

Port Arthur, TX

Diamond Green Diesel (proposed)

26

2024

Total

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Alternative Fuels Holly Frontier announced on June 1, 2020 that it will convert the Cheyenne, Wyoming refinery from a petroleum refinery into a 100% renewable fuel production facility. The repurposed plant is scheduled to come online in 2022 and will produce up to 90 million gallons per year.

Even with this level of investment over the next four years, demand in California alone may exceed the available capacity, in part due to aggressive greenhouse gas reduction targets established by the state of California.

According to research conducted by the California Air Resource Board (CARB), the carbon intensity (CI) of renewable diesel ranges from 50%-85% lower than baseline diesel fuel. CI describes GHG emissions per unit of energy and is measured in grams of carbon dioxide (CO2) equivalent emissions per megajoule of energy (gCO2e/MJ). Carbon intensities vary based on the combination of feedstocks used to produce the fuel. The most common feedstocks for renewable fuels are plant and animal fats.

Additional quality benefits of renewable diesel include the reduction of particulate matter and carbon monoxide emissions by 25% and 5%, respectively.

The per-gallon cost to produce a renewable diesel gallon is more expensive than traditional petroleum-based diesel fuel, yet adoption has been supported by cost offsets made available through the California Low Carbon Fuel Standard (LCFS) and the federal Renewable Fuel Standard (RFS).

Consumer interest in the product was echoed

by CEO Mike Jennings in the HollyFrontier announcement: “Demand for renewable diesel, as well as other lower carbon fuels, is growing and taking market share based on both consumer preferences and support from substantial federal and state government incentive programs.”

Early adoption of renewable diesel as an environmentally-friendly transportation fuel began in 2015 when heavy-duty fuel users such as UPS announced plans to increase

consumption. Adoption was made possible through extensive testing by all major original equipment manufacturers (OEM) of diesel engines who subsequently approved the use of Renewable Diesel. Renewable diesel may be used in most diesel engines without modification.

Based on the environmental benefits of renewable diesel as well as significant industry adoption and regulatory support, renewable diesel is here to stay. •

Biofuel Benefits • Environmentally sustainable solution • Drop-in replacement for petroleum-based fuel • Compatible with current fuel equipment • Complies with engine warranties • Year-round performance

Transportation Carbon Emissions Legislation in North America

Source: RBN Energy

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Alternative Fuels

Martin Trotter, Pricing & Structuring Analyst See his bio, page 42

NATURAL GAS

Natural Gas Demand After projecting growing natural gas consumption through the first half of 2020, multiple outlooks are beginning to reverse course and instead forecast declines through the end of the year.

buildings that create heating demand have been vacant or operating at vastly reduced capacity for months.

The virtual standstill caused by COVID-19 resulted in immediate halts in the industrial and commercial sectors and have left many businesses working to solidify new business practices and strategies. High traffic

The forced demand destruction comes on the heels of a warmer-than-average first quarter, which had already quelled weather-driven load usage and reduced residential and commercial usage.

Additionally, industrial consumption threatens to reach its lowest level since 2009, projecting more than a 15% reduction in Q3.

US Natural Gas Consumption by Sector (2016–2020)

Adding to the demand destruction are the cancellations of LNG cargoes. These cancellations come amid the continuation of high European storage levels and a slow demand recovery across Europe and Asia. LNG exports have fallen from a high of 9.5 Bcf/d this winter to just 3.2 Bcf/d today. • Source: U.S. Energy Information Administration, (EIA) Short-Term Energy Outlook (STEO), May 2020

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Alternative Fuels

Supply Natural gas production in the U.S. hit an all-time high this year at over 96 Bcf/d. But with March’s crude oil price crash hitting the E&P sector hard, capital spending is being drastically reduced, and drilling plans have gone to the wayside. The Energy Information Administration’s recent ShortTerm Energy Outlook projects natural gas production to drop by the fastest pace ever in 2021, poised to fall by 4.4%. This decline would be the largest annual retreat since 1998 and would be the first annual production decline since 2016.

