FUELSNews 360 - Q4 2013 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

OCTOBER–DECEMBER Q1

4th QUARTER Q4

2 0 1 3

Q11

Q4 2013 Executive Summary The Fourth Quarter of 2013 reflected a slowly improving global economy, with the U.S. making the most evident strides towards recovery. The U.S. economy improved on several fronts, finally convincing the Federal Reserve to begin tapering the controversial Quantitative Easing (QE) program by $10 billion per month —a split between Treasuries and mortgage backed securities— starting in January, 2014. QE has been controversial over the last several months, as apparent improvements in the U.S. economy called for a reduction in the previously implemented monetary policies. Furthermore, macroeconomic reports suggested the U.S. economy is still growing moderately, with the labor market showing improvements while inflation is below its long-term goal of 2%. In China, economists expect another challenging year as the world’s second largest economy attempts to reduce its economic dependence on foreign investments and exports. Chinese officials have expressed acceptance of slower economic growth in its pursuit of higher domestic consumption. The Eurozone has made some progress during 2013, but their situation remains the most concerning. The European Central Bank (ECB)’s monetary policy has not made the impact they initially expected, as it has exposed difficulties amongst members’ structural differences. The unemployment rate is another point of concern, with the E.U. unemployment rate remaining above 12%, and the unemployment rate of young professionals under the age of 25 rose above 24%. Overall, despite minor improvements in demand and consumer sentiment, experts suggest the Eurozone has a lot of work ahead in order to effectively recover from the economic recession. With that said, the International Monetary Fund (IMF) expects global economic growth to reach 3.6% in 2014 and to continue increasing by an average of 4% per year between 2015 and 2018. From a domestic supply standpoint, increases in crude oil production tested an already strained and aging U.S. infrastructure. With U.S. production increasing at a rapid pace, the market has been challenged by several logistics problems which have translated to higher costs and significant market arbs. Despite the challenges, refineries operated at very efficient levels, taking temporary shutdowns and maintenance closeouts in stride. Yet, as the U.S. continues to ramp up production, consideration will need to be given to building new pipelines to aid the flow of crude and products (right now we are putting that stress on trucks, rails, and barges), building new/expanding existing refineries, and potentially lifting crude oil export restrictions. Geopolitics remained a big market driver, with disruptions in Libya and Iran making most of the noise. Unrest in the Middle East continues to cause production concerns, providing the support crude oil prices needed to stay above the 90. The market seemed to react positively to the agreements between the West, Libya, and Iran. However, critics remain skeptical on whether the situation will in fact improve in 2014, as 2013 proved it is far more complicated than diplomatic visits and informal agreements. Overall, the year 2013 brought to light some global economic problems that will need to be addressed, but there are many indicators that suggest 2014 will be a positive year. Most of these indicators come from the U.S. As the economy continues to recover, increasing oil production will generate new jobs and encourage domestic investments. With the U.S. taking steps in the right direction, the EIA expects foreign oil dependency to decrease from 60% in 2005 to 28% in 2014. However, resources are limited, so it will be interesting to see what the U.S. will do this upcoming year and in the years to come as we approach the new “oil boom.”

Index FUELSNews 360° Quarterly Report Q4 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. 4

Overview

FUELSNews 360° Commentaries

October through December, 2013

Commentaries; Andy, Sara

Fourth Quarter Summary

Commentaries; Dan, Hannah and Jorge

Commentaries; Evan P., Chris and Evan S.

Economic Outlook 7

Global Economic Outlook

U.S. Economic Outlook, PPI, CPI

Fundamentals

Regional View 28

PADD 1, 1A, New England

PADD 1B & 1C, Central & Lower Atlantic

PADD 2, Midwest

PADD 3, Gulf Coast

OPEC

PADD 4, Rocky Mountain

Non-OPEC Supply

PADD 5, West Coast, AK and HI

Domestic Crude Production

Canada

Domestic Crude Inventories

Strategic Petroleum Reserve

Days of Supply, Crack Spread by Crude Slate

U.S. Liquid Fuels Consumption

U.S. Exports, On-Road Diesel

U.S. Retail Gasoline Prices

Rack to Retail Diesel Spreads per PADD

Alternative Products 41 46 49

Natural Gas Renewable Fuels Urea–DEF

FUELSNews 360˚ Supply Team

Overview October 2013 through December 2013 Oil prices trended down during the first two months of Q4 before rallying during the month of December. As seen on the graph below, prompt month WTI crude oil ranged from a high of $104.10 in early October to a low of $92.30 in late November before rallying back up and settling at $98.42 on December 31st. The main price drivers behind these moves included inventory draws, geopolitical uncertainty, production disruptions, macroeconomic reports, and industry-relevant infrastructure news.

Fourth Quarter 2013 Congress votes to raise the debt limit U.S. crude supplies drop for fifth straight week

98.42

Jobless claims fall to lowest level since September 28th

U.S. crude stocks rise to fifteen-week high

TransCanada confirms operation date of Gulf Coast pipeline OPEC production drops to a two-year low

FN360o

Source: Bloomberg Finance L.P.

ÂŠ 2014 Mansfield Energy Corp.

Overview Fourth Quarter Summary While oil prices finished lower on average during the Fourth Quarter of 2013, gasoline and diesel finished in positive territory. Prompt crude oil futures (green) decreased by $3.91 per barrel and settled at $98.42, while gasoline (yellow) increased 15 cents to $2.7858, and diesel (white) increased 11 cents to $2.9710. The Dow Jones, the main indicator for stock market price movement, rose in comparison to Q3 and settled at 16,576.66.

Summary, Fourth Quarter 2013 Low: 312.41

Low: 283.92

278.58

Hi: 282.00

Low: 250.31

307.72

Hi: 102.04

98.42 Low: 92.63

16576.66 Hi: 16576.66

FN360

Low: 14776.53

Source: Bloomberg Finance L.P.

ÂŠ 2014 Mansfield Energy Corp.

“With promising GDP growth data, as well as increases in manufacturing and demand, the global economy is expected to grow faster next year... ”

Global Economic Outlook “The most encouraging metrics and

promising forecasts come from the United States, which has been able to make headway in many of its main economic sectors, including the labor sector, the manufacturing sector, and the housing sector.”

The world economy ended the year 2013 on a positive note and is looking to maintain momentum through 2014. With promising GDP growth data, as well as increases in manufacturing and demand, the global economy is expected to grow faster next year than it has during the previous three years, though the growth is expected to be gradual rather than a leap forward. The most encouraging metrics and promising forecasts come from the United States, which has been able to make headway in many of its main economic sectors, including the labor sector, the manufacturing sector, and the housing sector. For this reason, the Federal Reserve took action during Q4 and announced plans to begin tapering their quantitative easing program in January of 2014. Furthermore, stock markets remain strong and economic indicators for major economies suggest next year will be better, with higher consumer confidence across the board. In China, economists expect another complicated year as the world’s second largest economy attempts to reduce its economic dependence on foreign investments and exports in its attempts to spur domestic consumption. Chinese government officials have stated on multiple occasions they are willing to accept slower economic growth as they pursue this new strategy. 7

The Euro Zone appears more stable than it did last year, though it remains the biggest concern for the global economy heading into 2014. Unemployment remains a point of concern as the unemployment rate surpassed 12% (the unemployment rate of young professionals under the age of 25 is above 24%). Despite minor improvements in demand and consumer sentiment, the Euro Zone remains a big question mark for next year. Overall, with the U.S., Europe, and China accounting for almost 67% of global output, experts suggest global economic growth will progress and grow at a gradual pace. Going into 2014, the International Monetary Fund (IMF) expects the global economy to grow around 3.6% in 2014, an increase of 0.7% from the 2.9% IMF prediction for 2013. Furthermore, the IMF predicts global growth will increase to around 4% per year between 2015 and 2018, which is close to the average growth rate during the ten years before the Great Recession.

“Industrial production, manufacturing, housing, and the labor sector all showed improvements in Q4.”

