FUELSNews 360° - Q1 2020 Market Report by FUELSNews

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JANUARYâ&#x20AC;&#x201C;MARCH Q1

1st QUARTER

Table of Contents FUELSNews 360° Quarterly Report Q1 2020 FUELSNews 360°, published four times annually by Mansﬁeld Energy Corp, analyzes and summarizes the prior quarter’s activity in the oil, natural gas and reﬁned products industries. The purpose of this report is to provide industry market data, trends and reporting—both domestically and globally—to provide insight into upcoming challenges facing the energy supply chain.

Executive Summary

Regional Views continued

Overview

Nate Kovacevich

January through April 2020 27

Petroleum Product Demand

Crude Inventories

Fuel Inventories

Reﬁnery Utilization

Crude Prodution

Exports and Imports

Natural Gas Price, Supply, Storage Martin Trotter

Viewpoints 34

Nuclear Verdict Nikki Booth

PADD 1A & B East Coast

Dan Luther

Renewables To Blend or Not to Blend. That is the Question. Sara Bonario

Regional Views 22

Alternative Fuels 29

Fundamentals 15

PADD 5 West Coast Brent Fergeson

Economy & Demand 13

PADD 4 Rocky Mountain

PADD 1C Lower East Coast

Comparison of Maintenance Regimes Cindy Moblo

Gabe Aucar

PADD 2 Midwest Dan Luther

PADD 3 Gulf Coast Mathew Smith

FUELSNews 360˚ National Supply Team Contributors

Q1 2020 Executive Summary With so many rapid changes in March and April due to COVID-19 and OPEC decisions, the end of the quarter seemed an inappropriate place to cut off the story. For that reason, the FUELSNews editorial team delayed publication to allow for a more complete and accurate depiction of early 2020 trends. We appreciate your patience. The first quarter of the new decade brought turmoil and uncertainty at virtually every level of oil markets. Globally, markets were shaken by OPEC in-fighting and the worldwide fight against COVID-19. Nationally, economic realities caused imbalances for market fundamentals. And locally, these trends trickled down to overwhelm supply chains while severely dampening economic activity. COVID-19 overwhelmed nearly every other market factor to begin the year. Social distancing policies resulted in shutdowns and layoffs, causing rampant unemployment and putting intense downward pressure on fuel demand. Initially, OPEC took the dampened demand as an opportunity to squash US shale competitors, and Russia led Saudi Arabia into a battle for market share. But as the global economy tumbled, both producers realized that drastic action was needed, leading to a historic 9.7 million barrel per day production cut. Even with historic supply quotas in place, the world was overwhelmed with excess oil. Estimates place the demand destruction at upwards of 20-30 million barrels per day, a gap nearly impossible to narrow. So much crude oil availability, particularly in Cushing, OK, forced NYMEX oil prices into the negative on April 20, the first time in history that a major oil market index has fallen below zero. While markets quickly returned to positive territory, the occurrence sent shockwaves throughout financial markets. While the world focused on COVID-19’s march around the world, local markets experienced upheavals as regional supply markets experienced volatility. In many local markets, refinery turnarounds early in the season put pressure on diesel markets, causing diesel inventories to fall below the five-year range at some points. Tight diesel supplies put pressure on prices, giving distillate prices strength even as the world began its COVID-19 panic. The world faces an uncertain energy market future. While markets have weathered supply gluts, recessions, and geopolitical uncertainty many times in the past, on few occasions have so many diverse factors converged to dismantle market expectations. Turbulent circumstances have forced forecasters to re-evaluate their models, further disrupting market patterns. The COVID-19 recession is unlike other downturns: it was caused by an external force – a virus – rather than fundamental business cycles. This critical difference makes projections difficult, as public health is a problematic confounding factor to predict. Whatever lies ahead, energy buyers must manage their fuel spend effectively regardless of market conditions. With uncertainty and complexity rising quickly, developing a clear understanding of market risk and potential scenarios is essential to navigating the complex changes in the energy supply chain successfully. •

OVERVIEW January through April 2020

Q1 Market Summary

$0.7319 $0.6978

$18.84

24,346

Source: New York Mercantile Exchange (NYMEX)

Overview

January – April 2020 WTI Crude Prices

Source: New York Mercantile Exchange (NYMEX)

January The new decade opened with quite a bang—one which now seems like ancient history. A drone strike at Baghdad International Airport killed Major General Qasem Soleimani, along with several Iraqi militia members backed by Tehran. General Soleimani was the leader of the Iranian Revolutionary Guard’s elite Quds Force, a secret group spreading Iran’s influence beyond their border. There had been a slew of escalatory activity between US and Iranian proxy forces in Iraq, including an attack on the US embassy in Iraq. As head of the Quds Force, Soleimani was instrumental in orchestrating attacks like these as well as coordinating other proxy groups. The Pentagon claimed the strike was retaliation for the “hundreds of Americans” killed by Soleimani’s plans, and that he “was actively developing plans to attack American diplomats and service members in Iraq and throughout the region.” Secretary of State Pompeo hinted at an “imminent attack” being planned by Soleimani. The attack produced a limited response from Iran, which launched airstrikes on US-Iraqi military bases; subsequently, the Iranian Prime Minister announced that Iran does not seek escalation or war but would defend itself. Iran’s Prime Minister Javad Zarif tweeted that the Islamic Republic “took & concluded proportionate measures in self-defense under Article 51 of UN Charter targeting bases…” Closer to home, in mid-January, the US and China signed a Phase 1 trade deal aiming to vastly increase Chinese purchases of US manufactured products, agricultural goods, energy, and services. Beijing will reportedly boost energy purchases by some $50 billion over two years, compared to a 2017 baseline of US exports to China. While the move supports Americanmade commodities like oil, the overall price effect will be moderated by flexible global supply chains that will merely re-route products to fill any supply or demand gaps. 7

