FUELSNews 360 - Q3 2013 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

APRIL MAY JUNE Q1

2nd QUARTER Q4

2 0 1 3

Crude oil terminal, Hong Kong

Q11

Q44

From the Desk of the CEO Dear Valued Customers and Partners, Welcome to the 1st anniversary issue of FUELSNews 360˚. When Mansfield started this publication in August of 2012, we anticipated our industry would continue to evolve, show volatility and display resilience. These assumptions proved accurate and we experienced several noteworthy events and emerging trends over the past year including: • A changing supply picture: This year China will become the world’s largest crude oil importer;

while the U.S., for the first time since 1995, will produce more crude oil than it imports. Both are profound events which will shape our future. • On October 29, 2012, Hurricane Sandy hit the Northeast U.S. With its historic devastation, this

storm reminded us of the absolute necessity to conduct robust and ongoing disaster recovery planning – especially as it relates to the storage and distribution of transportation fuels. • As in previous years, tensions in the Middle East have affected our industry –

stubbornly high crude oil prices, increased daily price volatility, and chronic concerns over potential supply disruption. One would think the nature of the Middle East’s problems would galvanize U.S. policy makers to execute an energy plan which promotes national security while spurring our economy, yet today there’s no evidence of such resolve. • The discussion regarding forms of natural gas as transportation fuels continues: their usage and

application, their potential as a replacement for liquid fuels and the domestic jobs they may create. The readers of FUELSNews 360˚ participate in the world’s most important industry: energy. This industry touches our lives and defines our collective future like no other. It’s the home of great companies, cutting edge technologies, and creative leadership. Whether you are a producer, distributor or consumer of energy, the FUELSNews 360˚ audience plays a vital role and carries a great responsibility to understand current events and emerging trends. I believe FUELSNews 360˚ can help you to fulfill these obligations and to thrive in a challenging energy landscape. As always, the Mansfield team appreciates our unique relationship and your willingness to be part of our energy family. Best Regards,

Michael F. Mansfield, Sr. CEO, Mansfield Energy Corp.

Q11

Q44

Q2 2013 Executive Summary The second quarter of 2013 showed once again that the global economy continues to struggle in its efforts for economic growth. Despite projections for a quickening economic recovery, the global economy remains affected by high unemployment and weak demand, which has a negative impact on consumer spending and consumer confidence. The second quarter reflected sharper weaknesses in the global labor and manufacturing sectors. Asia’s manufacturing continues to suffer from weak demand, as the U.S. and the E.U. (China’s two main trading partners) continue to struggle to post growth metrics. Furthermore, unemployment in the U.S. and the E.U. remains higher than initially expected for this time of the year. The U.S. unemployment rate remains at 7.6% while the Eurozone’s unemployment rate remains at 12.1%, with Italy, France and Spain’s unemployment rates increasing above 10% this quarter (Spain’s hit 26.9% in May). From a geopolitical standpoint, unrest throughout the Middle East remains worrisome and continues to impact oil prices. Extreme unrest in Egypt has added to the risk premium on oil prices as the market fears possible supply disruptions. Though Egypt is not an oil producing country, the market analysts watch closely as nearby oil producing countries may react to the chaos. Domestically, U.S. markets have been speculating about a possible premature end to the QE program due to the encouraging econometrics seen over the last quarter. U.S. consumer sentiment has been boosted by positive momentum from the housing sector, echoing an improvement in total payrolls. However, we have not yet reached trigger points determined by the Fed to be signals of substantial economic growth: an unemployment rate of 6.5% or a reduction in inflation to less than 2%. Many market analysts believe the Fed will cut the QE programs as soon as we hit the trigger points while others suggest QE will be tapered over time as the U.S. economy recovers. Critics worry the QE program will never end, thus calling it “Q-Eternity.” Overall, the second quarter reflected once again the market remains unstable and sensitive, as oil prices continue to receive external pressure from the U.S. dollar, U.S. equities, supply disruptions and geopolitics. The outlook for Q3 looks cautiously optimistic for the U.S. despite weak projections for global and domestic oil demand.

Index FUELSNews 360° Quarterly Report Q2 2013 FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain. 6

Overview

FUELSNews 360° Commentaries

April through June, 2013

Commentaries; Andy, Sara and Dan

Second Quarter Summary

Commentaries; Hannah, Jorge, Scott

Commentaries; Chris, Evan

Economic Outlook 8

U.S. Economic Outlook, PPI, CPI

Global Economic Outlook

Macroeconomic Headlines

28 30 31 32 33 34 36 38

Fundamentals 14

OPEC

Market Volatility, Crack Spread

Crude Oil Inventories

Days of Supply, Refinery Inputs

Domestic Production vs. Imports

Global Shale Oil & Shale Gas

U.S. Retail Prices

U.S. Fuels Consumption & Petroleum Exports

Regional View

Alternative Products 40 45

PADD 1, 1A, East Coast PADD 1B, Central Atlantic PADD 1C, Lower Atlantic PADD 2, Midwest PADD 3, Gulf Coast PADD 4, Rocky Mountains PADD 5, West Coast, AK and HI Canada

Natural Gas Renewable Fuels; Ethanol

FUELSNews 360˚ Supply Team

Overview April 2013 through June 2013

Much like the last few quarters, oil prices remained choppy during the second quarter of 2013. As seen on the chart below, prices for WTI crude oil ranged from a low of $86.68 in mid-April to a high of $98.44 in mid-June, before settling at $96.56. The main price drivers behind these moves were similar to the first quarter: revised and lowered global demand projections, shifts in the DOE and API inventory reports, external pressure from the U.S. dollar and equities, and global economic concerns.

Second Quarter 2013

96.56

86.68

Source: Bloomberg Finance L.P. 6

ÂŠ 2013 Mansfield Energy Corp.

Overview Second Quarter Summary

The oil complex finished mixed during the second quarter of 2013, with crude oil finishing higher and refined products ending in negative territory. RBOB gasoline (yellow) and heating oil (white) dropped to $2.7570 and $2.8798, respectively, while crude oil futures increased to $96.56, and the Dow Jones rose to 14,909.60. This quarterâ&#x20AC;&#x2122;s manufacturing reports showed weaknesses across the board, with the E.U., China and the U.S. all being affected by the weak demand. Additionally, volatile inventories also played an important role in market price trends, as the traditional build in gasoline inventories (ahead of the summer driving season) allowed RBOB prices to drop in the last few weeks of June.

Summary, Second Quarter 2013

287.98 275.20 96.56

14909.60

Source: Bloomberg Finance L.P. 7

ÂŠ 2013 Mansfield Energy Corp.

U.S. Economic Outlook Similar to other leading economies, the U.S. continues to struggle in its attempts to spur economic growth. The U.S. has been showing signs of improving economic conditions, with the labor sector hinting at progress as well as an improving housing market. Speculation about a premature end to QE4 made headlines midway through Q2, but the Fed quickly dismissed such speculations reminding everyone their monetary policy will remain active until unemployment falls under 6.5% or inflation falls under 2%. Under the QE programs, the Fed is printing a total of $85 billion per month to ensure liquidity in long-term bond markets and to maintain artificially-low interest rates. According to the Institute for Supply Management (ISM), the U.S. manufacturing PMI fell to 49.0 during the month of May, the weakest level of general activity since June of 2009.