U.S. Economic Outlook

The U.S. economy is improving on most fronts, translating into stronger consumer confidence and sentiment. Industrial production, manufacturing, housing, and the labor sector (despite the volatility in claims in December) all showed improvements in Q4. Perhaps the Producer Price Index (PPI) Month-to-Month Change Quantitative Easing (QE) program, which consists of printing biggest story during Q4 was the Fed’s decision to begin tapering the controversial October November December a total of $85 billion per month to ensure liquidity in long term bond markets, as-0.2% well as keeping interest-0.1% rates artificially low. The0.4% Fed announced tapering will begin in January of 2014, with a $10 billion reduction split between Treasuries and mortgage backed securities (MBSs). The tapering of QE had become such a popular subject that some had begun calling Wednesdays “Taper Wednesdays,” as the market speculated whether the Fed would announce a potential tapering of QE during each FOMC announcement. The Fed also announced they will leave policy rates unchanged and modestly reduce QE purchases, emphasizing that the Fed funds rate likely will remain low for quite some time after QE ends. The Fed also suggested the U.S. economy is still growing moderately, adding the labor market is improving but unemployment (at 7%) remains elevated, while inflation is below its long-term goal of 2%. Producer Price Index (PPI) Month-to-Month Change October -0.2%

November -0.1%

December 0.4%

Consumer Price Index (CPI) Month-to-Month Change October -0.1%

November 0.0%

December 0.3%

PPI Producer prices decreased following the Third Quarter, which CPI Consumer price inflation remained relatively flat during saw the producer price index increase at an average of 0.16% per month. As seen on the table above, producer prices decreased by 0.2% in October and 0.1% in November, and increased by 0.4% in December. At the headline level, weakness was led by decreased energy prices, which decreased by 1.5% percent in October and Consumer Price Index (CPI) Month-to-Month Change 0.4% in November (gasoline prices declined by 3.8% in October October November December and 0.7% in November). Overall, inflation remains relatively low, -0.1% 0.0% 0.3% which is a factor that has been used by some to argue that inflation is too low for the Fed to begin tapering QE. 9

Q4, with the consumer price index decreasing by 0.1% in October and remaining flat during the month of November. The energy component was perhaps one of the biggest contributors to keeping consumer prices in check, with energy prices slipping by 1.7% in October and 1.0% in November (gasoline declined by 2.9% in October and 1.6 in November). For the month of December, consumer prices increased 0.3%.

Fundamentals

OPEC Supply to Decrease in 2013 and 2014 As the year 2013 came to an end, the EIA estimated OPEC liquid fuels production declined by 0.8 million bbl/d during 2013, bringing the average down to 35.9 million barrels per day (bbl/d). The main contributors to the decline in production were the production disruptions of some OPEC members, while Saudi Arabia’s decrease in production during the first semester of the year also was an important factor. Total OPEC crude oil unplanned disruptions in November averaged 2.5 million bbl/d, a slight increase over October's 2.3 million bbl/d. Supply disruptions in Libya increased to nearly 1.4 million bbl/d in November, the highest level since the Libyan civil war in 2011, while unplanned supply disruptions in Iraq fell below 0.2 million bbl/d in November. 10

With that said, experts believe total OPEC surplus crude oil production capacity in the Fourth Quarter of 2013 reached 2.2 million bbl/d, which is 0.5 million bbl/d above Q3’s average and 0.2 million bbl/d under the Fourth Quarter of 2012. For 2014, projections are set for OPEC surplus crude oil production capacity to average 3.2 million bbl/d for the year which would represent an increase of 1.1 million bbl/d over the estimated 2013 average. Keep in mind these estimates do not include Iran’s additional capacity, which may be available if U.S. and European Union sanctions on Iran's oil sector are removed.

Fundamentals OPEC Surplus Crude Oil Production Capacity

(Million Barrels per Day)

FN360o Source: EIA

OPEC Basket Price

After averaging $108.73 during the month of September, the OPEC Crude Oil Basket Price dropped almost $4/bbl during the next two months, averaging $104.97 during the month of November. However, as seen on the graph below, Decemberâ&#x20AC;&#x2122;s rally brought prices back up to the $107.67 range, with the rally mainly attributed to Middle East production disruptions.

OPEC Basket Price

(Dollars per Barrel)

OPEC Basket Price

FN360o Source: OPEC

ÂŠ 2014 Mansfield Energy Corp.

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.

Fundamentals

Non-OPEC Supply to Increase Through 2014 As 2013 came to an end, the EIA estimates that non-OPEC liquid fuels production will average 55.9 million bbl/d in 2014. As discussed previously, the increase in non-OPEC liquid fuels production made up for OPEC production disruptions throughout the year. As seen on the graph below, the greatest contributor to non-OPEC supply growth is North America, where liquid fuels production is expected to increase by 1.9 million bbl/d in 2014 and by 1.5 million bbl/d in 2015. Most of the production growth comes from U.S. onshore tight oil formations and Canadian oil sands. Despite production hiccups around the world, only 0.5 million bbl/d of the 3.0 million bbl/d of global unplanned supply disruptions in November came from non-OPEC producers. Production disruptions occurred primarily in Syria, Brazil, Canada, and the United States, but most issues were resolved by November.

Non-OPEC Annual Production Growth

(Million Barrels per Day)

“Most of the production growth comes from U.S. onshore tight oil formations and Canadian oil sands.”

FN360o Source: EIA 12

Fundamentals

2014 Non-OPEC Crude Oil and Liquid Fuels Production

(Million Barrels per Day)

FN360o Source: EIA

For 2014, non-OPEC crude oil and liquid fuels production is projected to average 55.9 million bbl/d. The increase in non-OPEC production will be supported by a total production of 13.42 million bbl/d from the U.S. (a YoY increase of 1.125 million bbl/d), 4.38 million bbl/d from Canada, and 38.13 million bbl/d from other Non-OPEC members. Much like 2013, the increase in non-OPEC production will contribute to a declining OPEC production forecast, which experts estimate will be around 29.4 million bbl/d despite OPEC’s announcement that they plan to produce at least produce 30 million bbl/d.

OPEC vs. Non-OPEC Supply

“Much like 2013, the increase in non-OPEC production will contribute to a declining OPEC production forecast...”

(Million Barrels per Day)

FN360o FN360

Source: EIA 13

Fundamentals Domestic Production Exceeds Imports for First Time Since 1995 U.S. crude oil production exceeded net imports (imports minus exports) for the first time since February of 1995. Since reaching an annual average high of 12.5 million bbl/d in 2005, total U.S. liquid fuel net imports have been falling. The share of total U.S. consumption satisfied by liquid fuel net imports peaked at more than 60% in 2005 and has since fallen to an average of 40% in 2012. For the year 2014, forecasts suggest demand satisfied by net imports will decline to 28%, which would be the lowest level since 1985. U.S. crude oil production averaged 7.74 million barrels per day (bbl/d) during the month of October, while net imports of crude oil averaged 7.57 million bbl/d. As seen on the graph below, the gap expanded throughout the end of the year and is expected to continue widening through 2014. Forecasts suggest U.S. crude oil production will increase from an average of 6.5 million bbl/d in 2012 to 7.5 million bbl/d in 2013 and 8.5 million bbl/d in 2014, while net imports are expected to continue their downtrend. The biggest difference maker has been horizontal drilling and hydraulic fracturing technology (also known as fracking). This technology has allowed the U.S. to access supplies in shale formations in North Dakota, Texas and other states, which have contributed to most of the increase in field production from the Lower 48 States.

U.S. Domestic Production vs. Imports

(Million Barrels per Day)

FN360o Source: EIA

Top U.S. Crude Oil Producing States

(Thousand Barrels per Day)

FN360

Source: EIA 14

ÂŠ 2014 Mansfield Energy Corp.

U.S. Crude Oil Production per State In terms of U.S. crude oil production contribution per state, Texas (34%) contributed the most of any state coming into Q4, followed by North Dakota (12%), Alaska (7%), California (7%), and Oklahoma (4%). Breaking down this data shows that approximately 65% of U.S. crude oil production came from just five states. As discussed previously, most growth in U.S. crude oil production came (and is expected to continue for the next few years) from the drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian Basins.

Fundamentals

Adjusting Inventories for Accounting Purposes:

Domestic Crude Oil Inventories Domestic crude oil inventories played an important role during Q4, with domestic inventories surging to levels above the 5-year historical limit before plummeting later in the quarter. As seen on the graph above, crude oil inventories were almost 14 million barrels higher than the previous year until the month of December, when the destocking trend brought inventories back to more comfortable levels (yet higher than the 5-year average). It is fair to say that the downtrend was due to higher refinery run rates and companies adjusting their inventory levels for accounting/taxing purposes.

