FUELSNews 360° - Q4 2019 Market Report by FUELSNews

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M A R K E T

N E W S

I N F O R M A T I O N

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Table of Contents FUELSNews 360° Quarterly Report Q4 2019 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.

Executive Summary

Regional Views continued

Overview

October through December 2019

Fuel Price Overview

Rack-to-Retail Spreads

Gabe Aucar

US Economic Data

Consumption & Demand

27 28

Crude Inventories

Product Inventories

The Future of US Production

US Energy Security— But Not Independence

Currency Boosts Oil Prices

Alternative Fuels 29

Renewables Sara Bonario

Natural Gas Supply, Demand, Storage Martin Trotter

Viewpoints 32

How Technology is Altering the Logistics Industry Nikki Booth

Regional Views 22

Canada Nate Kovacevich

Reﬁneries Experience Slowdown

PADD 5 West Coast Sara Bonario

Fundamentals

PADD 4 Rocky Mountain Nate Kovacevich

Economy & Demand 13

PADD 2 Midwest Dan Luther

26 12

PADD 1C Lower East Coast PADD 3 Gulf Coast

PADD 1A & B East Coast Dan Luther

FUELSNews 360˚ National Supply Team Contributors

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Q4 2019 Executive Summary

Q4 Market Recap The final quarter of the decade saw oil prices move higher, yet markets failed to move significantly away from the $50$60 range in which oil has traded throughout 2019. The lack of price volatility came despite the best efforts of geopolitical actors. Q4 brought a continuation of the international drama which has populated headlines, ranging from trade wars and recession forecasts to missile strikes in the Middle East. Although OPEC’s supply cut agreement has successfully kept a floor under the market, economic concerns have weighed heavily. At the forefront of these concerns has been the US-China trade war, which cast a shadow over market participants. Although a Phase One truce in December inspired optimism, the broader array of economic indicators continue to suggest a recession may come within the next two years. For more economic analysis, turn to the Economy and Demand section on page 12. Weak demand has oil inventories well above historical levels, with US crude inventories 100 million barrels higher today than in 2011-2014. Despite OPEC’s best efforts, rising American production has overwhelmed global supply chains. How long can US producers maintain such rapid expansion? FUELSNews tackles this question on page 18. Future Market Forecast With a view ahead to 2020, supply and demand fundamentals will be pivotal. On the supply front, OPEC’s enduring supply agreement suggests the organization will continue doing whatever is required to moderate global supply. Decelerating production growth in the US should also prevent runaway global supply growth.

With the supply side of the equation losing its luster, the key factor determining oil prices in 2020 will be the economy and its effect on oil demand. A prolonged recession could tank oil demand, sending prices back to the historic lows seen in 2015 and 2016. Conversely, a quick slowdown followed by robust recovery would yield healthy demand growth, potentially leaving global supply chains undersupplied. With the US-China trade war cited as the most likely catalyst for a recession, continued negotiations progress will be necessary to avert a broader market meltdown. Regional Views Around the US, some regions experienced significant price volatility unrelated to the global market. In the Northeast, the PES refinery shutdown in Philadelphia caused local refinery utilization to fall to unprecedented lows, with the resulting supply shortage rippling throughout the Southeast and Chicago areas. Mansfield Supply Director Dan Luther shares the latest on page 22. On the opposite coast, California consumers faced earthquakes, wildfires, and refinery outages, leading to hefty price swings throughout the quarter. To the north, Oregon and Washington consumers struggled with a pipeline shutdown, cutting off local supplies. On page 27, Supply Director Sara Bonario highlights the extreme conditions experienced by the West Coast in Q4. Turning to the inner-areas of the country, the Midwest saw diesel prices come under heavy pressure due to a delayed harvest season and pipeline leaks that curtailed refinery production. Dan Luther explains the situation on page 25.

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OVERVIEW October through December 2019

Q4 Market Summary $2.0283

$1.6978

$61.06

28,53844

Source: New York Mercantile Exchange (NYMEX)

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Overview

Q4 2019 Crude Prices

Source: New York Mercantile Exchange (NYMEX)

October Beginning the ﬁnal quarter of the year, equities fell sharply as macroeconomic fears became the focus of traders once again. The slowing global economy and fears of contracting manufacturing indexes in the US and Germany led both equities and oil lower. Poor industrial data from Asia also weighed heavily on markets, and cumulatively these factors caused crude prices to experience an 8-day down streak. The bright spot countering this gloomy outlook was unemployment data, reported at a 50-year low of 3.5%.

Back in the US, Rick Perry resigned from his post as Secretary of Energy due to his involvement in the Ukraine scandal. Perry reportedly led a delegation to Ukraine earlier in the year, entangling him in impeachment probing. Although the DOE has little direct impact on oil production, Perry did impact energy more broadly by championing continued research in battery storage and solar energy while establishing a new cybersecurity ofﬁce to ensure energy infrastructure protection. Perry also pushed for increased exports of fossil fuels to Ukraine and other European countries reliant on Russian natural gas. To close out October, the Fed cut interest rates by 25-basis points. Markets seemed to have already priced in the change, as the cut barely registered in the crude market. Lower interest rates spurred a modest rally in equities, but those gains evaporated the next day.

Early in the quarter, an Iranian oil tanker was struck by two missiles while travelling in the Red Sea near Saudi Arabia, sparking market concerns about geopolitical risk in what has recently become a tinderbox of geopolitical instability. Early signs pointed to the missiles originating from Saudi Arabian soil, according to some Iranian sources, and the attack was considered a retaliation for the September attacks on oil infrastructure in Saudi Arabia. In mid-October, Trump announced sanctions and tariffs on Turkey following Turkey’s attack on US-allied Kurds in Syria. Turkey launched the strike following the withdrawal of US troops from Syria and immediately met with international backlash. Although neither Syria nor Turkey are major oil producers, the conﬂict risked drawing in major producers including Iran and Russia, who support the Syrian government. The Kurds live in a territory that spans Turkey, Syria, Iraq and Iran, blurring the lines where conﬂict could begin and end. 7

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Overview

November Saudi Arabia’s national oil company, Saudi Aramco, officially announced plans to go public as November started, following years of on-again, offagain drama related to its initial public offering. Having received approval from regulators, Aramco began building a prospectus and courting potential investors. Saudi Crown Prince Mohammed bin Salman planned to use the IPO funds to diversify Saudi Arabia’s economy, decreasing their dependence on oil. In mid-November, Winter Storm Caleb brought frigid temperatures, freezing rain, and snow to the front range of the Rockies and Central Plains into parts of the Midwest, Appalachians and interior Northeast. Gelling of diesel fuel was not a major concern, but the storm did impact road conditions in much of the US. A strike at Canada’s largest rail carrier caused concerns that prolonged negotiations could interrupt flows of crude-by-rail shipments to US Gulf Coast refiners. Gulf Coast refiners had grown dependent on train

shipments from Western Canada after imports of heavy crude from Venezuela collapsed. The strike was resolved after a week, and US reﬁning avoided a debilitating outcome. The turkey hangover seeped into markets on the last Friday of November, bringing the largest price drop since October. WTI crude gave up just shy of $3/bbl, falling from over $58/bbl to just above $55/bbl. The steep loss came as Russia rolled back bullish comments regarding OPEC cut extensions. Russian Energy Minister Alexander Novak said a decision to extend production cuts ought to be made closer to April 2020, when the current agreement expires. Also in November, the US was deemed a net exporter of petroleum products, the ﬁrst time the United States exported more petroleum than it imported since EIA records began in 1949. EIA expects total crude oil and petroleum net exports to average 750 kbpd in 2020, a hefty swing from the 520 kbpd average net imports in 2019.