US Marketed Natural Gas Production

It remains too early to determine potential fallout from the market shock in early March surrounding both the Coronavirus and the oil price standoff waged between Russia and Saudi Arabia. •

Components of Annual Change

Source: U.S. Energy Information Administration, (EIA) Short-Term Energy Outlook (STEO), June 2020

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Alternative Fuels

Storage

Monthly Withdrawals of Working Natural Gas in Underground Storage

Burgeoning natural gas production during 2019, an unseasonably warm winter season, and the pandemic-related economic and operational slow down left more than 2 Tcf of gas in storage at the end of the withdrawal season. This is nearly 20% higher than the previous 5-year average.

Heating degree days, a calculation indicating demand, was nearly 10% less than the 30-year normal. Low demand was supported by an unseasonably warm winter, including the fifth warmest January on record.

Many are forecasting an injection of over 2 Tcf by October 31, resulting in a record storage level going into the 2020-2021 withdrawal season. •

Source: U.S. Energy Information Administration, Natural Gas Pipelines Projects Tracker Source: U.S. Energy Information(EIA), Administration, (EIA), Weekly Natural Gas Storage Report

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VIEWPOINTS

By Noah Young, Corporate Marketing Intern

Hurricane Watch— How Storms Disrupt Fuel Supply Chains

When a natural disaster or emergency occurs, local fuel supply may be cut off or severely limited. Fuel prices skyrocket, and lines form at retail stations for hours on end. All too often, fleets run into these situations with little preparation, causing operational panic. Yet with the proper preparation, fleets can navigate emergency fuel situations with ease.

Companies depend on the reliability of vehicles and equipment, and disrupted fuel supply puts them at risk of disrupted operations. For this reason, it is imperative to be prepared for hurricanes before they make landfall. By analyzing past storms’ destruction, understanding the hurricane’s path, and knowing how fuel behaves during disasters, companies can better prepare for natural disasters that directly affect the oil industry.

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A Look at the Past

While it is almost impossible to precisely determine the market’s reaction to a storm that makes landfall in the United States, evaluating previous supply disruptions is instructive and can inform the reaction taken during hurricane season. Hurricane Katrina, Hurricane Rita, and Superstorm Sandy can be used to identify different market trends.

Viewpoints

Hurricane Katrina When Katrina hit the United States on August 29, 2005, oil production in the Gulf Coast was reduced by more than 88%, and almost 10% of the nation’s refining capabilities and infrastructure were taken offline.

For several weeks, both the Colonial and Plantation pipelines were inoperable. Disruptions caused widespread fear among the owners of both wholesale terminals and storage facilities.

As a result of shut down infrastructure, limited fuel supply, and continued demand, Katrina caused wholesale prices to skyrocket. In some areas, fuel prices rocketed upwards by nearly $1/gal overnight.

The surge forced fuel stations to increase their retail prices.

Hurricane Rita A month after Katrina hit, operations remained shuttered. Against this backdrop, on September 23, 2005, Hurricane Rita hit land. This back-toback strike is a salient reminder that no one knows exactly when and where the next hurricane will occur. Rita proved devasting for the recovering energy industry, as about 5% of the nation’s refining capabilities were still shut down during this time. Once Rita made landfall, it hindered an additional 10% of the refining capabilities in America, further delaying recovery time.

One unlikely benefit resulting from Katrina’s aftermath was that the market was somewhat protected by higher-than-average product inventories in storage. Demand fell more quickly than supply, resulting in excess capacity. This provided some time for many refineries in the Gulf to slowly come back online. While some of the refineries regained previous operational measures, wholesale prices nationwide continued to skyrocket to 9.5%, and NACS (National Association of Convenient Stores) reported that retail prices followed with an increase of 4.5%.

Superstorm Sandy Superstorm Sandy, although not a hurricane, showed just how devasting any storm can be when it hit the East Coast in October 2012.

The power of the storm left 8.3 million people without electricity, forced refineries to shut down, closed both the Buckeye and Colonial pipelines, destroyed fuel terminals, and forced New York Harbor to close. Delivery

Measuring Hurricane’s Impacts

While there are many factors that come into play when the oil industry is affected by a storm, the three most pressing factors are the storm’s strength, path, and speed. Those three factors, in different configurations, can present vastly different scenarios for oil markets.