“According to the Institute for Supply Management (ISM), the U.S. manufacturing PMI fell to 49.0 during the month of May, the weakest level of general activity since June of 2009.”

ISM Manufacturing Index An index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

PPI U.S. producer prices remained volatile during the second quarter of 2013. As seen on the table below, April’s producer prices dropped 0.7%, but bounced back during the month of May, increasing 0.5%. Contributors to price volatility remain the same: food, gasoline and energy. As of May, this year’s producer prices were significantly higher than the same time last year, with producer prices approximately 1.8% higher than in 2012. For the month of June, experts expect a drop of 0.3%. Producer Price Index (PPI) Month-to-Month Change April -0.7%

May 0.5%

June -0.3%** ** Projected

CPI

Much like producer prices, U.S. consumer prices remain unstable due to the constant shifts in energy and food prices. April’s consumer prices saw a drop of 0.4% before May’s consumer prices increased a strong 0.7%. As of May, consumer prices were 1.4% higher than during the same time last year. For the month of June, experts expect a 0.5% increase. Consumer Price Index (CPI) Month-to-Month Change April

-0.4%

May

0.7%**

June

-0.5%** ** Projected

Global Economic Outlook

Despite the fact that some global economies have introduced stimulus packages and lowered interest rates, the economic crisis persists. Some of the biggest factors that continue to inhibit global economic growth include geopolitical instability, weak global demand for goods and services, and a rapid increase in unemployment. These factors have all translated into the drop in manufacturing during Q2, with China, the U.S. and Europe all showing contractions in their respective manufacturing sectors during the month of May.

â&#x20AC;&#x153;Despite the fact that some global economies have introduced stimulus packages and lowered interest rates, the economic crisis persists.â&#x20AC;?

ÂŠ 2013 Mansfield Energy Corp.

Macroeconomic Headlines

European unemployment reaches concerning levels On top of their ongoing debt issues, unemployment in the European Union has reached staggering highs. According to Eurostat, the Eurozone’s unemployment level reached a record-high 12.2% during the month of April. Three out of the four major economies continue to struggle in their attempts to lower unemployment rates, with Spain’s unemployment rate reaching a whopping 26.8%, while Italy’s 12% and France’s 11% unemployment rates also remain alarmingly high. Even more distressing is the inflated unemployment rate of young professionals between the ages of 16 and 25, with Greece’s youth unemployment rate reaching 62.5% and Spain’s rate reaching 56.4%. As a result of the growing unemployment in the Eurozone, the market is speculating that lawmakers may introduce a bailout in the near future.

Chinese manufacturing contracts Weak Chinese manufacturing data during Q2 signaled deteriorating operating conditions. According to Markit/HSBC, China’s manufacturing dropped 1.2 points from April’s 50.4 level and reached a new level of 49.2 in May. The decrease was attributed to weaker demand, a decrease in new orders, and a drop in purchasing activity. Weakness in the Chinese manufacturing sector further reflects struggles in its main export destinations – the U.S. and Europe.

Iranian nuclear program proves to be costly The Middle East’s political instability continues to be a factor in supporting oil prices around the world, as the Middle East represents approximately 30% of the world’s oil production. One of the main topics over the last few years has been the controversial Iranian nuclear program, an issue that has continued into Q2. Though Iran and western countries remain far from reaching an agreement (the west continues to demand that Iran meet nuclear safety regulations while Iran continues to claim their nuclear developments are purely educational), we are finally starting to see the real impact of the western sanctions on Iran’s books. According to the EIA, 2012 Iranian crude oil exports dropped to the lowest point since 1986. Iran’s crude oil exports fell from 2.5 million barrels per day (MB/d) in 2011 to 1.5 MB/d in 2012, accounting for a 40% decrease in exports and a decrease of 17% in crude oil production (which fell 700k b/d) in one year. As a result, export revenues fell from $95 billion in 2011 to $69 billion in 2012. Oil exports account for 80% of Iran’s total export earnings and 60% of the government’s revenue. Iranian oil production has been affected by sanctions preventing large-scale investments in the country’s oil and gas sector, as well as access to European and U.S. sources of financial transactions. Though the geopolitical tension between the two sides continues, these metrics lead to speculation on whether Iran will finally halt their controversial nuclear program or if they can feasibly afford to continue development.

U.S. gasoline exports to Latin America increase U.S. exports of refined products to Latin America continue to increase year over year. Although the U.S. has been an exporter of fuels to Latin America historically, there is an uptrend in exports over the last few years, particularly in gasoline, as importing fuels has become a critical necessity for a Latin American region in need. According to the EIA, the main destinations for U.S. gasoline in Latin America during 2012 were Mexico, who imported 212,000 barrels per day (b/d), Venezuela (34,000 b/d), Brazil (17,000 b/d), Ecuador (10,000 b/d) and Colombia (8,000 b/d). The increase in Latin American demand reflects new spec changes, which is the case in Mexico, Ecuador and Colombia, as well as a decrease in regional refinery operating production. To put things in perspective, Brazil was self-sufficient on gasoline in 2008, while Venezuela was a net exporter of gasoline through 2010. However, these countries have faced adverse conditions as recent demand continues to outstrip refinery production levels. Brazil’s lack of refineries has proved difficult, though they will be adding several over the next 5 years, while cash-strapped Venezuela has not been able to properly maintain and revamp refineries as PDVSA’s funds are utilized to finance social programs for government expenses. 13

Fundamentals

OPEC In the latest meeting held on May 31st in Vienna, OPEC decided to keep official production levels at 30 MB/d despite a $6 drop in the OPEC basket price, which is a weighted average of oil prices collected from various oil producing countries. Historically, OPEC tends to be conservative in raising and lowering production levels. In this case, OPEC appears to be behind the curve as supply continues to outstrip demand and projections point to slower global economic growth, which ultimately affects demand. The next OPEC meeting is scheduled for December 4, 2013.

OPEC Basket Price

Dollars per barrel

A weighted average of oil prices collected from various oil producing countries. This average is determined according to the production and exports of each country and is used as a reference point by OPEC to monitor worldwide oil market conditions. Source: OPEC

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals Misconceptions About Market Volatility There have been numerous headlines and reports this quarter concerning recent market volatility. However, the daily price volatility has consistently remained within the 1% - 2% range over the last 30 years. As seen on the graph below, crude oil prices have changed dramatically, which are approximately 5 times higher than in the 1980s and 1990s. To put things in perspective, when oil prices were trading at $25 a barrel, a 2% move was only 50 cents, while a 2% move at today’s $95 per barrel price represents a significant $1.90 move.

Oil Price Volatility

Source: DTN ProphetX

Crack Spread by Crude Slate Oil refineries continue to generate revenue by producing refined products. The crack spread is the profit margin for oil refineries when compared to the cost of crude oil (inputs) to refined products wholesale prices (outputs). The 3:2:1 crack spread illustrates the product margin at a typical U.S. refinery. For every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel. As seen on the graph below, Western Canadian Select crude oil remains the best alternative in terms of product margin, averaging $53 per gallon so far in 2013, followed by WTI’s $30 per gallon and Brent’s $15 per gallon.