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Overview

December At the OPEC meeting in early December, rumors arose that Saudi Arabia had threatened to flood the market with cheap crude if OPEC members did not comply with production cuts. The Saudis attempted such a tactic in 2014 to drive out shale oil producers in the US. This time, the threat was leveled at countries not holding up their end of OPEC+ production cuts – namely Iraq and Russia. Crude prices rose more than 3% the day these rumors were reported. Days later, OPEC announced deeper cuts for Q1 2020, causing oil prices to soar. The group pledged to cut output by 1.7 MMbpd in Q1 2020, an additional 500 kbpd beyond existing production cut levels. The group is set to re-evaluate cuts in March 2020. In mid-December, the Federal Reserve chose to leave interest rates unchanged, a vote of confidence in the US economy. The Fed painted a more positive macroeconomic outlook and muted inflation pressures. Consensus among Reserve members points to no interest rate changes through the end of 2020. In the same timeframe, the US and China agreed on a Phase One trade deal, which included provisions for the US to cancel tariffs set to apply on December 15 on $160 BN in Chinese goods. US officials say China agreed to

increase purchases of American products and services by at least $200 billion over two years, with an expectation that the higher purchases will continue thereafter. In addition, the deal includes stronger legal protections for American patents, trademarks, and copyrights, including improved criminal and civil procedures to combat online infringement, pirating, and counterfeit goods. Further into December, markets received another boost following Congress passing the USMCA, a trade agreement between the US, Mexico, and Canada to replace NAFTA. While markets had broadly expected the deal, its passage provides business conﬁdence for the future. Combined with the recent US-China trade deal, markets are beginning to believe it could be a bullish New Year. •

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Overview

Fuel Price Overview Crude oil prices rose steadily throughout the fourth quarter, channeling the volatility from Q3 in an upward direction. The quarter’s lowest point came early in October at $52.45, with prices climbing as high as $61.72 before the end of the quarter – a range of $9.27 (roughly 20%). While 2019 experienced some extreme events including trade wars, missile strike exchanges in the Middle East, and a volatile economic picture, oil markets generally kept within the same $50-$60 range seen in Q4. Large inventories and weak demand have kept a solid lid on the market for the entire year, while OPEC has fought to keep a ﬂoor under the market. Those competing factors have kept the average quarterly crude oil price within a $5/bbl range since Q4 2018.

Quarterly WTI Crude Prices prices were roaring higher. Diesel markets were primarily supported by seasonally low inventory levels, and concerns of winter heating oil demand and IMO 2020 helped to drive prices above $2/gal to end the year.

Quarterly Diesel Prices

Source: New York Mercantile Exchange (NYMEX)

Looking ahead, prominent bank forecasts suggest a wide range of perspectives on 2020 prices.

Source: New York Mercantile Exchange (NYMEX)

Over thirty banks and forecasting groups are projecting an average price in 2020 of $62.22, suggesting a slight pick-up from 2019 levels. Forecasts range from a maximum of $92.50 down to a minimum of $51.90, highlighting the market has much more upside risk than downside risk thanks to OPEC’s de facto pricing ﬂoor. Economic woes represent the largest risk for 2020 oil prices, particularly following a yield curve inversion heralding a recession in 2020 or early 2021. Assuming such a recession is small and brief, markets may quickly rebound and experience strengthened demand. If, on the other hand, the economy languishes for a prolonged period, prices may dip even below the expected 2020 minimum forecast.

Gasoline markets experienced seasonal weakness in Q4, as both product speciﬁcations and demand patterns moderated from summer peaks. Unlike diesel prices, which were nearly 13 cents lower than Q4 2018 levels, gasoline was just a penny lower – a clear example of the weak product prices which have afﬂicted gasoline for years. This quarter, gasoline prices spanned from a low of $1.56 up to $1.75, a 12.2% increase from trough to peak. Crude prices caused both gasoline and diesel to rise by 19 cents from low to high, though gasoline rose from a much lower beginning rate. High gasoline inventories in Q4 kept gasoline prices far lower than diesel, and the glut of gasoline is expected to remain throughout 2020. •

Quarterly Gasoline Prices

Fuel prices in Q4 did not see a strong upward lift until the end of the quarter, with October and November prices generally trading sideways. Diesel reached its lowest point of the quarter just after Thanksgiving, a low of $1.85 before soaring as high as $2.05 in late December – a 20 cent (10%) range. In Q4, NYMEX diesel prices averaged $1.94, a 2.7% pick-up from the prior quarter, though signiﬁcantly below peaks seen in 2018 when oil 10

Source: New York Mercantile Exchange (NYMEX)

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Overview

Rack-to-Retail Spreads Rack-to-retail spreads stabilized in the final quarter of 2019 after experiencing a wide range throughout the year. Following a tough period for retail gasoline marketers in Q1, spreads roared higher over the summer as prices fell, gyrating from 30 cents down to 15 cents, recovering to 25 cents before sinking down below 10 cents. In Q4, though, relatively calm underlying oil prices kept spreads to a more modest 10-cent range. Gasoline spreads averaged 16.7 cents in 2019, slightly below long-term averages closer to 20 cents. Rack-to-retail spreads represent the premium paid by fleets using retail fuel instead of buying wholesale fuel. Lower spreads in 2019 were favorable for those buying at gas stations. The final quarter of the year, though, saw prices begin returning to normal, with average spreads of 18.8 cents. Diesel rack-to-retail spreads did not face the same volatility in 2019, though spreads did swell mid-way through the year as oil markets plummeted. Spreads normally widen when NYMEX fuel prices drop, since retail stations keep prices steady to minimize volatility to consumers. Diesel retail stations continued to enjoy high margins in 2019, with spreads never falling below 29 cents throughout the year. The average spread was 40.7 cents, though Q4 did bring a slight reprieve. Spreads in Q4 were just 38.5 cents. Strong rack-to-retail spreads have been a leading driver of the trend towards mobile fueling throughout the US. For fleets seeking to avoid installing a bulk tank, mobile fueling has become a popular alternative to expensive retail purchases. Mobile fueling not only avoids rack-to-retail spreads but can also help fleets minimize their driver labor expenses. •