U.S. Commercial Crude Oil Stocks

When oil prices are higher at the end of the year (in comparison to earlier in the year) oil companies like to reduce their inventories, especially those who are on a last-in-first-out (LIFO) accounting basis. This means that they get to book higher prices as a cost against refinery runs, which translates to lowers taxes, while moving down to a lower price layer in LIFO for what remains in physical inventory. This is a typical scenario during the month of December, and the same companies usually begin to replace those barrels at the beginning of the year (mainly in January).

(Excluding SPR)

FN360o Source: EIA 15

ÂŠ 2014 Mansfield Energy Corp.

Fundamentals

Strategic Petroleum Reserve (SPR) The Strategic Petroleum Reserve remains at 696 million barrels, meaning it is approximately 96% full. However, with domestic production rising and foreign dependency decreasing, some argue it is time for the U.S. to begin allowing exports of crude oil and reducing the SPR level. The SPR was tapped in 2011 during a period referred to as the “Arab Spring sale.” In this case, about 30 million barrels were sold to offset disruptions caused by political chaos in Libya and other parts of the Middle East. The amount was matched by other IEA countries, accounting for a total of 60 million barrels released from stockpiles around the world for the specific situation.

U.S. Crude Oil in SPR

(Million Barrels)

Did You Know?

FN360o Source: EIA

U.S. Commercial Crude Oil Stocks and SPR

(Million Barrels)

FN360

Source: EIA

With a capacity of 727-million-barrels, the U.S. Strategic Petroleum Reserve is the largest stockpile of governmentowned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy. It is also the critical component for the United States to meet its International Energy Agency obligation to maintain emergency oil stocks, and it provides a national defense fuel reserve.

Fundamentals Days of Supply After flirting with the 5-year average during Q3, the Days of Supply (DOS) average rallied during the months of October and November, reaching a 5-year high in November before returning to a more comfortable level during the month of December. The DOS average consists of the number of days it would take for crude oil inventories to satisfy demand. As seen on the graph below, the DOS average for Q4 was 24.50 days, which is 0.70 days above the 5-year average and 1.76 days above Q3’s level.

U.S. Days of Supply of Crude Oil

(Excluding SPR)

Days of Supply (DOS) The number of days that crude inventories would satisfy demand.

FN360o Source: EIA

Crack Spread by Crude Slate Crack spreads increased over the Fourth Quarter, with refineries seeing strong profits by producing refined products. As seen on the graph below, Western Canadian Select crude oil’s crack spread increased to $51.10 per barrel during Q4, followed by WTI crude oil’s crack spread of $18.80 per barrel, and Brent crude oil’s crack spread of $6.90 per barrel. For the year 2013, WCS’s crack spread averaged $48.40/bbl, while WTI’s crack spread averaged $23.60/bbl, and Brent’s crack spread averaged $12.80/bbl.

Crack Spread 3:2:1 Spread

Crack Spreads by Crude Slate

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, that a refinery produces from crude oil. 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.

(January - December 2013)

FN360o 18

Fundamentals U.S. Liquid Fuels Consumption (Demand)

Total liquid fuels consumption increased by 300,000 barrels per day (bbl/d) during 2013, averaging 18.80 million barrels per day in comparison to 2012’s average of 18.49 million bbl/d. As seen on the graph below, gasoline consumption increased by 88,000 bbl/d, while distillate consumption increased by 84,000 bbl/d. For 2014, the EIA expects total liquid fuels consumption to decrease by 25,000 bbl/d, with gasoline consumption expected to decrease by 33,000 bbl/d and distillate consumption is expected to increase by 45,000 bbl/d.

U.S. Gasoline and Diesel Consumption

(Million Barrels per Day)

FN360

“Total liquid fuels consumption increased by 300,000 barrels per day (bbl/d) during 2013, averaging 18.80 million barrels per day in comparison to 2012’s average of 18.49 million bbl/d.”

Fundamentals U.S. Exports of Finished Petroleum Products Exports of petroleum products increased during the Fourth Quarter of 2013. Total finished petroleum products exports averaged 3.39 million bbl/d in the Fourth Quarter of 2013, an increase of 316,000 bbl/d compared to the 3.07 million bbl/d in in the Third Quarter of 2013. The biggest difference versus Q3 was gasoline exports, which increased by 230,000 bbl/d, while distillate exports rose by 70,000 bbl/d and other fuels increased by 20,000 bbl/d.

U.S. Weekly Exports of Finished Petroleum Products

(Million Barrels per Day)

FN360o Source: EIA

U.S. Retail On-Road Diesel On-road diesel prices finished Q4 lower than the Third Quarter of 2013. As seen on the graph below, retail diesel prices averaged $3.87 per gallon during Q4, a decrease of 4 cents compared to Q3’s $3.91 price average, as well as a 16 cent difference to last year’s Q4 average of $4.03. Furthermore, at a yearly average of $3.92, 2013 retail diesel prices finished 5 cents lower than in 2012, but 43 cents higher than the 5-year average of $3.50.

Weekly U.S. No. 2 Diesel Retail Prices

(Dollars per Gallon)

$4.80 $4.30 $3.80 $3.30 $2.80 $2.30

5-Year Range

2013

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5-Year Avg.

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FN360o Source: EIA

Fundamentals

U.S. Retail Gasoline Prices Retail gasoline prices decreased during the Fourth Quarter of 2013, finishing the year at an average of $3.29 per gallon, a decrease of 28 cents from Q3’s average of $3.57. In comparison to the previous year, at $3.51 per gallon, retail gasoline prices averaged 12 cents lower than 2012’s average of $3.62. Even more interesting, retail gasoline prices not only finished atop the five-year average, posting a weekly average of $3.33 per gallon during the last week of December – but set an all time record for the highest regular gasoline retail prices have ever closed a calendar year in recorded history.

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Weekly U.S. Regular Conventional Gasoline Retail Prices (Dollars per Gallon) “Even more interesting, retail gasoline prices not only finished !)#$%& atop the five-year average, !)#%%& !(#$%& posting a weekly average of !(#%%& $3.33 per gallon during the last !'#$%& week of December – but set an !'#%%& all time record for the highest !"#$%& regular gasoline retail prices have ever closed a calendar o 5-Year Range 5-Year Avg. 2012 2013 FN360 year in recorded history.” Source: EIA

Fundamentals

Rack to Retail Diesel Spreads per PADD The following charts represent the average price spreads between prices at the retail level and prices at the rack level (rack to retail spreads) for the calendar year 2013. Notice how the rack to retail diesel spreads change based on each market’s mechanics over time.

Northeast (PADD 1A) – 35 Cents

FN360o Source: EIA

Central Atlantic (PADD 1B) – 36 Cents

FN360o Source: EIA

Lower Atlantic (PADD 1C) – 25 Cents

FN360o Source: EIA 22

Midwest (PADD 2) – 26 Cents

Fundamentals

FN360

Gulf Coast (PADD 3) – 30 Cents

Source: EIA

FN360o

Rocky Mountain (PADD 4) – 20 Cents

Source: EIA

FN360o

West Coast (PADD 5) – 25 Cents

Source: EIA

FN360o Source: EIA 23

FUELSNews 360˚ Commentaries Andy’s Answer

BULL BEAR

The Fourth Quarter of 2013 turned out to continue the trend of making me look good, then bad all in the same 3-month time frame. Referencing my last comments, the 3-2-1 futures crack spread did stay sub $18 but not all quarter. The lowered crack margins didn’t even last through November before skyrocketing to the mid-$20’s. However, I will take this opportunity to pat myself on the back and say I did note Crude would stay above $90 and products (gas & diesel) did stay relatively low although I needed them to stay lower longer for my crack spread prediction to come true. As it turns out, my magic-8 ball does have some value left, but it’s a bit hazy. What’s all that mean for products going into First Quarter 2014? I’ll focus on diesel which is suffering from slow domestic demand yet continuous pressure as a growing export product. Since early 2011, diesel has stayed in a relatively tight range ($3.25/2.80). We need something to happen to have any reason to break out of that range. It doesn’t look like demand is going to be the cause and I don’t foresee any major supply issues, so we’ll leave it to the speculators and hedge funds to drive the direction from here. Assuming the non-commercial traders stay in commodities, there’s no reason for the market to collapse and unless the dollar strengthens considerably I’d suggest we can stay in this range. I’d also caution we have ability to go higher out of the range as we get further into the quarter due to the herd mentality “any news is bullish news.” The fact that we are hovering at 10-year lows on distillate inventory levels doesn’t appear to help the bears either. After all that rambling I’d say I’m bullish going into the 1st quarter of 2014 based on current price levels.