Crack Spread by Crude Slate

Crack Spread 321 Spread A crack spread measures the difference between the purchase price of crude oil and the selling price of finished products, such as gasoline and distillate fuel.

Source: DTN ProphetX 15

Fundamentals Crude Oil Inventories Crude oil inventories remain historically high as domestic production continues to increase. According to the EIA, crude oil inventories are at the highest level since 1981. Despite efficient refinery operations, crude oil inventories also remain high due to logistical limitations and transportation issues, leaving the Midcontinent region with heavy inventories during Q2.

U.S. Commercial Crude Oil Stocks Excluding SPR (Million Barrels)

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

ÂŠ 2013 Mansfield Energy Corp.

Days of Supply (DOS)

Fundamentals

The number of days that crude inventories would satisfy demand.

Days of Supply The days of supply (DOS) average has been above the 5-year average for most of 2013, averaging 26 days. The DOS average consists of the number of days it would take for crude inventories to satisfy demand. The increase in DOS in 2013 is a result of an increase in domestic production and lower demand. The Strategic Petroleum Reserve (SPR) contains just under 700MB of crude, nearly 2X more than the market has on hand in the U.S.

U.S. Days of Supply of Crude Oil Excluding SPR (Number of Days)

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

Refinery Inputs As seen on the graph below, refiner net input has hovered around the 14.8 MB level during the first half of 2013. Despite higher input rates seen in Q3 and Q4 of 2012, refinery inputs have been within the 5-year range so far this year.

U.S. Crude Refiner Net Input (Demand) (Million Barrels Per Day)

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

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals Domestic Production vs. Imports The increase in domestic crude oil production has been a significant headline this quarter as earlier projections suggested U.S. production would exceed imports by the end of 2013. On the week ending May 31st, 2013, U.S. crude oil production exceeded imports for the first time in 16 years, with domestic output exceeding imports by 32,000 b/d. U.S. dependence on foreign oil has been a matter of concern for well over 40 years, as oil plays a significant role in the U.S. economy, and affordable liquid fuels have historically been key contributors to the country's economic success. Furthermore, the issue of supply security has improved by the U.S. increasing domestic production and increasing imports from its Canadian and Mexican neighbors, replacing imports from politically or economically unstable regions.

U.S. Domestic Production vs. Imports (Million Barrels)

“U.S. dependence on foreign oil has been a matter of concern for well over 40 years, as oil plays a significant role in the U.S. economy, and affordable liquid fuels have historically been key contributors to the country's economic success.”

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

Historically, oil imports have had their ups and down, with U.S. net imports rising to 47% by 1977 before declining to 27% by 1985. By 2005, imports rose again and reached as high as 60%, but had declined back to 41% by 2012. For the remainder of 2013 and 2014, the EIA projects further significant declines in foreign imports due to sluggish demand and an increase in domestic production. The increase is a direct result of new drilling and technologies which enable trapped supplies in shale formations to be extracted in states like Texas, North Dakota and Oklahoma. According to the EIA, the increase in oil and gas production allowed the U.S. to meet 88% of its own energy needs during February of 2013, the highest monthly rate since April of 1986.

Fundamentals

Global Shale Oil and Shale Gas Resource Abundance According to the EIA, the estimated shale oil and shale gas resources in the United States and in shale formations in 41 other countries represent 10% of the world's crude oil and 32% of the world's natural gas technically recoverable resources. These resources are readily available using current technology without any reference to economic profitability. As seen on the table below, technically recoverable shale oil and shale gas resource estimates indicate there are technically recoverable resources of 345 billion barrels of world shale oil resources and 7,299 trillion cubic feet of world shale gas resources, though only the U.S. and Canada are currently producing shale oil and shale gas in commercial quantities.

Technically Recoverable Shale Oil and Shale Gas Resources

United States EIA shale / tight oil and shale gas unproved resources5 Non-shale Total Increase in total resources due to inclusion of shale oil and shale gas Shale as a percent of total Total World Shale / tight oil and shale gas unproved resources Non-shale Total Increase in total resources due to inclusion of shale oil and shale gas Shale as a percent of total

Crude oil (billion barrels)

Wet natural gas (trillion cubic feet)

58 164 223

567 1766 2,431

35%

38%

26%

27%

345 3,012 3,357

7,201 15,583 22,882

11%

47%

10%

32%

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

Because they have proven to be quickly recoverable in large volumes at a relatively low cost, shale/tight oil and shale gas resources have revolutionized U.S. oil and natural gas production, providing 29% of total U.S. crude oil production and 40% of total U.S. natural gas production in 2012. However, given the variation across the world's shale formations in both geology and above-the-ground conditions, the extent to which global technically recoverable shale resources will prove to be economically recoverable is not yet clear. The market impact of shale resources outside the United States will depend on their own production costs and volumes.

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals Technically Recoverable Shale Oil and Shale Gas Resources Top 10 countries with technically recoverable shale oil resources

Top 10 countries with technically recoverable shale gas resources

Rank

Country

1 2 3 4 5 6 7

Russia U.S. China Argentina Libya Venezuela Mexico

Shale Oil (billion barrels) 75 58 32 27 26 13 13

Pakistan

9 10

Canada Indonesia

9 8

9 10

World Total

345

Rank

Country

1 2 3 4 5 6 7

China Argentina Algeria U.S. Canada Mexico Australia South Africa Russia Brazil

Shale Gas (billion barrels) 1,115 802 707 665 573 545 437

World Total

390 285 245

As seen on the left table, more than half of the identified shale oil resources outside the United States are concentrated in four countries—Russia, China, Argentina, and Libya—while more than half of the non-U.S. shale gas resources are concentrated in China, Argentina, Algeria, Canada, and Mexico. The United States is ranked second after Russia for shale oil resources and fourth after Algeria for shale gas resources when compared with the other 41 countries assessed.

7,299

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

“The United States is ranked second after Russia for shale oil resources and fourth after Algeria for shale gas resources when compared with the other 41 countries assessed.”

According to the EIA, several nations have begun to evaluate and test the production potential of shale formations located in their countries. Poland, for example, has leased prospective shale acreage and drilled 43 test wells as of April 2013. Argentina, Australia, China, England, Mexico, Russia, Saudi Arabia, and Turkey have begun exploration or expressed interest in their shale formations. The graph below illustrates global assessment of shale oil and shale oil formations.

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

Fundamentals U.S. Retail Gasoline Prices Retail gasoline prices remain above the 5-year seasonal average so far in 2013. As seen on the graph below, retail gasoline prices have averaged $3.52 per gallon in 2013, approximately 41 cents above the 5-year average of $3.11. Moreover, the EIA projects regular gasoline prices to average $3.53 per gallon over the summer driving season (April through September), while the average regular gasoline retail price is expected to decline from $3.63 per gallon in 2012 to $3.49 per gallon in 2013 and $3.37 per gallon in 2014.

Weekly U.S. Regular Conventional Retail Gasoline Prices (Dollars per Gallon)

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

U.S. Retail On-Road Diesel Unlike gasoline retail prices, on-road diesel prices have been closer to the 5-year average. As seen on the graph below, diesel prices have averaged $3.52 per gallon so far this year, approximately 6 cents per gallon more than the 5-year average of $3.46. According to the EIA, U.S. diesel fuel prices are projected to average $3.83 per gallon this summer, a 12 cent difference to last yearâ&#x20AC;&#x2122;s average of $3.95 during the same time period. It is important to keep in mind that daily and weekly national average prices can differ significantly from monthly and seasonal averages, while there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 30 cents or more per gallon.