Diesel Rack-to-Retail Spreads

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

Gasoline Rack-to-Retail Spreads

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

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ECONOMY & DEMAND The end of the year brought positive developments for the global economy, though economists continue to pepper their analysis with qualifiers regarding 2020 growth. The World Bank expects 2020 GDP growth to be 2.5%, just barely above 2019’s meager 2.4% growth rate. Most of this growth will come from developing economies, which will see growth pick up from 3.5% in 2019 to 4.1% in the new year. Still, the group added a qualifier, noting growth will only be achieved “if everything goes just right.” Specifically, the group highlights two important trends: Sovereign debt and slow productivity growth. On the first issue, total debt in emerging and developing countries was 180% in 2018, with the rate rising rapidly from 115% in 2010. Previous

rounds of debt accumulation have caused severe economic maladies in the early 80s, the late 90s, and during 2008-09. As recently as 2018, Argentina and Turkey each suffered devastating economic challenges due to high debt levels. Higher debts can trade off with more effective private sector investments while leaving countries more vulnerable to nearby economic disruptions. Productivity growth has also been anemic in developing economies, with productivity per worker slowing from 6.6% in 2007 to just 3.2% in 2015, with little recovery since then. Increasing productivity is necessary to raise populations out of poverty, so the long-running slowdown will weigh on economic demand in 2020. Productivity is notoriously difﬁcult to inﬂuence, requiring both public and private investment in workforce development, innovation, and growth-friendly institutions.

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Economy & Demand

US Economic Data The US economy continues experiencing weak—though positive—growth. In the ﬁnal quarter of 2019, the Federal Reserve Bank of Atlanta predicts growth was 2.3%, the highest quarter since Q1’s impressive 3.1% growth. If conﬁrmed, 2019 GDP growth would be a modest 2.4% for the year, down from 2.9% in 2018 but in line with 2017 levels.

US GDP Growth

Tighter labor markets across the US are beginning to put pressure on wages as well. Low-wage workers saw earnings rise by 4.5% based on November rates, the largest earnings increase since before the Great Recession. Minimum wage hikes in states and cities across the country have also contributed to this increase. Overall, wages rose 3.6% for all workers, a healthy level of growth given current GDP growth rates.

US Unemployment Rate

*Estimate Source: Bureau for Economic Analysis, Federal Reserve Bank of Atlanta GDPNow

While GDP growth remains solid for now, many fear that a recession is looming in 2020. In particular, the yield curve inversion in August remains a harbinger of an approaching recession. Historically, yield curve inversions – times when long-term interest rates fall lower than short-term rates – arrive 12-18 months before a recession occurs. While the yield curve has normalized since August, the economy is not out of the woods yet. In three of the last five recessions, the yield curve normalized prior to the recession hitting. Before the devastating 2008 recession, the yield curve inverted and normalized eight times before the recession arrived. Tightening manufacturing data in the US is considered the second leading indicator of a recession. In December, the Institute for Supply Management revealed its manufacturing index fell to a decade-low 47.2%. An ISM Manufacturing index reading below 50% signifies contraction. The manufacturing sector has been in decline since August 2019, with a steady deepening of troubling conditions. Whether the recent US-China trade truce will give the flagging industry a boost is yet to be seen.

ISM Manufacturing Index

Source: US Bureau of Labor Statistics

Low unemployment rates and strong wage growth are driving improvements in consumer sentiment. While trade concerns weighed on consumer sentiments earlier in 2019, sentiment in Q4 roared to near decade highs once again. The US-China trade war was a major cause of economic concern for consumers in the middle of 2019. Tariffs raise the cost of industrial and consumer goods, resulting in higher prices and reduced disposable income. Positive developments in US-China trade negotiations helped assuage economic fears, with consumer goods removed from tariff considerations in the middle of Q4. With trade obstacles removed, consumers felt quite conﬁdent about their economic situation heading into the holidays. •

Consumer Sentiment Index

Source: Institute for Supply Management

In contrast, the US unemployment rate continues slipping to new lows, falling in Q4 to just 3.5%. Since data reporting began in 1990, no quarter has experienced lower unemployment than the ﬁnal quarter of 2019. Such tight labor markets provide a sharp contrast with GDP growth rates, which have been lagging historically stronger rates closer to 3%. 13

Source: University of Michigan

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Economy & Demand

Consumption & Demand Liquid fuel consumption forecasts continued slipping throughout Q4. The EIA began the year with a low demand growth forecast of 0.2 MMbpd in US liquid fuel consumption – less than half of 2018 growth. Yet even this growth would not hold up. By the end of Q4, the EIA had reduced its demand forecast to just 0.1 MMbpd – barely any gain from the previous year. Notably, this near-ﬂat consumption trend includes net declines in diesel and gasoline demand relative to 2018 levels. Gasoline demand fell by a slight 30 kbpd, while diesel

consumption dropped 40 kbpd year-over-year. Weak GDP growth in the US relative to last year kept demand weak, and rising fuel efﬁciency and alternative fuels slowly crept in to shift demand to other products. The decline represents the ﬁrst time that average demand has fallen year-overyear since 2016.

US Liquid Fuels Product Supplied (Consumption)

While neither diesel nor gasoline demand will disappear anytime soon, the net demand decline does highlight the effect of alternative fuels when combined with weak overall economic growth. •

Components of Annual Change

Source: Energy Information Administration (EIA), Short-Term Energy Outlook, December 2019

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F U N D A M E N TA L S

The world remains awash with crude oil, despite disruptive events that unfolded throughout 2019. The EIA estimates that, despite a hefty net global draw in Q3, inventories built in Q4 to end the year.

Demand has taken a hit at a global level, and global consumption forecasts fell steadily throughout the year. The EIA’s latest estimate pegs 2019 demand at 100.72 MMbpd, a paltry 0.75 MMbpd increase over 2018 levels. •

World Liquid Fuels Production and Consumption Balance

OPEC was the leading factor moderating global supplies and preventing a wider imbalance of supply and demand. While Non-OPEC supply, led by US shale oil, grew by 2 MMbpd in 2019, OPEC’s cuts were deeper. As a result, global petroleum production fell in 2019 for the ﬁrst time since 2009. Even with less supply, though, demand was unable to keep pace. Overall, the data suggests a net daily build of crude inventories in 2019 of 0.11 MMbpd, roughly 40 million barrels of additional inventory over the course of the year. Behind the net build has been weakened economic growth, with the EIA estimating that oilweighted GDP growth (GDP weighted by oil consumption) was just 2.0% this year, down from 3.0% in 2018.

Source: Energy Information Administration (EIA), Short-Term Energy Outlook, December 2019

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Fundamentals

Crude Inventories

US Crude Inventories

Crude inventories have been tracking quite close to the 5-year average throughout 2019. For the last quarter of 2019, US crude inventories averaged 442 million barrels. While this is in line with recent seasonal levels, a broader perspective reveals why oil prices have been so slow to react to major breaking news throughout 2019. Crude inventories experience normal ﬂuctuations throughout the year, often ranging 30-50 million barrels from spring highs to autumn lows. Massive builds in 2015 and 2016, though, have radically altered the range in which crude inventories traverse. Before the shale revolution took hold and US production shot sky high, US oil inventories generally averaged around 340 million barrels, with normal seasonal activity bringing it above 350 million barrels on occasion. Since 2015, average crude inventories have been closer to 450 million barrels, more than 110 million barrels (32%) higher than old averages. While demand has risen over that period, supplies have far out-paced demand.