Sara’s Synopsis

BULL BEAR

The end of the 4th quarter had crude oil poised to trade three digits once again. Although refined products have not performed as nicely as crude, they, too, trended upward. However, cash differentials showed a different story. Gasoline traded at significant discounts to the NYMEX during the 4th quarter, and Ultra-Low Sulfur Diesel traded at a consistent discount as well. High U.S. Refinery Runs appeared to be much of the impetus for 4th quarter gains in the crude oil futures contract. With January usually posting sluggish demand, it will be difficult for refined products to maintain their zeal for higher prices. As for crude, however, unless the U.S. dollar continues to strengthen, it will perform in the high 90s and low 100s. In summary, I am a bullish on crude and bearish on products.

FUELSNews 360˚ Commentaries Dan’s Dissertation

BULL BEAR

While current ethanol inventories are at multi-year lows, ethanol production has risen steadily in recent weeks. Distillers have been incentivized by generally lower corn prices and higher spot ethanol prices, encouraging idled production back into the market. Ethanol production averaged 936,000 barrels a day in December, up 10 percent from the 849,000 barrels a day averaged in the first 11 months of the year. As a result, the tight supply in the market will ease into the New Year, with cash ethanol values falling from recent highs.

BULL BEAR

Hannah’s Hypothesis

BULL BEAR

As we finish out 2013 with crude testing $100 after a relatively tight $10 range throughout the last quarter, I’m bearish entering into 2014. Between the continued increases in U.S. crude production and the improved infrastructure to move crude out of the midcontinent for gulf coast inputs and exports, there is globally more incremental supply than there is demand from emerging markets. I don’t believe the market will be as nervous as we have been historically regarding threats of unrest in the Mideast, however I do recognize that significant turmoil can push us over the $110 mark in short order. That said, now that I’ve officially sided with the bear, it may be in your best interest to go long WTI!

Jorge’s Judgment

BULL BEAR

I’m bullish on crude prices going into the New Year. Despite U.S. crude oil production growing significantly year over year, the unrest in the Middle East has provided crude oil prices a floor in BULL the low 90s. Furthermore, the Fed’s decision to begin tapering QE in January could have an BEAR effect on energy commodities, which have been artificially inflated for a while. I think the tapering QE will also have a negative effect on the U.S. dollar, which will in turn push crude oil prices higher. With that said, I think the wild card will be OPEC production, with Iran, Libya, and Iraq poised to ramp up production to much higher levels. It will be interesting to see if the west eliminates oil sanctions on Iran, and if OPEC will allow these economies to overproduce or if they will enforce production levels (currently at 30 million bbl/d) to keep prices high. Keep in mind oil is the main source of income for most of these economies, so it is in everyone’s best interest to keep prices higher by keeping production levels in check. For products, I expect diesel prices to increase slightly and gasoline prices to remain fairly flat. On the diesel side, I expect demand to continue increasing in Q1, with the higher amount of distillates needed during the winter months having an effect on prices. I expect gasoline to stay fairly level as demand is expected to remain constant. 25

FUELSNews 360˚ Commentaries Evan’s Expression

BULL BEAR

Expect the downward Q4 momentum for crude to continue into the New Year as global demand slides lower, oil costs across all indices dip further, and uncertainty continues to plague the Middle East and Northern Africa. Of the 90.6 million barrels of crude produced each day in November 2013, OPEC members generated their lowest volume in more than two years — contributing 29.3mbd (nearly 30% of global production) yet accounting for more than 80% of the world’s global outages and costing the industry 2.5mbd. Perhaps by the Second Quarter production from OPEC nations will have normalized and progress will have been made toward resolving political unrest in Libya, Syria, Nigeria, Iran or Iraq. Take your pick, but I’ll be thrilled to see improvement in any of these regions. In the meantime, Brent crude prices will continue to soften as other nations pick up the slack in OPEC’s absence. At home, refined products will rebound from seasonally low prices, but expect it to be modest — 5 to 10% lower year-over-year. Strong domestic economics — including plentiful crude stocks at discounted rates and increased refinery capacity — will suppress diesel and gas prices until we enter the spring. While I believe this quarter will emerge as a lazy bear, its disposition will be determined by the global market and its demand for both crude and distillates. Should European demand surge or OPEC nations falter, this bear could start growing horns.

Chris’s Concept

Evan’s Estimation

BULL BEAR

As we move into the First Quarter of 2014, I expect the market to trade at current levels or possibly trend down. I believe the benefit of the U.S. producing more oil than it has in over two decades will have an impact on the market. Domestic oil production is expected to rise by a million barrels per day to 8.5 million barrels per day. Domestically, product prices will reflect that North American oil is around $8 per barrel cheaper than oil priced off the global index, although as crude production continues to grow, there are still challenges for logistics between crude and refined products in certain markets. Railcars and Jones Act approved vessels rates are still at an all-time high; this may cause certain markets to have higher downstream prices. For the overall market, I’m slightly bearish for the beginning of 2014.

BULL BEAR

For the First Quarter of 2014, I am going to stick with my bullish prediction I made for the Fourth BULL Quarter of 2013. One of the main influences for my decision is the ongoing tension in the Middle BEAR East. The disagreement overseas, especially in Libya, seems like it’ll never come to a close. Libyan ports were scheduled to reopen on December 15th but remained closed; this is causing tensions to increase and exports to be reduced dramatically (around 83% lower than what Libya exported earlier in the year). This conflict by the Libyan rebels is going to escalate and put upward pressure on the oil market. Another event influencing my bullish prediction is the inventory levels dropping even though we are out of the height of the driving season. This is partially due to the reduced output by Libya and the refinery issues faced in the U.S. As long as these inventory levels stay suppressed, we can see a boost in oil prices 26

“U.S. crude oil production exceeded net imports (imports minus exports) for the first time since February of 1995. ”

Regional View ? PADD 4: Rocky Mountain

PADD 5: West Coast, AK, HI

Did You Know? PADD 2: Midwest

PADD 3: Gulf Coast

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.

2013/2014 Northeast Winter Season PADD 1 East Coast PADD 1A New England

Wintery conditions have caused numerous logistical issues in the Northeast from treacherous driving conditions to product outages. Some locations in New England have already seen sub-zero temperatures which caused concerns of gelling diesel fuel. These frigid temperatures are not expected to hang around for the entire winter, according to the Climate Prediction Center (CPC) at NOAA. The CPC has forecasted warmer than normal temperatures for the majority of the New England area. The U.S. Energy Information Administration (EIA), on the other hand, is predicting a 3% decrease in temperatures this winter season compared to the previous winter.

“ The CPC has forecasted warmer than

The Northeast is currently the largest consumer of heating oil in the country. According to the EIA’s predictions, out of all the different heating methods in the Northeast, heating oil is the only product that is predicted to drop in price compared to last winter. Heating oil prices are predicted to decrease 5% this winter season, saving a typical household an average of $46 this season. Conversely, homes that heat with natural gas, propane and electricity are predicted to spend more on average this winter in comparison to last winter.

normal temperatures for the majority of the New England area.”

COOLER EQUAL CHANCES

WARMER

EQUAL CHANCES

After reviewing these differing predictions of winter temperatures by the CPC and EIA, it will be interesting to see how this winter season affects the Northeast region. We have already seen over a foot of snow in parts of Pennsylvania and New York, and sub-zero temperatures in Northern New England states with months to go before a spring thaw. The question now remains: does Mother Nature have more hazardous weather in store for the coming months or will this winter season be warmer than average?

EQUAL CHANCES

WARMER

“Some locations in New England have already seen sub-zero temperatures which caused concerns of gelling diesel fuel. ”

PADD 1 East Coast

Hess Exits Downstream Market At the beginning of the Fourth Quarter of 2013, Hess announced that Buckeye Partners agreed to acquire Hessâ&#x20AC;&#x2122; twenty terminals up and down the East Coast (and the Caribbean). The terminal acquisitions were expected as Hess stated earlier this year their intent to exit the downstream sector of the oil industry. During the first week of December, Hess ceased sending prices for unbranded supply in the Connecticut and Philadelphia markets. By December 11th, Hess concluded their unbranded rack sales throughout the East Coast, and Buckeye took ownership of all Hess terminals. During this transition, Buckeye has altered the names of multiple terminals where Buckeye terminals already existed. This departure from the East Coast markets has created additional opportunities for other companies within the region to expand their respective businesses.