Weekly U.S. No 2 Diesel Ultra Low Sulfur (0-15 ppm) Retail Prices (Dollars per Gallon)

Source: U.S. Energy Information Administration (EIA) 22

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals U.S. Liquid Fuels Consumption (Demand) It is apparent that global and domestic demand remains affected by the slow economic recovery. Following 2012, a year in which liquid.fuels consumption declined by 390,000 b/d, 2013 has shown an increase in total liquid fuels consumption of 180,000 b/d in comparison to the same time period last year. According to the EIA, there have been evident increases in liquefied petroleum gas and distillate consumption mainly due to weather conditions, with heating degree days in the Northeast 21% higher than in 2012. As a result, analysts expect total liquid fuels consumption to increase by 90,000 b/d in 2013, followed by a slight decline in 2014. The projections suggest flat motor gasoline consumption over the next two years as continued increases in vehicle fuel efficiency is expected to offset any gains in motor vehicle travel.

U.S. Crude Oil and Liquid Fuels Consumption (MB/d)

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

U.S. Exports of Finished Petroleum Products (MB/d)

U.S. Exports of Finished Petroleum Products As seen on this graph, exports of petroleum products have decreased in 2013 in comparison to 2012. Total finished petroleum products exports are averaging 2.36 MB/d in 2013 compared to the 2.67 MB/d in 2012, while motor gasoline exports have increased from .421 MB/d in 2012 to .447 MB/d in 2013 and distillate fuel oil exports have decreased from 1.01 MB/d in 2012 to .800 MB/d.

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

ÂŠ 2013 Mansfield Energy Corp.

FUELSNews 360˚ Commentaries Andy’s Answer

BULL

Crude has managed to stay range bound, topping off in the upper 90s for the year so far, then bouncing off the lows in the upper 80s. Heating oil and RBOB however topped off in the $3.20s in February and really never looked back, settling in the $2.95-$2.75 range this year, which has crack spreads hovering at the lowest point since early 2012. Looking to next quarter, the constant uncertainty of the U.S. economy and our neighbors’ economic woes are not very supportive. On one side, U.S. housing has definitely improved, initial jobless claims are lessening, and exports and local U.S. production are keeping money at home. However, Europe is struggling to say the least, the Chinese machine seems to be slowing, and there is an increasing amount of crude supplies in the U.S. that we really haven’t seen this consistently in a long time. I will stick with my bullish sentiment, but it’s certainly a gelded bull at this point. I’m fearful our economic improvement could be short lived and that others around us will drag us down, along with our own local reluctance to improve our long-term financial condition. The bull continues to be a bull, but it wouldn’t surprise me if we stayed range bound barring any major global event.

Sara’s Synopsis

Dan’s Dissertation

BEAR

I have been looking for a reason to turn away from my bearish stand, but have yet to see a compelling argument. Reports show U.S. crude supplies expanding with the American Petroleum Institute reporting in mid-June that crude supplies rose by 8.97 million barrels. This was the biggest gain since January 2009. In addition, the International Energy Agency adjusted demand estimates downward for OPEC crude, and China has weaker than expected growth. Even the banks (BNP Paribas, Barclays, Goldman Sachs) have lowered their price outlook for WTI and Brent in this past quarter. As a result, crude struggles to shake off the negative sentiment. As for refined products, year-on-year gasoline demand fell at the beginning of the second quarter. According to a report issued by the American Petroleum Institute, U.S. gasoline demand during the month of April was at its lowest level since the year 2000. Although May is the start of driving season and gasoline consumption increases, demand in the U.S. is still forecast to decline in 2013. Finally, there is little interest when it comes to diesel, especially when it comes to the Funds and their lack of interest in investing. Middle Eastern turmoil, particularly in Syria, is the only factor currently poised to push crude higher. However, with sluggish demand, refined products may not take the full brunt of that pressure. So, I remain bearish. BULL

I believe crude prices are poised to increase in the third quarter. Middle Eastern turmoil continues to concern market participants – while Egypt is not a large outright crude oil producer, its control over the Suez Canal and pipelines that run across the country are important to the global oil market. Additionally, the near term threat to oil prices via a reduction in quantitative easing seems overblown for now; I don’t expect the Fed to ease off the pedal significantly in Q3.

FUELSNews 360˚ Commentaries Hannah’s Hypothesis

Jorge Pradilla’s Predictions

BEAR

I still view fundamentals as bearish, as domestic crude production facilities only continue to bolster outputs while emerging economies report lackluster demand figures. Even so, the Euro still fights for stability and the Mideast remains anything but, so regardless of supply and demand balances, I think flat price cares much more about currencies and geopolitical climates, both of which are anyone’s guess. For this reason, I am sidelined for the third quarter of 2013 and call it another range bound trend for the next three months, barring any extremes the hurricane season might bring to the U.S.

BULL

Crude oil has been trading comfortably within the 90s range during most of the year. Though I expect this pattern to continue, I think crude oil will be up slightly in Q3 considering the NOAA and EIA’s predictions that the hurricane season could affect domestic crude oil production in the Gulf of Mexico by approximately 19 million barrels. I also think the slowly improving U.S. economy will continue to reflect positive metrics into Q3, which could boost energy commodity prices in general as they have become a more popular investment option. As for refined products, I am bullish on diesel and gasoline prices for Q3. The main reasons behind my bullish predictions include the anticipated summer driving season, the hurricane season and the probability of supply disruptions, while also taking into consideration the increase in exports to a Latin American region that remains in desperate need of fuels, as their regional refineries currently cannot keep up with demand.

Scott’s Sixth Sense

BULL

Canada’s crude price outlook to 2030 shows a tendency toward rising prices. I predict this trend to continue based on the current world markets growing and an improving North American economy. Rising petroleum prices over the past 18 months have restarted the oil sands investment and development which are now back on track for rapid growth. I expect we will see more oil sands projects come on stream, following major Canadian projects by Imperial Oil, Suncor Energy, Cenovus Energy, Total and Conoco Phillips. I anticipate increasing Canadian oil supplies are aimed at markets in Eastern Canada, traditional and newer markets in the United States, and a growing Asian market, displacing imports from less secure foreign sources. Some uncertainty associated with the U.S. fiscal landscape could limit Canadian economic activity in the first half of 2013, as well as ongoing concerns about the depth and duration of the European recession. However, expect to see a bolstered Canadian economy for the second half of 2013. 25

FUELSNews 360˚ Commentaries Chris’s Concept

BULL

For the third quarter of 2013, I’m overall bullish. As always when entering the summer months, we have to consider hurricane season. The first storm Andrea was named the first week of June. Predictions for this hurricane season show it will be another active year for named storms. Meteorologists are expecting the water temperatures to be .8 degree warmer than usual, and this small increase in temperature can help create disturbances. El Niño typically helps prevent hurricanes from forming and developing into a cyclone, but a significant El Niño event is not expected which would create an environment for storms to develop in conjunction with the warmer waters. Any disturbance on the rigs or vessel traffic to Florida will send prices higher. However, if we escape any major storms, we will see RBOB prices lower due to the transition back to high RVP.