Crude Inventories Historical Comparison

Source: Energy Information Administration (EIA)

Inventories in developed nations around the world reveal a similar trend. Globally, inventories are benchmarked via OECD (Organization for Economic Cooperation and Development) data, since most economically developed countries report on oil inventory levels. Saudi Arabia has referenced OECD inventories as a key metric for measuring the success of OPEC supply cuts. In 2010-2014, the average petroleum inventory levels for OECD countries was around 2.6 billion barrels. In today’s oil-saturated market, the average is closer to 2.9 billion barrels – a 300-million-barrel increase. •

OECD Petroleum Inventories

Source: Energy Information Administration (EIA)

OPEC’s supply cuts were intended to reduce inventories to average levels, but “average” doesn’t mean what it used to. Many evaluate the 5-yr average when discussing inventory trends but do not look farther back. With time, the 5-year range has increased to historically unusual levels. Looking at long-term US crude inventories, it’s clear that recent levels are historically abnormal. Before 2015, crude inventories had never surpassed 400 million barrels; today, inventories rarely fall below this threshold.

Source: Energy Information Administration (EIA)

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Fundamentals

Product Inventories

Throughout most of 2019, both diesel and gasoline inventories kept in close proximity to historical averages, but Q4 brought hefty deviations for each product.

Northeast, expect diesel consumption to rise, placing further strain on inventories. And of course, IMO 2020 adds a good deal of uncertainty to demand in the new year.

Diesel inventories fell far below the 5-year average in Q4, at points even setting new ﬁve-year seasonal lows. On average, Q4 diesel inventories are 135 million barrels; this year, inventories were roughly 13 million barrels (10%) below that level.

While diesel inventories are well below the average, gasoline stocks rose above the norm. Gasoline inventories typically average roughly 222 million barrels in Q4, but this year they averaged 226 million – a 3% deviation above the norm.

Such low inventories come at a time when diesel ought to be in high demand. Winter cold requires higher heating oil usage to keep homes warm. Should a severe cold snap hit heavy population centers in the

Gasoline inventories typically rise during the ﬁnal quarter of the year, recuperating all the draws experienced during the high-demand warm season. Early in 2019, inventories hit record-high levels; markets will be watching closely to see if 2020 will bring new record inventory highs. •

Gasoline Inventories 5-Yr Range

Diesel Inventories 5-Yr Range

Source: Energy Information Administration (EIA)

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Fundamentals

The Future of US Production US crude production plateaued in the ﬁnal quarter of 2019, levelling off at a healthy 12.9 MMbpd by mid-November. After three years of astronomical output growth, some fear that the US shale revolution is beginning to cool. Still, 2020 projections put output around 13.2 MMbpd, maintaining America’s status as the largest oil producer by a wide margin. Looking ahead, though, an IHS report released in Q4 indicates that US producers will have to drill far more in 2020 just to maintain comparable output. Oil wells are subject to “base decline”, meaning that initial output will quickly slow to a trickle. If a well produces 500 barrels per day on day 1, it may only produce 300 barrels per day after a year, a 40% base decline. Brand new shale wells can see base decline around 60-85% in some areas, according to IHS Markit.

US Crude Oil Production and Rig Count

Permian Basin output began 2019 at 3.8 MMbpd, and by the end of the year those same rigs (not counting new production) lost 1.5 MMbpd – a massive 40% loss in just one year. Oil companies must explore and drill 1.5 MMbpd of new production just to keep output flat. Of course, this year they produced far more new oil, leading to rapid output growth. At the same time, US oil & gas companies are facing mounting financial constraints. With many companies failing to turn out positive cash flow, banks are weary of lending to risky clients. Oil & gas is already a volatile commodity business which experiences huge booms and busts. Banks are now expecting producers to demonstrate more discipline in their drilling and generate a return for investors, rather than pouring every penny into more drilling. Without the capital to expand, US shale producers are forced to focus on more productive wells, slowing new projects. Amid tight finances and improving well technology, US rig counts have been declining for the past year, with December rig counts down 25% from 2018 levels. While the IHS does predict 440 kbpd production growth next year, that’s tiny compared to the millions of barrels of daily capacity added over the past few years.

Source: Energy Information Administration (EIA), and Baker Hughes

The US has dominated global production growth for the past few years, meaning a slowdown may spell tighter markets over the next two years. Non-US crude production growth was negative this year relative to 2018 levels; only by adding America’s massive growth do global supply trends turn positive. If American shale producers cannot traverse this tumultuous operational and ﬁnancial climate, global oil markets may feel the impact. •

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Fundamentals

US Energy Security—But Not Independence US Petroleum Net Imports

In the ﬁnal few months of 2019, American energy markets accomplished a historical achievement – America became a net exporter of petroleum products. Since data tracking began in the 1970s, the US has always been a net importer of petroleum products. America’s reliance on foreign oil has steadily declined since 2006 and 2007, when demand began falling throughout the US in anticipation of the Great Recession. At the same time, Congress passed the Energy Independence and Security Act, increasing fuel mileage and mandating greater biofuel utilization. The fracking revolution in 2014 and 2015 sent net imports spiraling lower, resulting in America’s new net exporter status. Despite being a net exporter, America is more linked to global oil prices than ever. Lifting the crude export ban in 2015 brought American oil prices more in line with global trends, since American reﬁneries must now compete against other countries for domestic supplies. As new exporting infrastructure comes online, expect the difference between US crude prices and international Brent prices to continue shrinking. •

Source: Energy Information Administration (EIA)

Refineries Experience Slowdown For most of Q4, refinery throughput trended below historical averages, putting pressure on fuel markets. Refinery utilization runs in regular patterns, with high utilization during the summer giving way to fall maintenance season. This year, refinery maintenance brought heavy downtime, leaving markets searching for additional fuel. In early October, utilization bottomed out at 83.1% - the lowest level since Hurricane Harvey’s devastating outages in September 2017. Before that, one would need to look back to March 2013 for comparable lows. As the quarter continued, markets continued lagging normal seasonal levels. Only in the last two weeks of the year did utilization return to normal levels. In the new year, refinery throughput is expected to normalize across the US, though unexpected downtime can rear its head at any time and cause temporary reduced capacity. •

Reﬁnery Utilization 5-Yr Range

Source: Energy Information Administration (EIA)

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Fundamentals

Currency Boosts Oil Prices The US Dollar experienced significant losses in Q4, corresponding to a gradual gain in oil markets. In part, the two were both reacting to geopolitical concerns. A US-Iran conflict would be a nightmare scenario for oil markets, while causing jitters for equity and financial markets. But the inverse reaction also speaks to a broader negative correlation between the dollar and WTI prices. It’s important to clarify that the US Dollar Index is not the same as inflation – in the US, crude prices are the same whether the USD Index is at 85 or 105. But because the index measures exchange rates, it has a huge impact on foreign countries.