PADD 1A New England

BUCKEYE PARTNERS, L.P.

Continuing their pull out of the downstream sector, Hess also sold their bunker fuels business to Aegean Marine Petroleum Network Inc., a Greek-based company. Aegean is a worldwide company and this purchase will leverage their presence in the United States. Hess sold their commercial fuels business outside of the New York City area to Sprague Resources LP and sold their business within New York City to Direct Energy. With these transactions, Hess has officially exited the wholesale sector. Hess will continue to decide whether to sell or spin off their retail assets.

U.S. East Coast

St Croix St Lucia

ÂŠ 2014 Mansfield Energy Corp.

PADD 1 East Coast PADD 1A New England

“ Since many wholesale

suppliers and retail stations are refusing to let this tax eat into their margins, fuel prices have increased at the pump.”

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic

Pennsylvania Wholesale Taxes on the Rise Since January 1st, the State of Pennsylvania enforced a higher tax rate for wholesale fuels sold within the state. The wholesale tax for gasoline rose to $0.4070 per gallon (increase of $0.0950 per gallon) and the tax for diesel product rose to $0.5100 per gallon (increase of $0.1300 per gallon). This increase puts Pennsylvania state fuel taxes well above the average across the nation ($.1278 on gasoline and $.2214 on diesel). Since many wholesale suppliers and retail stations are refusing to let this tax eat into their margins, fuel prices have increased at the pump. In 2013, Pennsylvania’s gas prices were already among the highest in the Northeast and, with this extra tax in place, many drivers are being encouraged to drive into neighboring states to purchase cheaper fuel.

Within the bill, tax hikes for the upcoming years were also outlined. Gasoline wholesale taxes are expected to increase an additional $0.0900 at the start of 2015 and another $.0800 at the start of 2017. By 2018, this tax increase is expected to bring in over $2.3 billion a year for the Pennsylvania Department of Transportation. This extra revenue created by the tax hike is going to fund multiple road projects and reinforce many bridges. Since Pennsylvania has the fifth-oldest road system in the U.S. and is leading the country in structurally deficient bridges, these funds are much needed to make repairs.

Florida Supply Florida supply continued to be tight during the Fourth Quarter of 2014. During November, both ULSD and Gasoline were very tight in Tampa, Orlando, Miami and Cape Canaveral. The majority of supply issues in Tampa and Orlando were caused by dock maintenance at the Port of Tampa. As old docks were taken out of service, it created a limited amount of dock space for vessels to unload. The maintenance will allow future deliveries of product to be unloaded from a single dock to multiple terminals as opposed to previously taking deliveries to only one or two terminals. During this construction period, it wasn’t uncommon for vessels to be delayed 2-3 days from unloading at the docks, but allocations began to be fully resupplied around the end of November.

For the past year, Florida supply has faced increased vessel rates for U.S. flagged vessels. Due to the increase in demand, vessels are currently booking 3-5 years out for $90,000-$110,000 per day. Last year, vessels would only book for 1-2 years and the market rate was $65,000 –$70,000 per day. The increased vessel demand is not only due to refiners in the Caribbean shutting down but also to the increase of crude being delivered into the Gulf via pipelines and rail. Vessels could see another spike in demand in 2014 as TransCanda starts delivering crude into the Gulf via pipeline. 31

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic

Atlanta Junction In October, Colonial Pipeline announced it would be performing scheduled maintenance on the Atlanta Junction and tank farms. The upgrade was part of a program to help improve the company’s control systems that support safe, centralized, efficient and timely deliveries. During the maintenance, Lines 1 and 2 saw very little impact, with the most impacted lines being line 15/13 Doraville, Line 19 Nashville, Line 17 Bainbridge, and Line 18 Knoxville. These lines had allocations reduced on Cycles 57 - 60. Due to the upgrade, terminals that are supplied through the spur lines mentioned above had limited allocations during this time. Colonial was able to complete the project ahead of schedule which helped provide some needed relief for the tight markets.

RVP Change The EPA announced that it’s likely to approve North Carolina’s request to redesign the Charlotte LRVP attainment area. This move would change the spec of gasoline required to be sold in certain counties. There are six counties impacted by this move: Cabarrus, Gaston, Lincoln, Mecklenburg, Rowan, Union, and part of Iredell. If the EPA approves the change, these counties would move from a 7.8lb spec to 9.0lb spec; however, gas marketers don’t believe that the EPA will make a decision before the RVP change in the spring of 2014. 32

The EPA is also expected to take final action in approving Georgia’s attainment area. Georgia has 45 counties that require the 7.0lb spec gas as opposed to the 7.8lb spec. Last year the EPA waved the 7.0lb requirement for surrounding Alabama counties, and Atlanta gas marketers are hoping the change will help with shortness of supply during RVP transitions.

PADD 2 Midwest

Citgo Lemont Refinery Fire In late October, residents in Lemont, IL were shocked to see thick, black smoke billowing over the Citgo Lemont refinery. While thankfully no injuries or fatalities occurred, the threehour fire, presumed to be caused by a leak, badly damaged the vacuum distillation unit (VDU) and forced the refinery to halt production entirely. The refinery has since resumed production, however, at reduced rates. Sources say that the VDU, often viewed as an extension of the crude unit, will continue to undergo repairs for up to the next six months.

As a result of the unplanned drop in production, Chicago-based diesel markets fetched a premium over almost every other U.S. market, compared to the previous month in which Chicago boasted the cheapest ULSD prices in the nation.

Source: Chicago Tribune

Magellan North Pipeline Converts to Sub-Octane Magellan Midstream Partnerâ&#x20AC;&#x2122;s Magellan North pipeline system, the main vein for refined products in the central United States, officially underwent transitioning from a conventional gasoline (87 octane) to a CBOB, or suboctane, gasoline (84 octane) effective September 15th. This transition coincides with the standard switch to HRVP (high Reid Vapor Pressure) at this time of year. End users should only notice a slight discount in cost, as CBOB blended with 10% ethanol equates to an 87 octane gasoline. This does mean, however, that supplies of nonethanol gasoline, or a straight conventional 87 gasoline fuel, may become more difficult to find. The pipeline, which runs from Houston through northern Minnesota, was considered fully converted as of 10/01/2013.

ÂŠ 2014 Mansfield Energy Corp.

PADD 3 Gulf Coast

Ho-Ho Pipeline Reversal Update

As of mid-December, Europe’s largest oil refiner, Royal Dutch Shell plc, had completed the second phase of the Houston-to-Houma (or Ho-Ho) pipeline project. Originally transporting crude from Louisiana to Texas, the reversed line originates in the inland oil plays such as Eagleford, allowing for cheaper crude access for gulf coast refiners. The reversed pipeline will carry approximately 360,000 bpd and will assist in relieving a supply glut currently seen on the coast of Texas, as pipelines start to ship crude away from the Midwest.

There are still two phases remaining in the Ho-Ho project, involving the construction of pumping stations at Channelview and Port Neches and increased capacity levels for the pipelines. The final upgrades are scheduled to be completed in early 2014, with the new tariffs in effect as of December, 2013.

Ho-Ho Pipeline Systems LAKE CHARLES REFINERIES

HOUSTON

EAST HOUSTON

SHIP CHANNEL REFINERIES GENOA JUNCTION

CHANNEL VIEW JUNCTION

BAYTOWN REFINERIES

BATON ROUGE

LAKE CHARLES LAFAYETTE

NEDERLAND TERMINALS

CONVENT REFINERY NEW IBERIA

ST. JAMES

ERATH

PORT ARTHUR REFINERIES

HOUMA

GALVESTON

BP SEAWAY EXXON

USGC Distillate Exports Reach All-Time Highs As the U.S. continues its trend of high crude production, refined products have followed suit and serve as the marginal supply to meet global demand. Gulf coast distillate exports, in particular, have boasted new highs year-on-year for almost a decade and don’t show signs of slowing down. 2013 distillate exports, already on pace to exceed the previous year, finished the year strong with the Fourth Quarter representing a sustained trend of over a million barrels-per-day. To put the increase in perspective, only ten years ago exports totaled roughly 59,000 barrelsper-day, making the Fourth Quarter print an increase by a multiple of 18. This extreme uptick in export barrels can be attributed to increased U.S. production, as well as open arbitrage opportunities into South America and Europe. A recent revocation of Europe’s jet import tax will likely boost these numbers even higher for 2014.