Take away any one factor, and a catastrophe can turn into a near miss.

Strength A storm’s strength is the most well-known factor. Cyclones are categorized from 1-5 on their wind speed and destructive power. Most of the time, a weak storm will quickly be forgotten, though some exceptions exist. Hurricane Matthew in 2016 weakened from a Category 5 to a Category 2 before nearing the Carolina coastline, yet its slow movement and heavy rainfalls caused extensive flooding that took weeks to clear.

Path Like strength, a storm’s path is usually the center of attention. Dozens of forecasts attempt to predict a storm’s eventual path, with varying degrees of accuracy. No matter how strong a storm becomes, few will remember the ones that never make landfall. Often, storms spin off to sea of their own accord, causing only minor disruptions to maritime 40

of fuel became all but impossible. The destruction was so vast, the government was forced to withdraw 2 million gallons of diesel from the Northeast Home Heating Oil Reserve, the first withdrawal since its creation in 2000.

Sandy had a markedly different effect on the oil market compared to that of the two major Gulf storms (Katrina and Rita). Sandy completely shut down supply points and made fuel deliveries impossible. NACS notes that the disruption to the energy industry caused by Superstorm Sandy decreased demand enough to help offset inflationary pressure, unlike the previous Gulf storms. OPIS reported that the Northeastern United States began to see a steady decline in retail prices from $3.898 at the end of September to around $3.603 by the end of the November.

When examining the trends of past storms, especially those of Katrina, Rita, and Sandy, it is helpful to notice the differing reactions of the market. Understanding market behavior as it relates to these emergencies plays an important part in determining how to react when a natural disaster strikes.

shipping. In 2019, several major storms skirted away from the US, minimizing their effect on fueling infrastructure.

Speed One of the most important factors is also less common to hear about—speed. Fast-moving storms tend to wreak less havoc, blowing through an area in a matter of hours and allowing recovery to begin quickly. Conversely, some storms meander along, stalling in one area while pummeling with heavy winds and torrential rain for days at a time. A Category 2 storm that hovers in one place for days can cause more pain than a Category 4 storm that rushes inland.

One hurricane that demonstrates the perfect storm (pun intended) of these three factors was Hurricane Harvey in 2017.

The storm began by wreaking havoc on Gulf Coast oil production.

The EIA reports that 66% of Gulf Coast crude oil and 42% of Gulf nat gas is produced in the Mississippi Canyon and Green Canyon areas, which are off the southeast coast of Louisiana. Unfortunately for the industry, this is exactly where Harvey began its destructive path.

As the storm passed through the Gulf, roughly 20% of the area’s production was forced offline, equivalent to about 430 kbpd.

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Viewpoints Offshore oil rigs are resilient, however, and within days of passing, production was brought back online.

The storm continued on to hit Houston, TX, a hotbed of refining capacity. Traveling incredibly slowly, Harvey stalled over Texas for days with its Category 3 winds and heavy rainfalls. Ultimately, the rainfalls – not the strong winds – proved to be the most damaging factor. At some places, over 60 inches of rain were dropped.

Rampant flooding forced refineries to close. Roughly 2.2 million barrels per day— almost 100 million gallons a day—were taken offline. The Colonial Pipeline, though not damaged, was forced to shut as refiners could not supply enough fuel to maintain operations. The situation extended for weeks throughout the entire Southeast before normalizing.

While any storm can affect the fuel industry, its strength, path, and speed are very important. Hurricane Harvey was a worst-case scenario—a strong storm that slowly meandered over a major infrastructure hub.

Fuel Trends During Hurricanes

To adequately prepare, it’s important to understand how fuel behaves during a hurricane. During natural disasters, first responders and major equipment such as generators must continue to provide their services.

These services often require fuel, increasing some businesses’ demand for oil. As demand rises before the storm, prices may increase as well.