US Dollar Vs. WTI Crude Prices

When the USD Index rises, foreign traders must use more of their domestic currency to purchase the same barrel of crude even if dollardenominated prices remain the same. For that reason, a strong US Dollar depresses trading demand, resulting in lower prices. This strong negative correlation is very clear over long periods of time, though isolated large oil market changes may overwhelm it, as was the case in Jan-Jul 2018 and Apr-May 2019 when both the dollar and oil prices moved in unison. For the past few months, it’s clear that a declining US Dollar has been an important factor in propelling oil prices higher. While other factors such as trade progress, Iran concerns, and declining inventories have driven the market higher, a weakening dollar has provided tailwinds, propelling the markets farther and faster than they otherwise would have moved. •

Source: Energy Information Administration (EIA)

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REGIONAL VIEWS Dan Luther,

Overview

Director, Supply Optimization See his bio, page 34

PADD 1A & B East Coast

Northeast distillate buyers should expect limited local stocks to keep prices strong relative to NYMEX futures. Keep an eye to area temperatures as an extended or extreme cold snap could send prices higher due to regional heating demand. •

Falling Distillate Inventories Induce Higher Prices Northeast fuel buyers continued to feel the pinch of a regional refinery closure as area distillate inventories dropped well below the five-year range. According to the EIA, PADDs 1A and 1B distillate inventories dropped as low as 24 million barrels at the end of October, nearly 40% below the previous five-year average. While inventories remained below the average throughout 2019, they turned markedly lower in late-September, trending below the five-year low throughout Q4.

Northeast Distillate Inventories

Source: Energy Information Administration (EIA) Weekly Petroleum Status Report

Traders took notice of the lower inventories which contributed to a change in the pricing structure of NYMEX diesel futures. Prices are currently in a backwardated structure, meaning prices in the future are lower than current fuel prices. This structure incentivizes traders to sell from inventories now, since product values will fall in the future. The result is more product available to the market now, but also declining inventories and higher prices in the future. The previous two times that spreads reached these levels were in January 2018, when an unusually cold weather event known as a bomb cyclone occurred, and September 2017, when Hurricane Harvey disrupted Gulf Coast refineries and their supply chains. These events put short-term pressure on distillate supply, which disrupted near-term supply prospects more than the longerterm supplies, creating significant backwardation. With inventories quite low, however, an extended cold weather event like the January 2018 bomb cyclone could cause significant heating oil price increases. The price impact would spread to the Southeast as product is drawn to the north, leaving less product to go around and causing diesel prices to spike. •

Northeast Wrestles with PES Outage Implications The effects of the Philadelphia Energy Solutions July reﬁnery closure on Northeast diesel supplies exacerbated a seasonally tight time for supply. The plant had a capacity of 335 kbpd of production of which roughly 100 kbpd was distillate output. Inventories did not immediately drop on the unexpected summer closure since some supplies can reach the Northeast from the Gulf Coast or via international imports from Europe. While the PADD 3 Gulf Coast has plenty of excess reﬁning capacity, there is limited pipeline infrastructure to

transport signiﬁcantly more fuels from the Gulf Coast to the Northeast. As seasonal demand for heating oil increases in the Northeast, the region will have to be supplied from elsewhere. For instance, the recent implementation of bidirectional ﬂow on the Laurel pipeline allowing Midwest shipments into Central Pennsylvania will offset some diesel that traditionally left the core Northeast. Additionally, weekly imports of distillate fuels increased more than 200 kbpd in early November as US prices escalated more than local European values. Higher US prices incentivize international traders to take advantage of the arbitrage by sending shipments across the Atlantic. Ultimately, suppliers and consumers will need to keep an eye on distillate imports into the US to resolve the low Northeast inventory levels. • 22

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Regional Views

Gabe Aucar, Senior Supply Manager See his bio, page 34

PADD 1C Lower East Coast PADD 3 Gulf Coast

Overview The Gulf Coast has seen an unusually high level of unplanned refinery turnovers in the final quarter of the year. Of the ten turnarounds occurring in October and November, six were unplanned. Marathon’s Galveston Bay, Valero’s Port Arthur, and Marathon’s Garyville were among the larger refineries to go down during Q4. With less refined products coming out of refineries, diesel basis saw above-normal values for this time of year. This time last year, diesel basis values in the Gulf Coast fell as low at 12.6 cents under the Nymex HO contract, averaging 10.5 cents in late-November through early December. Fast forward to 2019, and basis values have instead remained roughly 8 cents below the NYMEX.

Lower than normal inventories and limited reﬁnery production in the Gulf Coast due to outages will make for an interesting start to 2020 on the East Coast. In addition, two very large unknowns loom on the horizon: the closure of the PES reﬁnery in Philadelphia and IMO 2020. •

Colonial Pipeline No Longer Shipping 7.8-RVP Gasoline

In light of the removal of summer RVP requirements for the Atlanta area, the Colonial Pipeline has decided to no longer ship 7.8-RVP gasoline through the pipe. Colonial Pipeline grades "A1," CBOB regular 7.8-lb. RVP, and "D1," CBOB premium 7.8-lb. RVP, will no longer be shipped starting in 2020. The 5,500-mile pipeline system has the capacity to transport more than 2.5 million b/d of gasoline, home heating oil, aviation fuel and other reﬁned products from its starting point in Houston to New York Harbor. The low-RVP removal comes at the request of GA state ofﬁcials due to air quality improvements in the region. The affected counties include Cherokee, Clayton, Cobb, Coweta, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Paulding and Rockdale counties. The number of areas requiring lower RVP grades has been shrinking in recent years as the EPA has recognized air quality improvements in many areas that had been under tighter regulations. These include areas around Pittsburgh, PA; Baton Rouge, LA; and in parts of Florida, North Carolina, and Tennessee. 23

There are six areas still subject to the federal 7.8-RVP limit according to the EPA: • Beaumont-Port Arthur, TX • Denver, CO • Salt Lake City, UT • Reno, NV • Salem, OR • Portland, OR Individual state rules also require 7.8-RVP gasoline in 95 counties in eastern Texas, two counties in Indiana, and a portion of the Louisville, KY area. •

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Regional Views

Northeast Outage Opens Up-Down Arbitrage Supply struggles in the Northeast created a ripple effect throughout the entire eastern half of the US. The Northeast only has a few methods of supply – barge imports from abroad, shipments up the Colonial Pipeline, and recently pipeline deliveries via the Laurel Pipeline. Demand from the North kept pressure on the Colonial Pipeline to move as much product as possible up to the line’s endpoint in Linden, NJ rather than keeping supply in the Southeast. In Q4, the up-down arbitrage opportunity between the Gulf Coast and NY Harbor fuel prices opened, incentivizing shippers to bypass the Southeast and send products farther north. In mid-October, the price difference between NY Harbor fuel and Gulf Coast fuel exceeded the Colonial Pipeline shipping costs, opening the arbitrage.