U.S. Gulf Coast Distillate Exports

FN360o 34

Source: EIA

PADD 4 Rocky Mountain

“ The Rockies are

typically short of gasoline during the summer, yet long in the fall and winter.”

HollyFrontier Gets Green Light on Woods Cross, UT Refinery Expansion HollyFrontier announced the receipt of their permit for the Woods Cross, Utah refinery expansion. The expansion of the refinery from 31,000 barrels per day to 45,000 barrels per day is expected to be completed in mid-2015. According to HollyFrontier, the Woods Cross Refinery is a high conversion refinery that has privileged access to regional sweet and black wax crudes, as well as pipeline access to Canadian crude oils. Woods Cross refined products are marketed primarily in Utah, Idaho, Nevada, Wyoming, and eastern Washington.

Magellan Midstream Partners, L.P. Finished Acquisition of Rocky Mountain Pipeline

Calumet to Triple Production in Great Falls, MT Refinery

Magellan Midstream Partners, L.P. closed on its acquisition of Rocky Mountain Pipeline from Plains All American Pipeline, L.P. in November of 2013. The pipeline system includes four terminals and distributes refined products in Colorado, Wyoming, and South Dakota with 550 miles of pipeline and nearly 1.7 million barrels of storage.

Calumet announced plans to triple its production at its small refinery in Great Falls, Montana. The refinery currently has a capacity of just 9,500 barrels per day. Calumet received the necessary air quality permit to increase the refinery’s output to 30,000 barrels per day. The Rockies are typically short of gasoline during the summer, yet long in the fall and winter. With a small population base, there is speculation on where the additional production would be utilized during those off-season months. 35

PADD 4 Rocky Mountain

Group 3 Diesel vs. Denver Rack Diesel Meanwhile, a discount to Group 3 (or PADD 2) barrels created an arbitrage opportunity to ship #2 Ultra-Low Sulfur Diesel to the Denver rack market in the 4th quarter. During the month of November, Group 3 #2 Ultra-Low Sulfur Diesel was at a $.12 per gallon discount to the Denver rack average, while maintaining a discount of $.06 per gallon throughout the 4th quarter.

Group 3 Diesel vs. Denver Rack Diesel

“ Twelve hour truck

lines were the norm as drivers waited for rack terminals to receive product, with only a handful of available loads at a time.”

FN360o Source: EIA

Unfortunately, Group 3 economics did not help the struggling #1 Ultra-Low Sulfur Diesel market throughout the Rockies. An early blast of frigid Canadian air caught the region by surprise. A shortage of #1 Ultra-Low Sulfur Diesel in Montana, Wyoming, and the Dakotas had carriers driving as far as Denver to load the product. Twelve hour truck lines were the norm as drivers waited for rack terminals to receive product, with only a handful of available loads at a time. Although area pipelines continued to ship the product, suppliers were held to transit times of more than twenty days, making it difficult to commit to shipping with the onerous timeline. 36

PADD 5 West Coast, AK, HI

The beginning of the Third Quarter reflected a year over year drop of nearly $.86 cents/gallon for gasoline prices in Los Angeles, California. With the refinery issues of 2012 taken out of play, California consumers found some relief at the pump, while the Pacific Northwest gasoline market saw low prices not seen since the beginning of January. This pattern continued through the 4th quarter with spot prices for gasoline trading at lows not seen since the beginning of the year.

Los Angeles CARB Gasoline vs. Portland Gasoline

FN360o Source: Bloomberg Finance L.P.

As for diesel, spot prices finally started to strengthen at the end of December with refinery buyers entering the market. A handful of refinery issues as well as inventory draws seemed to support the activity. In fact, the Department of Energy reported that total supplies along the West Coast were 1.3 million barrels lower on the year.

Los Angeles CARB ULD, San Francisco CARB ULSD, Portland ULSD

FN360o Source: Bloomberg Finance L.P.

Following the acquisition of the BP Carson, CA refinery, Tesoro announced plans for the integration of its two refineries in Los Angeles (Carson, CA and Wilmington, CA), which will increase Tesoro’s refining capacity to 363,000 barrels per day - making it the largest refinery on the West Coast. However, Tesoro also announced its plans to shut down the 36,000 barrel per day fluid catalectic cracking unit at Wilmington in order to comply with the state of California’s AB32 cap-and-trade regulations. The shutdown of this unit will help Tesoro reduce its CO2 emission by approximately 500,000 tons per year. With the integration of the former BP Carson facility, Tesoro can continue to supply its southern California markets in spite of the planned shutdown. 37

Canada Key Economic Indicators Gross Domestic Product has grown by 2.3% year-over-year after a 0.7% increase in Q3 with the largest gains in mining, quarrying, and oil extraction (7.6%) followed by agriculture (6.8%) and entertainment (6.5%). Meanwhile, the Bank of Canada cut its outlook for economic growth between now and 2015 based on slowed growth in the United States. Exports were up by more than 5% ($2.05B), but those numbers should increase further as volumes in Alberta’s oil sands are expected to nearly triple to 5.2 million b/d between now and 2030. The Canadian Association of Petroleum Producers (CAPP)’s vice-president Greg Stringham suggested this “creates further opportunities to replace foreign crude oil imports in both Canada and the United States and to increase exports to new markets beyond North America.”

U.S. Crude Exports into Eastern Canada Surge U.S. crude exports into Eastern Canada have nearly tripled since this time last year. Consequently, Canada has secured its place as one of the world’s few net exporters of crude and has become the largest foreign supplier of crude oil to the U.S. You may notice these two statements appear contradictory. However, while Canada is one of the world’s largest exporters of heavy sour crude, their own refineries on the east coast are incapable of processing heavier classifications and run predominately light sweet varieties — like those found in the Eagle Ford shale formation. Subsequently, cheaper crude is exported from Western Canada to the United States’ Group 3, Chicago, and Gulf Coast refineries while costlier U.S. light grades are imported to Canada’s Atlantic refineries.

Canada Western Canada Construction of Sturgeon Refinery, Alberta Begins In an effort to increase production of refined products in Western Canada and make the most of their own natural resources, Calgary-based North West Upgrading Inc., in conjunction with Canadian Natural Resources Ltd. and the Alberta provincial government, broke ground in late September on the first Canadian ground up refining operation since 1984. The first phase of the Sturgeon facility — costing $5.7-billion — will convert 50,000 b/d of heavily discounted bitumen oil to diesel capable of meeting domestic demand or being sold abroad at a considerably higher market value. The facility will also hold the distinction of being the first refinery in the world to capture and sell CO2 generated during the refining process. North West Upgrading founder and Chairman Ian MacGregor claims the fullyrealized project should generate $10 billion a year in sales and roughly $1 trillion in economic activity for Alberta over the course of its economic life. 38

Canada Eastern Canada Sun-Canadian Pipeline Forced to Shut Down Due to Heavy Leakage On September 10th, the Sun-Canadian pipeline leading through Sarnia — home to four oil refineries responsible for supplying the majority of Ontario — leaked two hundred barrels of diesel into the streets and nearby St. Clair River, crippling an already tightly-stretched distribution network. After 71 days of cleanup and repair, the pipeline was restarted and supply is beginning to stabilize. Source: Sun-Canadian Pipe via CNW

Enbridge Crude Pipeline to Reverse Flow Once Again Due to Arbitrage Opportunities

At the start of December, a Quebec National Assembly committee unanimously approved the reversal — with conditions. First, no crude oil from the pipeline will be exported. Second, Enbridge would perform hydrostatic testing to assess the structural integrity of the now 38-year-old pipeline. This condition is sparking debate as it would cost Enbridge roughly $8 million in lost revenues as the $2 million testing is performed. While Enbridge argues the necessity of hydrostatic versus industry-standard drone testing, they have little room to negotiate after spilling more than 3 million liters of crude in Michigan during a 2010 reversal. If Enbridge is successful, consumers may soon reap the benefits of cheaper Western Canadian oil at a retail level as refineries in Ontario and Quebec switch to the considerably cheaper stock. Source: Kevin Dougherty, Montreal Gazette

Enbridge Inc. embarked on a controversial crusade in 2012 — to reverse the flow of the Enbridge crude pipeline connecting Sarnia, ON and Montreal, QC. Constructed in 1976, legislators approved in 1998 an east-to-west reversal of the then 22-year-old pipeline in order to capitalize on more economic West African imports. Now, with Western Canadian crude priced so far below foreign imports, Enbridge hopes to reverse their previous reversal, pushing domestic crude to Quebec refiners.