During the actual hurricane or storm, fuel demand tends to decline because most fuel consumers evacuate or shelter in place. Emergency services and other large pieces of equipment make up just a small percentage of fuel consumption, so fuel demand typically moves lower overall once the storm hits. Depending on how destructive the storm is, demand can remain low after the storm until normal economic activity resumes, yet there is also potential for fuel infrastructure damage that increase prices.

During storms, governments often act to alleviate hardships. For fuel markets, the government has a few levers to assist markets. If oil production is severely affected or demand rises too quickly, the federal government may release oil from the Strategic Petroleum Reserve to provide short-term relief. FEMA, of course, is a key resource for all during a hurricane, clearing areas to enable critical infrastructure like power and refining to resume. Operationally, the EPA often waives gasoline formulation requirements to ensure ample product availability, while the FMCSA waives hours of service requirements that constrain fuel truck capacity.

This results in partial deliveries and retains, which strain carrier capacity.

The uptick in orders also causes longer lines at fuel terminals, slowing all deliveries even if every other step goes smoothly. Panic buying can extend short-term issues, slowing down recoveries by making every order more difficult.

Natural disasters have cost billions of dollars in damage to the infrastructure of the Gulf and Atlantic Coast, resulting in major problems for Americans and businesses across the country.

When storms land in the United States, the energy market takes a large hit. But this does not have to be the case for your company.

Predicting storm behavior using past disasters as examples; analyzing hurricane strength, direction, and speed; and looking at fuel behavior all play a large role in reducing the risk to the energy sector. Implementing the correct fuel supply risk management program can lead to seamless business operations during a disaster and allow a quick turnaround when the clouds part. •

Panic buying is often a severe problem during hurricanes. Sites impulsively order fuel for their site, even when they have full tanks.

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© 2020 Mansfield Energy Corp

Noah Young Corporate Marketing Intern Noah joined Mansfield’s Corporate Marketing team as an intern, tackling customer solutions analyses and several market research projects. He has spent past summers working in Mansfield’s Supply Department on data analysis and supply optimization. Noah is a senior at Baylor University, where he is studying Business Marketing.

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Mansfield 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 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

Sara Bonario

Senior VP of Supply & Distribution

Supply Director

Andy heads the supply group for Mansfield. During his tenure, the company has grown from 1.3 billion gallons to over 3 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. •

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. Sara has an MBA in logistics and finance from Ohio State University. •

Alan Apthorp Corporate Marketing Manager Alan Apthorp leads Mansfield's Corporate Marketing Team and is the lead writer and editor of Mansfield’s FUELSNews publication. Prior to his marketing role, Alan served as Chief of Staff, providing Mansfield's leadership team with insights on market trends and conducting industry analysis to inform business strategies. •

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. •

Dan Luther Director, Supply Optimization Dan manages Mansfield’s Great Lakes and Northeast fuel procurement teams with responsibilities for supply contract negotiations, bulk inventory purchases, and hedging. Dan holds an MBA from Georgia Tech University and a BSBA in Supply Chain Management and Marketing from Ohio State. He has over 13 years’ experience in the energy industry. •

Brent Fergeson Supply Director Brent has a long history with the oil industry, working for a small energy trading startup, Merchant Energy Group of America, SC Fuels and most recently a 15 year career at IPC (USA), where he was an original founding member. Brent and the team grew IPC to a billion gallon/year company before selling it to TAC Energy earlier this year. •

Gabe Aucar Senior Supply Manager Gabe manages Mansfield’s southeast fuel procurement team with responsibilities for supply contract negotiations as well as providing trading and business development expertise. Gabe holds an MBA from Pace University and has over 12 years’ experience in the energy industry. •

Matthew Smith Manager, Supply Optimization Matthew manages Mansfield’s Gulf Coast fuel procurement team with responsibilities for supply contract negotiations, bulk inventory purchases and hedging. He also manages Mansfield’s Pricing and Data Team’s responsible for various buy side formulas and data insight. Prior to his current role, he served in various Supply and Carrier Relations positions nationwide. Matthew holds a BBA from Georgia State University in Atlanta, GA. •

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© 2020 Mansfield Energy Corp

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. •

* 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 2020. 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.

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