Gulf Coast Vs. NY Harbor Arbitrage

This up-down arb typically opens during the winter months for gasoline, but diesel has only seen the opportunity open in one of the last three years. This year, the diesel arb opened for longer than normal, lasting throughout Q4. The up-down effect on prices was notable. Most years, Gulf Coast diesel basis falls to 12 cents or more beneath NYMEX futures contracts, as weak winter demand and high reﬁnery output pressures prices. Since 2013, only one year (2017) failed to hit -12 cents basis. In Q4 2019, though, Gulf Coast diesel basis generally stayed just 810 cents below the NYMEX, bottoming around 11 cents. Strong demand from the Northeast kept a steady pull on products, spreading higher prices throughout the Gulf Coast and Southeast. •

Source: Energy Information Administration (EIA)

Simplifying Fuel Supply and Logistics Across North America Mansfield Energy is North America’s leading fuel partner, providing:

• Reliable Fuel Supply • Superior Logistics • Strategic Fuel Management Solutions Over 8,000 customers across the U.S. and Canada trust Mansfield to deliver more than 3 billion gallons of fuel and complementary products annually.

Contact Mansfield Today 800.695.6626 | www.mansﬁeld.energy | info@mansﬁeldoil.com 24

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Regional Views

Dan Luther, Director, Supply Optimization See his bio, page 34

PADD 2 Midwest

Overview Markets faced very tight supplies in Q4 due to late agricultural demand and a pipeline shutdown, resulting in high fuel prices for consumers over the holiday months. Expect the Midwest supply situation to improve in Q1 2020 on the return to service of the Keystone Pipeline, increased production post reﬁnery maintenance, and seasonal low demand. Ample supplies should reduce gasoline and diesel prices relative to NYMEX futures in the coming months. •

PADD 2 Distillate Stocks at Low Levels Distillate stocks in PADD 2 approached ﬁve-year lows on reduced reﬁnery output and brisk late-season liftings. According to the EIA, Midwest diesel inventory reached a 2019 low point the week ending November 21 at 23.1 million barrels.

PADD 2 Diesel Inventories 5-Yr Range

Instigating the extreme inventories was the seasonal peak in fuel demand, driven by a late fall agricultural harvest. High demand resulted in the highest November pulls across Magellan’s central pipeline network over the last ﬁve years. Typically, the highest period for Midwest liftings occurs in October. On the supply front, crude availability into the Midwest was reduced in part by a key pipeline closure. In late October, TC Energy was forced to shut their 590 kbpd crude oil pipeline after a spill was discovered near Edinburg, North Dakota. The pipeline carries crude from Alberta to reﬁneries in the US Midwest and Gulf Coast; the spill of 9,000 barrels coated a half acre of wetland and is the third spill from the pipeline in as many years.

Source: Energy Information Administration (EIA)

Unsurprisingly, diesel days of supply on Magellan’s central pipeline system, which covers much of the Midwest and Great Plains, dropped to around 18 days in mid-November, the lowest outright days of supply ﬁgure over the last ﬁve years. The situation failed to improve in the latter half of November, with days of supply still posting under 22 days the last week of the month. For comparison, in the same period of 2018, markets held 36 days of supply.

Given the tight supply situation, Midwest refined products prices rose as refinery production was curtailed. Of note, Chicago diesel was up more than a nickel and Group 3 diesel up nearly seven cents per gallon the first week of November. On the gas side, Chicago CBOB increased four cents per gallon while Group 3 gasoline jumped eleven cents per gallon. The leak occurred along a stretch of the existing Keystone pipeline system, as TC Energy is still attempting to build the larger 1,179 mile addition referred to as the Keystone XL pipeline. The new line has been the subject of environmental protests for years. •

Timeline for Return of Superior, WI Refinery In early December, Husky executives provided updated guidance on when their Superior, WI refinery might return to operation. Initiation is projected to occur in late 2021 after the refinery is rebuilt from an April 2018 explosion. That incident saw 36 people injured, caused a temporary evacuation, and damaged significant processing equipment and storage tanks. The good news for patient buyers is that while the refinery is relatively small, projected to be 45 kbpd after expanding post-rebuild, it will add refined products to a part of the country that is already generally long gas and diesel. • 25

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Regional Views

Nate Kovacevich, Senior Supply Manager See his bio, page 34

PADD 4 Rocky Mountain

Overview Refined product prices jumped sharply in Q4 on the heels of planned downtime for refineries in Wyoming and a few unplanned events at refineries in North Texas. Retail gas prices in the Rockies climbed to $2.82 for the week ending December 2, according to weekly data published by the EIA, compared to a nationwide retail gasoline price average of $2.58. On the diesel side of things, PADD 4 retail prices stood at $3.24 versus a U.S. average of $3.07 per gallon. As refineries come online through Q4 and into Q1 2020, we expect prices to start moving lower. potentially dropping below the US average at some point this winter. Normally, prices jump in Q4 and seasonally start dropping once the new year rolls around. Absent unseen PADD 4 refinery downtime, expectations are for markets to act in a similar fashion this winter. •

Utah Leases Suspended on Inadequate Environmental Analysis In November, the Trump Administration pulled 130 oil and gas leases in Utah due to a ruling stating that the Bureau of Land Management (BLM) failed to analyze greenhouse gas emissions and the potential harm caused by oil and gas exploration.

are complete, the BLM either cancels the leases, modiﬁes the leases, or lifts the suspensions entirely.

Administrative efforts to spur shale development and unlock the country’s vast reserves may have actually slowed down investment. Leases have been continuously rolled back by the BLM in light of successful court challenges stating the government entity has not performed adequate environmental impact analysis. Once challenges

The news is a hit to the current administration’s plans to open up federal lands for oil and gas production. Oil production in PADD 4 has already dropped signiﬁcantly over the past couple years due to lower oil prices, but additional regulatory hurdles could further impede investment for future projects in the region. Drilling activity generates additional gas and diesel demand locally, so a decrease in oil and gas production activity in the Mountain region would actually create downward pressure on oil prices. •

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Regional Views

Sara Bonario, Supply Director See her bio, page 34

PADD 5 West Coast

Overview West Coast fuel markets have experienced price volatility as well as supply and demand imbalances caused by numerous market influences, both predictable and unpredictable. Seasonal agricultural demand in Northern California markets paired with reduced supply due to prorated pipelines and cycle delays, creating tightness for some shippers and even causing complete terminal supply outages in August and September. Fuel buyers were forced to be nimble and long-haul product from alternate supply terminals to keep customers supplied. This stressed an already tight carrier market with limited driver hours and equipment. The West Coast is expected to become long refined products in the first quarter of 2020 with low seasonal demand and no significant refinery maintenance planned to reduce run rates. Market participants should continue closely following the development of export opportunities from the US West Coast into Mexico, which has less complex product specifications requirements and fewer fuel markets regulations. •