TERREBONNE STATION

ONTARIO

CANADA

QUEBEC

MIRABEL/SAINT-JANVIER MONTREAL

OTTAWA

LANCASTER

MONTREAL TERMINAL

IROQUOIS LAKE HU R ON

PRESCOTT

HILTON STATION BELLEVILLE

NORTH WESTOVER STATION

LINE 9A

SARNIA

LONDON

CARDINAL STATION

LINE 9B

LINE 9

OSHAWA

GANANOQUE

PORT HOPE

TORONTO LAKE ON TARIO

WESTOVER TERMINAL

HAMILTON

SARNIA TERMINAL

CHIPPAWA

UNITED STATES OF AMERICA LAKE ERIE

LINE 9 REVERSAL PHASE I PROJECT (APPROVED)

LINE 9B REVERSAL PROJECT (PROPOSED)

Line 9 Projects EXISTING LINE 9 PIPELINE

ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR THE LINE 9 REVERSAL PHASE I PROJECT ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR BOTH THE LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT AND THE LINE 9 REVERSAL PHASE I PROJECT.

CITY/TOWN

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Alternative Products Natural Gas: Affordable, Abundant, American Due to the enormous production of â&#x20AC;&#x153;tightâ&#x20AC;? natural gas from shale formations throughout the country (map at left), the United States is experiencing an energy renaissance, with well over 100 years of identified and recoverable natural gas reserves within our borders.

According to the Potential Gas Committee, these reserves were estimated to have increased by 28% between 2010 and 2012 alone.

As a result of the substantial increase in domestic supply, natural gas prices, which first began to drop in 2007, are expected to trade in a relatively low-priced and narrow range for the foreseeable future. On an energy equivalent basis, natural gas, which trades on the NYMEX based on Henry Hub prices at an average 2013 price of $3.50/mmBtu, costs the equivalent of $0.50 on a diesel gallon equivalent (DGE) basis. On a retail basis, the nation-wide average price of CNG for the 12 months ending October 2013 was $2.39/gal compared to a diesel at $3.94/gal, representing a price spread of $1.55/gal. 41

ÂŠ 2014 Mansfield Energy Corp.

Natural Gas

US Natural Gas vs. Petroleum Distillate Pricing (Dollars per Gallon)

FN360o Source: EIA

The chart above illustrates how the price of natural gas (on a $/million Btu basis) has dropped and stabilized over the past 5-6 years, while the cost of diesel and gasoline has risen significantly over the same period, while demonstrating much higher pricing volatility. This decoupling of natural gas and petroleum distillate pricing represents a secular change in the market, with no expectations of near-term reversal. Of great significance to the fuel consumer is the fact that the underlying commodity price of natural gas only comprises 20% of CNG on a retail basis, so any move in commodity price will be dampened. For example, a doubling in the price of natural gas commodity only increases the pump prices by $0.50/gal. In contrast, approximately 70% of the price of crude is reflected in diesel prices, so the underlying volatility of crude is substantially translated into the wholesale and retail price of diesel. A doubling of crude prices could result in a diesel price increase of over $2.50/gal to around $6.50/gallon. 42

ÂŠ 2014 Mansfield Energy Corp.

Natural Gas Natural Gas as a Transportation Fuel Natural Gas has long been in widespread use as a transportation fuel throughout the world, but has lagged in the United States. This has largely been a function of the relatively inexpensive prices of petroleum distillates in the U.S. compared to other countries; coupled with the lack of natural gas vehicle options and scarcity of fueling locations. There are over 17 million Natural Gas Vehicles (NGV's) operating world-wide, with the majority of them in less developed countries such as Pakistan, Iran, India, Argentina and Brazil; each with well over 2 million vehicles. By contrast, there are only around 250,000 NGVs operating in the U.S. This global market has been primarily comprised of light duty vehicles (LDV) up to this point, with a much broader array of vehicles and infrastructure available in these countries. In many of these countries, the cost of gasoline and diesel is often 30% - 50% more than in the U.S. (and before fuel prices in the U.S. increased, many were 100%-200% more), thus providing the economic motive for switching. Even now, western European gasoline and diesel prices are typically well over double the U.S. prices.

In the US, NGV use had historically been associated with Transit (i.e., buses), largely driven by air quality requirements and financed by federal funding, with fuel price as a non-factor. As shown in the chart on page 42, until the mid-2000’s petroleum distillate fuels were comparably priced with natural gas on a cost per unit of energy ($/mmBtu) basis in the U.S. That price parity, coupled with a scarcity of natural gas fueling infrastructure and a higher cost of natural gas vehicles, provided virtually no incentive for conversion. With rare exception, only municipal transit agencies with available federal funding and sufficient aggregate demand to develop their own fueling infrastructure were switching to NGVs. Transit use was largely responsible for the steady rise of natural gas use in vehicles from the mid-1990s through the late 2000’s, as illustrated below. The first sector to seek widespread adoption was trash collection, which was enabled by their high annual fuel consumption and return-to-base operations, making a single refueling location quite suitable.

U.S. Natural Gas Vehicle Fuel Consumption (Million Cubic Feet)

FN360o Source: EIA 43

Natural Gas The 3rd “T”– Growing Natural Gas Use in Class 8 Trucking As discussed Previously, the natural gas revolution in the U.S. was led by Transit, and later Trash which was the first private sector to seek widespread adoption of natural gas, which was enabled by their high annual fuel consumption and return-to-base operations, making a single refueling location quite suitable. The 3rd “T” is now having its day – Trucking. As part of an effort to gain market advantage through reduced operating costs, environmental footprints and carbon emissions, more and more large companies are beginning to convert their trucking fleets to take advantage of the economic, societal and environmental benefits of natural gas. Class 8 truck operators have also benefitted from the commercial release of the 12 liter Cummins ISXG12 natural gas engine, which has the torque and horsepower to meet the vast majority of their service demands. Virtually all of the major truck manufacturers are producing tractors that include this engine, including: Mack, Volvo, Freightliner, Peterbilt and Kenworth; and major leasing companies, like Ryder, have incorporated natural gas vehicles into their full service leases. A small sampling of these companies includes: • UPS, who recently announced the construction of 9 LNG stations, bringing their total to 13; in conjunction with an announced expansion of their natural gas trucking fleet to 1,000 units. • FedEx, who announced plans this quarter to convert 30% of their long haul fleet to natural gas over the next decade. • Lowe’s, who has released plans to replace its diesel fleet with natural gas by 2017. • Waste Management, who led the waste industry by beginning the conversion of their trash trucks over 5 years ago, and will be substantially converted to CNG by the end of the decade. They are being followed by other large players in their industry, such as Republic Services, Waste Industries, and Advanced Disposal, who are all pursuing their own initiatives to reap the benefits of natural gas. Even companies in the liquid fuels industry are getting in on the act, with Gulf Oil, Love’s Truck Stops and KwikTrip all making substantial investments in natural gas tractors and, in the case of the latter two, building out natural gas fueling infrastructure for their fleets and others. Pilot, Flying J, and Clean Energy Fuels are partnering in an arrangement whereby Pilot Flying J is hosting Clean Energy natural gas stations at its truck stops. The irony of using natural gas to deliver petroleum distillates is very easy to swallow when fuel costs can be reduced by 30%. In most cases, the payback on the natural gas vehicle is 1 to 2 years. Many states are offering tax breaks and subsidies, as well.

U.S. CNG Stations

Public access Private access u Planned u

Source: EIA

Other companies, running the gamut from Fortune 500’s to those with just a handful of fleet assets, are converting their fleets to natural gas. Along the way, natural gas fueling infrastructure in the U.S. is growing at an increasing rate. There are currently over 1,400 CNG and LNG fueling stations in the U.S., with over half of those offering public access. Many more are being built every day. The U.S. is on the brink of an inevitable tipping point, where natural gas fueling infrastructure will be easily found close to anywhere one travels. For those that have questioned how to jump start the issue of the “chicken and the egg” (infrastructure availability vs. fleet NGV adoption), the chicken is arriving. The map above shows CNG fueling stations across the U.S. 44

Natural Gas

Natural Gas Transportation Consumption

(Bcf/yr)

FN360o Source: EIA

The confluence of many factors including fuel price spreads, vehicle and engine availability, infrastructure growth, and strong economic and environmental incentives is driving a major wave of vehicle conversions and infrastructure projects across the U.S. In recognition of this surge, the Energy Information Administration (EIA) is forecasting a 300% increase in natural gas vehicle consumption in the next 25 years, as shown above. 45

ÂŠ 2014 Mansfield Energy Corp.