Evan’s Estimation

BEAR

For the third quarter of 2013, I am slightly bearish on my market predictions. Even though this is the time of the year where gas demand is elevated, the global economy is still struggling. OPEC announced that their members produced a gluttonous amount of crude in May, which topped the crude oil production amount in each of the previous seven months. Non-OPEC countries are also boosting their daily output of crude oil this year. The global demand will not be able to keep pace with the current output being produced by OPEC members. China’s economy is showing signs of slowing down and Europe is still struggling. The United States is recovering; however, crude stockpiles in the U.S. have grown. Even with the unrest in the Middle East, this weakened supply and demand will overpower that turbulence. With the struggling global economy and declining demand, I am predicting an oversupply of product and, therefore, a bearish market for the upcoming quarter.

Regional View ? PADD 5: West Coast, AK, HI

PADD 4: Rocky Mountain

Did You Know? PADD 2: Midwest

PADD 3: Gulf Coast

PADD 1 East Coast PADD 1A New England

PADD 1: East Coast

PADD stands for Petroleum Administration for Defense Districts

During World War II, the United States was divided into five different PADDs in order to help organize the allocation of fuels derived from petroleum products, including gasoline and diesel fuel. This virtually meant that if the U.S. was attacked, the country’s oil supply would be strategically spread out among five different regions, making it more difficult to destroy the country’s oil infrastructure and resources.

Midwestern Crude Continues Eastward The motivation continues for Northeast refiners to switch from the historically more expensive Brent crude to the plentiful, less expensive domestic crude. As Northeast refiners’ demand for domestic crude continues to increase, the spread between WTI and Brent crude has narrowed. Petroplus, Blackstone, First Reserve (PBF Energy) (who owns refineries in Toledo, Delaware City, and Paulsboro) has constructed a doubleloop track at its Delaware City refinery to handle the increased deliveries of Bakken crude. With the track in place, they have been railing in crude from the Midwest and are the first Northeast refiner to sign a deal for Midwestern crude oil that does not involve a third party. Without a third party, PBF has a more direct connection to this cheaper crude source. Philadelphia Energy Solutions (PES) also has new infrastructure in place to receive crude by rail, with a new high-speed unit-train unloading facility at their Philadelphia

refinery, where they received their first shipment of Midcontinent crude in April. This new facility has the ability to receive 140,000 to 180,000 b/d of more competitively priced Midwestern crudes. PES, who used to barge in Bakken crude from the Sunoco Logistics’ Eagle Point terminal, will now have the ability to take this crude straight from the railcar to their refinery. Irving, Delta, and Phillips 66 (along with PES and PBF) are also projecting their domestic crude usage will increase throughout 2013. This increased demand, of what was once landlocked crude, contributed to the sharp decline of the Brent/WTI spread. This spread, which was closer to $20/bbl at the beginning of this year, has dropped to under $9/bbl and continues a downward trend. 28

PADD 1 East Coast PADD 1A New England

Heating Oil in the Northeast The New England states are constantly looking for ways to clean up the atmosphere. New York enacted two mandates in 2012 requiring all the heating oil burned within the state to be ultra-low sulfur (15 ppm sulfur) and requiring a bio-heat blend within New York City limits. In the first weekend of July, the House of Representatives in Connecticut amended their plan to mandate a lower sulfur content in heating oil. Connecticut anticipates a change to 500-ppm sulfur for heating oil in July 2014, and the Connecticut Energy Marketers Association is pushing to switch to ultra-low sulfur heating oil in July 2015 (now scheduled for July 2018). Connecticut has rejected the former “three-state trigger” rule, where they would mandate a low sulfur heating oil only if New York, Massachusetts and Rhode Island joined the effort.

Heating Oil Sulfur Mandates

Sources: U.S. Energy information Administration (EIA); OPIS

“ New York enacted two

mandates in 2012 requiring all the heating oil burned within the state to be ultra-low sulfur (15 ppm sulfur) and requiring a bio-heat blend within New York City limits.”

Along with Connecticut making this switch to cleaner heating oil, the following states will also be switching to a 500-ppm sulfur heating oil in July 2014: Vermont, New Jersey and Massachusetts. In preparation of this four state switchover, many are expecting a boost in low sulfur heating oil output during the first half of 2014 (this spec can be reached by blending ¾ ULSD and ¼ high-sulfur heating oil). Rhode Island is also trying to enact a cleaner heating oil mandate. If all goes well in the passage of this plan, Rhode Island will have a set date to switch to 500-ppm heating oil, and possibly will require a bio-blend for all heating oil. By the end of 2017, all states shown in the graph above (Rhode Island pending) expect to have made the switch to a lower sulfur content. Since additional refining is necessary to reduce the sulfur content, an increase in the price of heating oil in these states is almost imminent once these mandates go into effect.

PADD 1B Central Atlantic

NYH vs. GC RB Basis

“ Another factor that increased gas supply in the Northeast was an excess of imports being barged across the Atlantic.”

Source: OPIS

New York Harbor Gasoline The second quarter of 2013 began with Gulf Coast (USGC) RBOB trading at a discount to New York Harbor (NYH) RBOB, but that quickly changed just over a week into April, with NYH RBOB trading at a steep discount to USGC RBOB. One factor contributing to this arbitrage switch was slack RBOB demand in the Northeast. This unseasonable lack of demand in the NYH market created a surplus of product of which many took advantage, taking product from Pennsylvania down to Maryland. Not only was demand lacking, but refiners were cranking out a higher supply of gasoline due to crack spreads remaining favorable, climbing to over $11 for NYH refineries. Another factor that increased gasoline supply in the Northeast was an excess of imports being barged across the Atlantic. In early April, shipments of motor fuel to the eastern U.S. reached a seven-month high. Ethanol RINs were also a contributing factor to the increased supply of gasoline. The elevated value of RINs encouraged suppliers to increase the sale of ethanol-blended gasoline, with suppliers even giving discounts on their rack price to push product to their customers. In mid-April, NYH RBOB was trading between .0700 and .0950 under USGC RBOB, with the largest gap being on April 23rd. Currently, the arbitrage is back to where it has been historically, with USGC RBOB trading at a discount to NYH RBOB. 30

PADD 1C Lower Atlantic

Florida Floridian supply is finally seeing some signs of stability in 2013. As mentioned in the two past issues of FUELSNews 360â °, Floridian supply has experienced challenges from vessel restrictions and terminal closures. Apex CenterPoint purchased the Chevron Jacksonville terminal, providing additional storage space for rack marketers. Jacksonville supply is still predominantly based off New York Harbor Cash indices, providing an opportunity to supply from Gulf Coast pipeline terminals; however, suppliers are optimizing vessels in an effort to bring in Gulf Coast barrels to help capture more margin and market share. Tampa has also seen ULSD prices stabilize as suppliers are renewing vessel contracts. Gasoline prices continue to remain unstable in Tampa and Orlando as the RVP transition in Florida forced suppliers with excess inventory of high RVP (9.0) to offer discounts in preparation for Low RVP (7.8) season. Prices for 9.0 pound began to stabilize in June as all tank turnovers to Low RVP were completed.