Natural Disasters Strike California October arrived with a flurry of natural disasters to “shake” up markets. Two earthquakes within hours of each other shook Northern California on October 14, 2019. A magnitude 4.5 quake hit the San Francisco Bay area and threatened refinery operations in Martinez, CA, just 10 miles from the epicenter. Fortunately, only limited flaring was reported at one area refinery and no impact was reported by other area refiners. Kinder Morgan Pipeline Company confirmed that their Concord station lost power, and the company shut down other local facilities as a precaution until the safety of all facilities could be checked. Operations returned to normal within 24 hours. In addition to earthquakes, California experienced a series of wild fires which impacted operations of Kinder Morgan’s (KM) North Pipeline. The local utility, PG&E, preemptively shut off power to customers including the KM Rocklin pump station. In total, 7 days of pump time was lost (Oct. 9-10, 23-24, 26-28) causing terminalwide outages and general supply tightness extending to the end of the line in Reno, Nevada. Rack prices responded to reduced supply with significant increases, and customers were forced to source products from as far away as Las Vegas. •

Paciﬁc Northwest Suffers from Olympic Shutdown Supply tightness was not limited to California. Oregon and parts of Washington also experienced shortfalls. BP shut the Olympic Pipeline for unplanned maintenance on October 9. Shippers were informed with short notice the line would be down for 36-48 hours.

Source: WA Department of Energy (DOE), 2012 from publication: Transporting Alberta

Later in the month, ﬂow rates were reduced to 90%. This cutoff was a precursor to a complete cutoff of shipments when the line was unexpectedly taken down on October 25 for a full week. Since most fuel markets rely on just-in-time deliveries to meet constant demand, the shutdown caused signiﬁcant disruptions for fuel markets. • 27

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Regional Views

Nate Kovacevich, Senior Supply Manager

CN Railway Strike Comes to an End After 8 Days

Canada’s longest railway strike in more than a decade ended in late November when the country’s largest rail See his bio, page 34 operator, Canadian National, reached a tentative agreement with workers demanding improved working conditions. CANADA About 3,200 workers at the company went on strike for eight days hoping to secure a new contract. CN Rail is one of the biggest commodity transporters in the country, with petroleum and chemical shipments accounting for 20% of the company’s revenues and the company shipping more than 180 kbpd of oil in September. The strike and loss in railway capacity caused a lot of consternation in the oil industry. Analysts worried a prolonged outage could have a severe impact on the price of Canadian crude, which has already been trading at a big discount to the WTI contract. Last November, WCS Crude prices dropped to a -$45/bbl discount to the US-based WTI crude contract. Currently, WCS is sitting at around a -$20/bbl discount. A prolonged outage would have put even more strain on one of Canada’s main arteries for transportation of crude oil from Alberta to demand areas in the U.S. •

Western Canadian Crude Inventories at Record Levels Due to Pipeline Issues and Railway Strike Canadian oil stocks climbed to a record high 39 million barrels as of November 29, according to Genscape data, resulting from a temporary outage of the Keystone Pipeline and the worker strike at Canadian National. The Keystone Pipeline was shut following a spill of about 9,000 barrels in North Dakota. This is the second shutdown of the pipeline in less than a month. In mid-October, the pipeline operator, TC Energy, declared force majeure on its 590-kbpd pipeline that transports oil from Alberta to the United States. The shutdown was due to severe snowstorms in Manitoba. The most recent issue caused nearly 400,000 gallons to be leaked in a field near Edinburg, ND. TC Energy has cleaned up the majority of this crude oil and is waiting on U.S. regulators to allow it to ramp up pressure back to normal levels. It’s been operating at reduced levels for weeks as the company tries to identify the root cause of the problem. Sections of the pipeline on both sides of the leak have been forced by regulators to run at a 20% reduction in pressure. However, the entire system has not imposed the reduction, so deliveries into the US might not be curtailed as significantly as first thought. WCS crude oil prices will likely remain pressured versus its North American counterpart until operations are fully restored. Markets are extremely sensitive to operational issues in the region, especially with inventories sitting at record levels. Generally, when stocks start to climb and takeaway capacity via rail and/or pipeline face challenges, crude prices begin to push lower. • 28

A LT E R N AT I V E F U E L S Sara Bonario, Supply Director

See her bio, page 34

RENEWABLES

California Leads the Way in Proactive Climate Policy... Or Do They?

California is regarded as a global leader in climate policies – but do they truly achieve desired results? The matter comes down, as many do, to perspective. Parties representing the reﬁning sector and transportation fuel providers have pointed out that California was the last state in the union to approve the underground storage of biodiesel blends which contain 20% biodiesel. The California State Water Resources Control Board amended California Underground Storage Tank (UST) Regulations on August 6. The regulations now say that diesel containing up to B20, meeting the ASTM standard for B20 (D7467), “shall be recognized as equivalent to diesel for the purpose of complying with existing approval requirements for double-walled USTs, unless any material or component of the UST system has been determined to not be compatible with B20.” This action came after ten years of active dialogue and pressure from the fuel industry, particularly the National Biodiesel Board (NBB), several member companies and the California Advanced Biofuels Alliance. Biodiesel was introduced in California in 2000, yet it was not until recently that the state ﬁnally provided updated language that paved the way for storage of biodiesel underground. This change became effective October 1, 2019.

federal mandates required incremental biofuel blending increases into the fuel supply beginning in the mid–2000s. California consumes 8,000,000 gallons of diesel per day. Yes, eight million gallons of diesel per day. Many terminals in the state already supply diesel that may contain up to 5% biodiesel and still meet the ASTM D975 requirement for on-road diesel. With the introduction of underground storage of B20, the market can expect to see up to an additional 15% of biodiesel or 1.2 million gallons per day replacing petroleum diesel. This alone could provide a signiﬁcant win in the state’s effort to reach their climate initiative of reducing greenhouse gas emissions by 40% below the1990 level by 2030. •

Source: National Biodiesel Board

California Greenhouse Gas Emissions by Sector (1990-2015) and Targets Through 2050

California regulators initially expressed concerns about the possibility of biodiesel leaks, but they were ﬁnally convinced to allow B20 to be recognized as equivalent to regular diesel when it comes to applying regulations for underground storage. Most diesel fuels are kept in underground tanks across the US, with retail stations the primary holder of underground fuel. Some in the industry have pointed out that biodiesel dissolves quickly in water, mitigating concerns of groundwater contamination. Biodiesel is a renewable, clean-burning diesel replacement that can be used in existing diesel engines without modiﬁcation. The use of biofuels in the United States is growing, partly because 29

Source: Environmental Protection Agency (EPA), based on California Air Resources Board

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Alternative Fuels

Martin Trotter,

SUPPLY:

Pricing & Structuring Analyst

Oil and Infrastructure Drive Production Two main drivers of domestic natural gas production have worked hard throughout 2019 to keep prices down and inventories up. The ﬁrst of those is continued growth in the oil sector. With crude production skyrocketing, associated natural gasses, a by-product of the oil production process, continues rising. These natural gasses include not only usable natural gas, but also natural gas liquids such as propane and butane. Associated gas accounts for nearly 40% of total production in oil producing regions and over 10% of domestic US nat gas production. Consequently, NGPLs are also operating at records levels.