Renewable Fuels 2014 RFS Proposal In mid-November, the EPA released their much anticipated proposal for the 2014 renewable standard, and as expected most of this year’s original biofuel targets are at risk of being significantly reduced. Overall, the proposition would mandate 15.22 billion gallons of biofuel in 2014, well below the 18.15 billion gallons statutorily written into the Renewable Fuel Standard. The most noteworthy change is the reduction of the conventional biofuel category, primarily fulfilled by corn-based ethanol, which is proposed at 13.01 billion gallons; as a comparison, the current 2013 requirement is for 13.8 billion gallons while the original 2014 obligation was 14.4 billion gallons.

RFS2 Original vs. Proposed Mandate

FN360

Source: EIA

The primary reason for the corn ethanol reduction was the concern about the rising requirement to blend more of the biofuel, even as overall gasoline demand declines, vehicle fuel economy increases, and many hurdles exist to utilizing higher ethanol blends – mainly retail infrastructure and engine warranties. The EPA stated, “The proposal seeks to put the RFS program on a steady path forward – ensuring the continued growth of renewable fuels while recognizing the practical limits on ethanol blending, called the ethanol ‘blend wall’.” Additionally, the proposal would keep the biomass-based diesel mandate unchanged from 2013’s level of 1.28 billion gallons. While not a year-over-year reduction in volume as seen in other categories, most biodiesel supporters view a stagnant mandate as detrimental given the industry is set to produce over 1.7 billion gallons in 2013. As seen in previous years, the cellulosic biofuel mandate was reduced significantly from a proposed 1.75 billion gallons to only 17 million gallons. The EPA has consistently revised down this standard to meet each year’s forecasted commercial cellulosic production. Adding uncertainty to the 2014 biofuel market, the EPA proposed ranges rather than definitive targets for the renewable volume. Accordingly, the EPA is seeking comments from affected industries over a 60-day period which started on November 29th; after reviewing all statements and data, the agency claims they’ll be able to adjust the proposed volumes as needed based on the latest information.

Renewable Fuels RINs On the news that next year’s conventional biofuel mandate could be significantly lower, RIN prices fell considerably in the Fourth Quarter. For instance, after a leaked draft of the EPA’s proposal circulated through the industry in early October, ethanol RINs lost over 35% of their value in the beginning of that month to trade under $.30 per RIN for the first time since February. For the remainder of the year, ethanol RINs continued to trade on either side of $.30, settling at around $.34 per RIN to end the year; additionally, biodiesel RINs settled just higher at $.35 per RIN.

2013 RIN Prices

Next year’s mandate can affect current year RIN prices as 20 percent of an obligated party’s renewable volume obligation can be fulfilled by prior year RINs; so 2013 vintage RINs can be retired against a portion of a refiner’s or fuel importer’s 2014 obligation. RIN carryovers can be sizeable, as it was estimated that over 2 billion 2012 RINs were carried toward the 2013 obligation.

FN360o Source: OPIS

Ethanol Spot Prices Spot ethanol values rose sharply toward the end of 2013 as national inventories declined to multi-year lows. U.S. stockpiles hovered around 15 million barrels, the lowest EIA data since June 2010, for much of the quarter. Considerable backwardation at the beginning of the fall season, crossing from the smaller old corn crop to the record newer harvest, led many blenders to keep inventories extremely tight.

Q4 NYH Ethanol and Gasoline Prices

FN360o Source: OPIS; NYMEX 47

Adding to the already low levels of supply, U.S. ethanol export demand has picked up in recent months as lower prices make the domestically produced biofuel more competitive on the global market. The US exported around 1.3 million barrels of ethanol in September, a six-month high, according to the latest data available from the EIA. As a result, on the back of a mild rally in corn prices, many large demand markets – particularly common export markets – experienced a jump in ethanol prices over gasoline values.

Renewable Fuels Expiration of Biodiesel Tax Credit For the third time in five years, the $1 per gallon biodiesel mixture credit expired at the end of 2013. The tax credit was previously allowed to lapse in 2010 and 2012, though both times it was retroactively reinstated. Nonetheless, the National Biodiesel Board continues to push Congress to extend the credit. In a letter to tax writers the group stated, “The uncertainty this creates is a major reason why we are still so dependent on petroleum. It is incredibly disruptive, not just to biodiesel plants across the country, but also to our bipartisan goals of creating jobs in new domestic energy industries and boosting our energy security by diversifying our fuel supplies.” As it stands now, biodiesel producers are shouldering much of the $1 credit loss by decreasing their premiums to ULSD, thereby keeping blenders incentivized to use the biofuel.

UREA (Diesel Exhaust Fluid) With the growth of DEF consumed by new SCR equipped trucks to reach around 200 million gallons, urea prices have become an important element in the U.S. transportation industry over the last few years. This growth follows recent mandates to burn cleaner fuel and to reduce harmful NOX emissions from diesel engines. The EPA mandate has influenced truck and tractor manufacturers to adopt SCR technology to all engines made in 2010 or later in order to meet the rigorous environmental requirements. Urea is the active reagent contained in DEF consumed by SCR units. The urea reacts over a catalyst to produce ammonia, which then reacts with the NOX produced by the diesel engine and effectively scrubs it out of the diesel exhaust. The Fourth Quarter run-up in natural gas prices left some wondering whether this would lead to a run up in ammonia, and in turn urea, prices. Indeed we did see urea prices rise in Q4 after dropping the previous two quarters, as depicted in the chart below.

NOLA Urea Average and DEF NOLA Price Adjustment

FN360o Source: Green Markets

For the near term, domestic natural gas prices will probably have less impact on urea pricing than foreign supply and demand dynamics, especially when considering urea supply from China and demand in India, which could become significant wild cards that could impact urea pricing in the first half of 2014. China remains a net exporter of urea, and until the Chinese economy strengthens, it is likely that China will remain a strong exporter of urea, keeping domestic urea prices in check. In addition, the Chinese government’s new export tax regime has lowered the urea export tax during the non-export season of November through June, so it appears that Chinese producers are positioned to continue exporting urea year-round, rather than just during the traditional export season. This practice will quite likely continue to hold domestic urea pricing stable. The significant international counterbalancing factor to China’s urea supply is India’s true urea demand. International traders are dismissing statements from inside India that the country has sufficient urea supply on hand to finish the current season and store reserves for the start of the next. Conventional wisdom suggests that India still needs about 1 million metric tonnes by February to ensure sufficient urea to service this season and prepare for next. One million metric tonnes is a sufficiently large enough demand swing one way or the other that could ultimately impact global urea pricing. 49

The Impact of Natural Gas on Ammonia To understand why natural gas prices have limited impact at this point in time, one needs simply to look at ammonia and urea production economics. It takes approximately 33 MMBtu to make a U.S. short ton of ammonia, and natural gas futures finished the year just below $4.40/MMBtu, placing the ammonia feedstock supply cost at about $145 per U.S. short ton. Variable expenses range from $30 $50 per ton, making the total cost to produce a U.S. short ton of ammonia around $200. With wholesale ammonia selling at $400 per U.S. short ton, producers still have lots of incentive and margin to continue producing ammonia, and marginal run-ups in natural gas pricing are not expected to have a material impact on ammonia pricing.

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.

Evan Poole Supply Support Manager Evan started his career with Mansfield analyzing purchasing strategies and index behavior throughout the US and Canada. He’s the resident expert in Canadian refined products and serves in an advisory capacity to the Canadian Supply team. Evan holds an MBA concentrated in Managerial Leadership from Piedmont College.

â&#x20AC;&#x153;Domestic crude oil inventories played an important role during Q4, with domestic inventories surging to levels above the 5-year historical limit before plummeting later in the quarter.â&#x20AC;?

ÂŠ 2014 Mansfield Energy Corp.

OCTOBER–DECEMBER

4th QUARTER Q4

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