Colonial Pipeline Colonial Pipeline announced changes affecting new shipper status allocation assessments that became effective May 26, 2013. Historically, new shippers on Colonial would receive 25,000 barrels of allocation per cycle on the main lines, as well as 5,000 barrels of allocation per cycle on line segments ( i.e.: line 20- Nashville, line 17- Albany and line 29North Augusta). After May 26th, new shippers will be entitled to 10% of the available space on the main lines, and then put into a lottery for the 10% allocation on line segments. Colonial made the decision to prevent new shippers from applying for shipper status solely for the purpose of selling the line space. The policy revisions were made after holding four regional meetings during April 2013 where Colonial Pipeline answered questions and received feedback from stakeholders regarding the proposed changes. Colonial Pipeline also announced in April the completion of the Line 1 gasoline main line expansion, which allows an increased flow of 100,000 b/d. Customers began noticing product allocation increases shortly thereafter, providing necessary relief as the Southeast moved into the RVP transition.

Kentucky Prices in Kentucky have been volatile over the past quarter due to the spreads between Gulf Coast and Chicago basis. Kentucky is considered a border state that can easily take product from Chicago or Gulf Coast depending on the spreads between the two regions. During the past quarter, the market was favorable to pull from Tennessee delivering up to Kentucky for most locations. For example, the rack spread between Knoxville and Louisville has ranged .10 -.15 cpg for both gas and ULSD. This spread provides a very attractive arbitrage opportunity, offering significant cost per gallon savings with the additional freight. 31

ÂŠ 2013 Mansfield Energy Corp.

PADD 2 Midwest

Enterprise Pipeline Update In the previous issue of FUELSNews 360⁰, we recapped the recent development of Enterprise Pipeline’s plan to halt interstate shipment of distillates on their midcontinent pipeline due to low shipper volumes. The announcement shocked the industry, with refiners and end users alike wondering what this will mean for markets that rely solely on the pipeline for distillate supply. Despite protests, the change is still slated to go into effect as of July 1, 2013. Major markets on the line include Shreveport, North Little Rock, Cape Girardeau, Princeton, Indianapolis, and Lebanon. While markets like Lebanon and Indianapolis are easily supported by other pipelines in the area, North Little Rock and Cape Girardeau will feel the pinch in supply once they are dependent on their local refinery as their only means of supply. For example, Arkansas’ El Dorado refinery will be solely responsible for supplying Little Rock after July 1—a minor concern while the refinery is fully operational — but potentially a huge problem in the event of an unplanned or planned turnaround, such as is scheduled for Q1 ’14.

While all players in the market are currently reevaluating their supply position and preparing for the worst, the truth is that no one knows how the chips will fall until the change occurs. While extended product outages are not anticipated, end users can certainly expect a premium in relative pricing to other markets as well as an increased need for long haul support going forward until the MidCon finds its new normal.

PADD 3 Gulf Coast

WEC Plans to Build New Whitetail Refinery in Texas Worldwide Energy Consortium, Inc. (WEC), announced in May 2013 that they are planning construction of a 10,000 b/d refinery located in La Salle County, Texas. Just south of San Antonio, the intent of the small refinery is to leverage crude production in the Eagleford shale play for inputs and help supply the diesel-starved region with its modest output. WEC has said that this is only the first of many several planned refineries in the area, with Whitetail construction to begin immediately pending permitting and the facility expected to be fully operational by the end of next year. This strategy is not unlike the one discussed in the most recent issue of FUELSNews 360⁰ where the new refinery construction in the North Dakota Bakken came into play, the first new refinery in decades, and now with seemingly many more to follow. These changes represent a permanent shift in the mindset of domestic refining, as small niche refineries will continue to surface to support local demand versus the upgrade of existing refining giants.

Enterprise Develops GC Products Export Facilities Enterprise Products Partners LP announced in May that they are developing two refined products export facilities at its ports in Beaumont, Texas and the Houston Ship Channel. Previously designated to serve as a feeder to the TEPPCO pipeline system, the Southern Complex has been repurposed to allow for easier export services versus feeding domestically inland. The upgrades include incremental storage of about 6 million barrels, refinery pipeline segment feeds becoming bi-directional and enhanced connectivity to three interstate and one intrastate pipeline. Export service at Beaumont will begin in Q1’14 handling Panamax size vessels, with Houston’s expansion allowing it to handle Aframax class vessels in the middle of 2014. This ties directly in with the halting of distillates on Enterprise’s TEPPCO pipeline, as the company retools its infrastructure to support the U.S. as an increasingly larger producer and exporter of crude and refined products alike.

PADD 4 Rocky Mountains

The second quarter in the Rockies was relatively quiet. Sinclair’s Casper, Wyoming refinery was back to full production after a 40 day turnaround. The Casper refinery produces 20,000+ b/d and is a key supplier for central Wyoming. Wyoming typically has some of the lowest gasoline prices in the nation. In other areas, both Tesoro and HollyFrontier, in the Salt Lake City area, are performing maintenance at the end of Q2. Tightening of both gasoline and diesel has been the result in the Salt Lake City region, with the effects of the refinery maintenance illustrated in the charts below. Wholesale prices throughout PADD 4 have been stable compared to the preceding quarter. By way of comparison, Denver saw a high in wholesale gasoline (E10) of $3.3264 and a low of $2.8380, whereas Salt Lake City saw a high of $3.2480 and a low of $2.7940. As for diesel (ULSD), Denver saw a high of $3.1450 and a low of $2.8500, whereas Salt Lake City saw a high of $3.2650 and a low of $3.0550.

PADD 4 Wholesale Gas Prices

“Sinclair’s Casper, Wyoming refinery was back to full production after a 40 day turnaround.”

Source: OPIS

PADD 4 ULSD Wholesale Prices

Source: OPIS 34

PADD 4 Rocky Mountains

â&#x20AC;&#x153;The chart illustrates how the

Front Range area is dependent upon refinery production from multiple states including, Wyoming, Texas, Oklahoma, and Kansas.â&#x20AC;?

Front Range Market Overview The chart below shows a refining market overview of the Front Range markets. Each refinery has its listed production capacity in barrels per day, as well as the primary market(s) served and the percentage of supply share for their Front Range market. In addition, the chart includes those refineries which access the Front Range market by pipeline as well as the capacity shipped to the Denver area. The chart illustrates how the Front Range area is dependent upon refinery production from multiple states including, Wyoming, Texas, Oklahoma, and Kansas. Suncor Energy has the bulk of the supply share (34%) with their refinery assets in Denver, CO. Holly Frontier comes in second (27%) with their refineries in Cheyenne, WY and Eldorado, KS. In summary, Front Range refiners do not meet the total demand of the market. Disruptions in refineries outside the area routinely impact availability of supply as well as price.

ÂŠ 2013 Mansfield Energy Corp.

PADD 5 West Coast, AK, HI

West Coast Relatively Quiet PADD 5 has been relatively quiet as well this quarter. Although we saw a few spikes in prices in Q2, it was nothing like the last quarter of 2012. ExxonMobil’s Torrance, California and Tesoro’s Golden Eagle, California, and Tesoro’s Anacortes, Washington refineries took part in maintenance. BP’s Cherry Point Refinery’s Clean Diesel Project will be completed mid-2013. Cherry Point provides about 20% of the gasoline market in Washington and Oregon.