See his bio, page 34

NATURAL GAS

US Associated and Non-Associated Natural Gas Production (2006-2018)

Source: U.S. Energy Information Administration, (EIA), based on Enverus DrillingInfo Data

Natural Gas Pipeline Capacity Added in 2019 from Selected Regions billion cubic feet per day 12

within South Central in service under construction

within Northeast in service under construction

within Midwest in service under construction

within Mountain in service under construction

2 0 South Central

Northeast

Midwest

Mountain

to external region

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

Associated gas from crude production accounts for over half of the Permian’s natural gas and has become constrained by the second major driver, domestic gas infrastructure. High output has spurned the need for further infrastructure in the region to produce and move gas to salable points. Infrastructure project have been popping up furiously to keep up with production, and more than 40% of the additional capacity coming online through the end of 2019 serves the South Central region. While several of the projects move gas throughout the Permian region, one projects supports additional exports to Mexico. Runner up in the race for infrastructure in 2019 was the Northeast, which worked to disseminate gas from the Appalachia region. Projects from Millennium and Transco have already increased service to New York and Pennsylvania. •

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Alternative Fuels

DEMAND: Mirroring last year, November demand turned a typically mildweathered month into an opportunity to withdraw for many storage positions. A historic cold snap blanketed the East Coast, ushering in temperatures up to 30 degrees below normal. Records were set from Texas to Maine, causing demand to surge and prices to jump over $5.00/dth at TETCO M3 while rising nearly $1.00/dth in Chicagoland. The price volatility caused many dual fuel facilities to switch from burning natural gas to coal to combat rising pricing. Both the need for and availability of this operational dexterity continues to decline as coal-ﬁred plants are retired due to renewable requirement standards, depressed natural gas prices, and increased maintenance. In October, natural gas ﬁred generation reached a peak in the MISO region, topping out at nearly 36% of demand. Following November, however, overall demand including power-related burn as well as residential and commercial sectors has tailed off. •

Tetco M3 Natural Gas Spot Price and PJM Coal/Natural Gas Generation Share

Chicago Citygate Natural Gas Spot Price and Miso Coal/Natural Gas Generation Share

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

STORAGE: Welcoming the fourth quarter also means saying goodbye to injection season – at least, most of the time. After entering injection season with the lowest stockpile since 2014 with 1,155 Bcf in ground, surpassed prices and demand contributed to the one of the strongest injection seasons in recent history. Benchmarks closing October showed inventories surpassing 3,724 Bcf. Net injections totaling 2,570 Bcf were fueled by 6 straight weeks of injections of 100 Bcf or greater, as well as injections in the ﬁrst two weeks of November. Injections fell just shy of an all-time record for the period, surpassed only by 2014 levels. These net gains worked to push working gas inventories beyond the 5-year average for the ﬁrst time since summer 2017. The newly bolstered storage position is partially due to record production. Continued production has quelled prices throughout injection season and presented potential upside opportunity into the winter. •

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

Weekly Natural Gas Inventory Level, Lower 48 States (2014-2019) billion cubic feet (Bcf)

injection season (Apr through Oct)

4,500 4,000

Oct 31, 2019 3,724 Bcf

3,500 3,000 2,500 2,000 1,500

Mar 31, 2019 1,155 Bcf

1,000 500 0 2014

2,727

2,471

2015

1,516

2016

1,742

2017

1,837

2018

2,569 Bcf

injection season total

2019 Source: U.S. Energy Information Administration, (EIA)

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VIEWPOINTS By Nikki Booth, Senior Logistics Manager, Carrier Relations

How Technology is Altering the Logistics Industry

Since the mid-1990s, the Internet has had a revolutionary impact on culture, commerce, and technology – creating the digital era. Today, thanks to the Internet, consumers enjoy instantaneous communication through email, instant messaging, interactive video calls, social networking, blogs, and online shopping. The impact of the digital era has had a profound effect on the common marketplace, which has trickled down to the logistics space to reshape operations, spread growth opportunities, and drive process efficiencies across all facets of the industry. We’ve seen this influence in logistics over the last 15-20 years as the commerce industry has evolved. Thanks to technology, customer expectations have increased and will continue doing so. Customers want products when, where, and how they want it, compounding the demand for faster deliveries, more flexibility, and reduction of shipping costs and services. E-commerce is one of the largest drivers in the marketplace, rising almost 18% in 2019 to $3.46 trillion in online sales. Amazon is a quintessential example of a global technology company that focuses on e-commerce, promising customers faster shipping and package tracking. The promises that Amazon and similar companies make are increasing demands on the entire logistics industry – packaging, warehousing, fulfillment, and shipping.

through mobile devices. Most metropolitan cities utilize smart sensors on traffic lights and digital cameras to gather real-time detailed traffic flow patterns creating route data analytics. There is great opportunity for logistics companies to focus on their supply chain needs and utilize route optimization to create shipping efficiencies. The digitalization of supply chain is also eliminating the communication silos that have plagued the logistics industry with slow response times. This is a game changer because digitized supply chains have centrallyfocused information that should be easily accessible to the customer, answering the when, where, and how questions. In turn, increased data flow is removing bottlenecks, breakdowns, and disruptions in communication. Technology has had a profound effect on logistics, and this will continue to progress. If you can’t keep pace in this competitive marketplace, you will be left behind. Everything comes down to improving efficiencies to better meet customers’ demands. •

As such, shipping has transformed from the days of putting a package on a truck and hoping the delivery arrives eventually. Thanks to mobile apps like Google Maps, consumers have access to real time trafﬁc routes 32

Nikki A. Booth Senior Logistics Manager, Carrier Relations 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 vendor procurement, address logistical concerns, and identify cost-saving solutions for Mansﬁeld Energy and our customers. Nikki has several years’ experience in supply chain management, with the majority of that focused on energy transportation and logistics.

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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. •

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. •

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. •

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. •

Alan Apthorp

Dan Luther

Corporate Marketing Manager

Director, Supply Optimization

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. •

Teamwork

•

Innovation

•

Integrity

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. •

Excellence

•

Conscientiousness

•

Personal Ser vice

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* Some of the information provided is owned and licensed by OPIS. In no event shall any user copy, modify, publish, retransmit, or otherwise reproduce information from OPIS. Copyright 2019. 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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FUELSNews 360° M ARK ET N E WS & IN FO RM ATIO N

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

Teamwork • Innovation • Integrity • Excellence • Conscientiousness • Personal Ser vice