West Coast Gasoline Spot Prices

Comparisons of wholesale spot prices at San Francisco (white), Los Angeles (yellow), and Portland (green) show the Pacific Northwest (PNW), for the most part, maintained a premium for both gas and diesel. The premium for gas in the PNW spiked in May, as much as $.20/gallon amid thin prompt supplies, a demand spike, and refinery related issues.

“BP’s Cherry Point Refinery’s Clean Diesel Project will be completed mid-2013.” Source: Bloomberg

West Coast Diesel Spot Prices

Source: Bloomberg 36

Tesoro Cleared to Purchase BP’s Carson City Refinery

PADD 5 West Coast, AK, HI

Tesoro Corporation finally received both federal and state clearance for the purchase of BP’s Carson Refinery as well as ARCO stations and other assets totaling $2.4 billion. The purchase closed in early June and the acquisition means that Tesoro and Chevron will control more than half of the refining business in California. Consumer advocates see this as a disaster for California consumers considering they already pay some of the highest gasoline and diesel prices in the nation. However, the Federal Trade Commission believes the continuing drop in gasoline demand was leading to excess refinery capacity, and, in turn, constrained any ability for refiners to affect retail prices. Also, seven major refiners continue to supply the West Coast. BP will pull out of the southern California market as a result of this sale; however, they will remain committed in northern California. Even though the BP sale to Tesoro included ARCO retail brand rights, BP licensed those rights exclusively in Northern California, Oregon, and Washington. BP is expected to supply those retail sites from its Cherry Point refinery in Washington.

Source: OPIS

Tesoro shut down its 94,000 b/d Kapolei, Hawaii refinery in April and is now importing gasoline and distillates into Hawaii. This is the first time in recent history refined products are being imported into Hawaii. Hawaii is now down to one refinery, the 54,000 b/d Chevron refinery at Kapolei. Although Tesoro has options for importing into Hawaii from its own refineries on the U.S. West Coast and Alaska, the most economical purchase would come from Asia including South Korea and Japan.

Kinder Morgan Energy Partners Cancels Pipeline Project Kinder Morgan Energy Partners announced the cancellation of their Texas-California crude pipeline project. Kinder Morgan will not move forward with the project, citing a lack of sufficient market support. Many West Coast refiners hoped to have access to price advantaged Mid-continent and West Texas crude oil supply. Without the price advantaged crude oil from West Texas, West Coast refiners will continue to rely on costlier oil production from Alaska, San Joaquin Valley, and various imports. Without the project moving forward, Kinder Morgan plans to focus their attention on providing crude by rail from Texas locations.

Chevron Back to Normal in Richmond, CA Chevron restored normal refining operations at its Richmond, CA refinery. The refinery’s crude unit and pipes were damaged by fire in August of 2012. Chevron was quoted by OPIS as stating the repairs took more than 1.2 million hours over 242 days to complete. The 245,000 b/d refinery ran at reduced rates with downstream units that remained operational prior to the crude unit restart.

Canada Economic The Bank of Canada lowered its growth forecast for 2013, stating Canada’s economy will grow by only a meager 1.5% this year, well below the 2% expansion predicted only a few months ago. Canada’s economy is greatly influenced by other world markets, particularly the U.S., and won’t see the 2.4% improved growth it has hoped for until 2014. While exports are showing promise, Canadian housing markets are in decline and building starts are expected to continue to decline throughout the remainder of this year.

Consumer Price Index

Gross Domestic Product

Canada’s consumer price index rose 1.2 % from Q4 2012 to February 2013, displaying strong upward momentum. In March, however, the CPI declined by 0.2%. A key contributor to March’s lower CPI and inflation rate was a 0.3% decline in the price of gasoline from a year ago. March’s decline removed some of the volatility, confirming a widely held view that Canada remains in a very moderate inflationary environment. The consumer prices for food, household goods, clothing and transportation all declined in March.

Canada’s Gross Domestic Product increased by 0.6% in the first quarter of 2013, led by a solid boost in exports of 1.5%. On a monthly basis, the GDP expanded by 0.2 % in March, with exports being the key factor in Q1 growth. Four of seven GDP measures all moved higher in March. Other contributors to the GDP growth in March were mining, oil and gas extraction and utilities. Canadian Oil Sands Operation, Alberta

Canadian Oil Sands & Conventional Production MB/d

Source: Canadian Association of Petroleum Producers (CAPP)

2012 Canada & U.S. Crude Oil Demand by Market Region

Sources: CAPP, CA Energy Commission, EIA, Statistics Canada

Canadian Crude Oil Markets Canadian crude oil production is expected to grow steadily to 2030, and although oil sands remain the largest percentage of growth, a resurgence of conventional crude production represents the largest component of change on an annual basis. Oil sands production is predicted to reach 5.2 MB/d by the end of 2030. The resurgence of conventional oil in both Canada and the United States is leading to greater continental energy security and is changing the historical flows of crude oil through North America. With this growing production forecast, it has become a top priority for Canadian producers to establish new markets. A fundamental shift is occurring in the market due to strong growth in light crude production, which is replacing offshore imports to the light oil refineries in eastern Canada and the United States. Markets for growing heavy oil supplies are primarily found in the Midwestern U.S. and Gulf Coast regions. New market opportunities are emerging as a result of demand in Asia. Canada’s challenge remains gaining access to these markets, specifically for oil sands production.

Imperial To Convert Dartmouth Refinery Into Terminal In June, Imperial Oil announced in June the conversion of their Dartmouth, Nova Scotia refinery into a terminal operation, sighting competitive conditions as a challenge of operating a refinery of Dartmouth’s scale in the Atlantic market. The full conversion to a terminal operation is expected to be completed by the end of 2013. Source: The Canadian Press 39

Alternative Products Natural Gas

U.S. Natural Gas Consumption Natural gas demand has been on an uptrend over the last two years mainly due to more residential, industrial and commercial consumption. While still a relatively small percentage of overall natural gas demand, more and more businesses in different industries are starting to build natural gas fueling stations and purchase natural gas powered vehicles due to an established, reliable technology, favorable fuel savings, and quick ROI. Such is the case of UPS, who recently announced they would be adding four new fueling stations and purchasing 700 new LNG vehicles by the end of 2014. UPS already operates 112 LNG trucks in numerous markets across the country, including Nevada, Arizona, Utah and California. Like UPS, other large corporations are taking advantage of highly efficient natural gas vehicles, which have allowed some customers to save up to 40% in fuel costs over a 12-month period.

U.S. Natural Gas Consumption

Source: EIA

From a weather and temperature standpoint, natural gas consumption peaks during the winter season, due to larger residential and commercial space heating needs. According to the EIA, natural gas consumption is expected to increase in 2013 to average 70.0 billion cubic feet per day (Bcf/d) in 2013 and 69.6 Bcf/d in 2014. Following a consumption level of 69.7 Bcf/d in 2012, the increase is mainly due to colder winter temperatures (in comparison to 2012) as well as declines in electric power usage due to higher prices. 40

ÂŠ 2013 Mansfield Energy Corp.

Natural Gas U.S. Natural Gas Production Uptrend Continues, Exports to Mexico Increase U.S. Natural Gas production continues to be a popular topic as the U.S. benefits from higher and more efficient onshore supply, while federal Gulf of Mexico production continues to decline. According to the EIA, U.S. production is expected to increase from 69.2 Bcf/d in 2012 to 70.0 Bcf/d in 2013 and 70.4 Bcf/d in 2014, while net imports are expected to remain around the 0.4 Bcf/d level in 2013 and 2014.

U.S. Natural Gas Production and Imports

From a trade standpoint, the U.S. continues to benefit from a deficit in Mexico’s natural gas production, as the neighboring country’s growing consumption has outstripped declining local production. This has led to an increase of almost 29% in net exports of natural gas from the United States to Mexico, averaging 1.6 Bcf/d so far in 2013.

Source: EIA

U.S. Natural Gas Inventories

U.S. Working Natural Gas in Storage

As seen on the graph to the right, natural gas inventories remain within the 5-year range. Natural gas stocks totaled 2,252 Bcf on the week ending May 31st, leaving inventories 616 Bcf lower than at the same time in 2012 and 69 Bcf below the 5-year range. The EIA projects natural gas inventories will continue to build ahead of the winter season, reaching a level of approximately 3,813 Bcf by the end of October, which is 117 Bcf below last year’s level.

Source: EIA 42

Natural Gas

U.S. Natural Gas Prices

Henry Hub Natural Gas Price

Natural gas prices have been trending higher in 2013 mainly due to higher demand during the winter season. In fact, natural gas futures settled at a 2-month high price on April 5th due to colder weather conditions, increasing approximately 4.5% in one day. As expected, the increase in consumption due to severe weather conditions has reduced the inventory surplus so far in 2013. As seen on this graph, natural gas spot prices at Henry Hub (a distribution hub on the natural gas pipeline system in Louisiana) are expected to average $3.92 per MMBtu in 2013, approximately $1.17 per MMBtu higher than in 2012.

Source: EIA

ÂŠ 2013 Mansfield Energy Corp.

Renewable Fuels

Ethanol Inventories As was the case in the first quarter, the ethanol industry continued to keep an eye on the biofuel’s dwindling stock levels in Q2. For the week ending June 7th, the EIA reported ethanol inventories at 16 million barrels, the lowest on record since June 2010. Total supply is down 4.7 million barrels, or 22.6%, from year-ago levels, while ethanol plant production for the same week was down 3.9% from last year to 884,000 b/d.

U.S. Ethanol Stock Level

Source: EIA

Ethanol inventories have declined as producers reduced operations since last year’s drought – the worst since the 1930s – damaged the corn crop, boosting the cost to make the biofuel and decreasing production margins. The U.S. is required to use 13.8 billion gallons of ethanol this year, or about 900,000 b/d, while national production has averaged only 825,000 b/d.

Renewable Fuels

Planting Season Farmers faced unseasonably cold, wet weather to start the year’s planting season, raising concerns that delayed progress would ultimately affect crop output. On April 29th, the USDA released a progress report highlighting that farmers had sowed only 5% of the corn crop, trailing the 5-year average pace of 31% for the same period. On the news, CBOT corn for December delivery – the benchmark contract for the “new crop” – was up $.355 per bushel while the spot July contract traded up the daily limit of $.40 per bushel. The slow planting continued through the 19th week of the season when the USDA reported on May 13th that only 28% of the crop had been planted, the lowest since 1980. The tally was 27% behind the 2008-2012 average of 55% completion.

But the very next weekly report detailed concerns; on the back of warmer and drier weather, farmers had planted at a lightning pace. In a seven day period, U.S. farmers planted 42 million acres of corn, a one-week record. The crop progress report for the week for May 17th showed 71% of the planting complete, exactly on the 5-year average. The rapid planting make it more likely the U.S. will have a record harvest, bolstering depleted global inventories.

U.S. Corn Planting, % Complete

Source: USDA 46

Biodiesel RIN Prices

Renewable Fuels Ethanol to Gasoline Spread For much of the second quarter, ethanol’s discount to gasoline dwindled due to the aforementioned news. Q2 began with New York Harbor ethanol trading at a $.65 discount to RBOB gasoline; at the time, ethanol was led lower by corn plunging over 13% in two days as the USDA reported farmers will plant 97.282 million acres of the crop this year, the most since 1936. But, the declining national inventories and slow start to the corn planting season in the Midwest boosted ethanol values.

Ethanol RIN Prices

As a result, the ethanol to gasoline spread shrank considerably in most markets across the country, and for a time ethanol traded at or above gasoline values (excluding the RIN value). For instance, in the New York Harbor, ethanol increased to nearly $.02 above gasoline at the end of May. At the time, the ethanol to gasoline spread was the lowest since November 2011 based on front-month settlements.

Source: EIA

Spot NYH Ethanol – RBOB Gasoline

However, toward the end of the quarter, with government reports showing planting near completion, ethanol values began to ease; consequently, the spread widened, settling in the New York Harbor near a $.30 discount.

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

Andy Milton VP of Supply & Distribution Andy Milton heads the supply group for Mansfield and during his tenure the company has grown from 1.3 billion gallons to over 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuel supply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Prior to Mansfield, Andy worked at RaceTrac Petroleum. 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. Andy’s team handles a wide geographic area of all 50 states and Canada, including all gasoline products, ULSD, kerosene, Heating Oil, biodiesel, Ethanol, and Natural Gas. Andy’s education began at Young Harris College and later at Georgia Southern University where he received a BS in Sports Management.

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

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

Hannah Hauman Manager of Supply & Distribution Hannah Hauman serves as the Midcontinent Manager of Supply & Distribution and is based in Houston, TX. Hannah manages Midcontinent refined products trading and scheduling, contracts, procurement optimization, and fixed price shorts. Prior to joining Mansfield, Hannah worked for Marathon Petroleum Company and Atlas Oil Company in a variety of functions within marketing, supply, and trading. Hannah holds a BS from The University of Findlay and an MBA with a focus on Energy Risk Management from the University of Houston.

Jorge Pradilla Supply Risk Supervisor Jorge Pradilla started at Mansfield as an intern where he assisted with tracking supplier postings and market analytics. Jorge progressed to become a Supply Risk Supervisor focusing on Mansfield’s futures and clearport activities including reconciliation, broker dealings and trade executions. Jorge oversees the company’s hedging portfolio as well as tracks liabilities, fixed price contracts and analyzes market trends. Jorge also authors the FUELSNews Daily. Born in Colombia, Jorge holds a BS in Marketing from Piedmont College and an MBA in Managerial Leadership.

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

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

Scott Van Berkel Director of Canadian Operations Scott recently joined Mansfield after a 32 year career with Shell Canada Ltd. Scott’s broad expertise spans a variety of areas including marketing, sales, logistics and customer service. Scott held numerous management positions with both Shell Canada and their parent company, Royal Dutch Shell. Scott’s extensive knowledge of the Canadian market, coupled with his experience working in the Commercial, Industrial and Retail businesses, makes him an invaluable asset to the supply team. Scott holds a BS in Agricultural Economics from the University of Manitoba. 49

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FUELSNews 360° M A RKET NEWS & INFORMATION

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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 2013. 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.