Overview

February

The trade agreement also provides for stricter enforcement of intellectual property rights and prevents forced technology sharing for US companies. The deal averts tariffs on $160 billion of Chinese goods, while also halving 15% tariffs on $112 billion of Chinese goods. Still, 25% tariffs remain in effect on a hefty portion of Chinese goods.

As February started, the IEA’s Monthly Oil Report reported that oil demand would fall in Q1 for the first time since the financial crisis in 2009 due to the coronavirus outbreak in China. Still, the bearish forecast was limited to Chinese demand destruction and gave no foreshadowing of the global shutdown to come. By the middle of February, China began rolling out the first round of economic stimulus plans to counteract the economic decline spurred by coronavirus-induced quarantines. The stimulus did not have a lasting effect, as markets had a short-lived rally only to falter soon thereafter.

At the end of January, the ﬁrst rumors of coronavirus began taking their tole on international crude and fuel markets. The virus that originated in Wuhan, China demonstrates just how vulnerable oil markets are to a vast array of potential risks. Goldman Sachs sounded the alarm, predicting that oil markets were likely to take a hit from China’s deadly coronavirus, with aviation fuel suffering the most. No one could have foreseen just how big this situation could get.

In the US, a brief crude price rally centered on sanctions on Russia’s national oil company, Rosneft, imposed due to close ties with Venezuela’s President Maduro and the state-run oil company PDVSA. The US restrictions came with a three-month wind-down period, expiring May 20.

Saudi Arabia’s energy minister tried to downplay the impact of the coronavirus, noting there was, at the time, “very little impact” on global oil demand. He added that there was also “extreme pessimism” during the SARS outbreak in the early 2000s but that ultimately the impact on oil consumption was not signiﬁcant. Both Saudi’s Energy Minister and the UAE’s Energy Minister stated OPEC+ would meet in March to discuss the market and would, if required, consider all options to ensure continued market balance.

As February ended, the coronavirus quickly became a global phenomenon, with Italy, Iran, and South Korea reporting accelerated infection rates. Italy saw infections jump to 150 reported incidents, the most extensive spread in a non-Asian country. Iran had 61 conﬁrmed cases and 12 deaths, marking one of the highest lethality rates of the disease outside China. By the end of February, hundreds of new cases of COVID-19 had been reported in 30 countries. In the US, the Center for Disease Control braced for the inevitable outbreak of the virus, warning the population of the approaching “severe” disruptions to daily life. 8

Overview

March The Federal Reserve made a surprise cut between meetings as March began to boost markets in the face of the coronavirus losses. The 50-basis point rate cut, the largest since the 2008 recession, had the opposite effect of intended, however, and equity markets read the cut as a warning that things would devolve further. At the March OPEC+ meeting, Russia and Saudi Arabia failed to agree on the appropriate production cuts. Presented with an ultimatum to accept steeper production cuts or no deal at all, Russia chose the latter. Russian Energy Minister Alexander Novak crystalized the significance after the OPEC meeting closed by saying, “From April 1, neither OPEC nor non-OPEC have restrictions.” Saudi Arabia responded by slashing oil prices well below Russia’s and announcing plans to increase output by as much as 2 million barrels per day. These were the first shots of the 2020 oil price war. This oil price war, in conjunction with coronavirus demand destruction, created a perfect storm for oil prices in April. By mid-March, the World Health Organization had officially labeled COVID-19 a pandemic. Downward price pressure continued after President Trump announced restricted travel from Europe for 30 days.

Having already cut rates by 0.5% two weeks prior, the Fed slashed rates by another 1%, bringing interest rates to essentially zero. Once again, the cut became the steepest action the Fed has taken since 2008, the last time it took rates to 0%. While the move injected liquidity to a tightening market, markets were anxious that the Fed had ﬁred the last bullet in its arsenal to stave off a recession. As March closed, the White House and Senate reached a historic $2 trillion stimulus deal amid growing coronavirus fears, providing a jolt to the struggling economy. Details of the package included $250 billion set aside for direct payments to individuals and families, $350 billion in small business loans, $250 billion in unemployment insurance beneﬁts, and $500 billion in loans for distressed companies.

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Overview

April In April, OPEC did its part to support markets by ending its price war and reaching a historic 9.7 million barrel per day cut. Despite what OPEC described as an “extraordinary” agreement, prices plunged. The 10 MMbpd cuts were insufficient to address massive demand destruction. With US GDP expected to drop 25%-35% in the coming months and global GDP down at least 10% in Q2, oil demand was cratering. Gasoline demand fell roughly 50%, and, despite stable diesel demand to mid-April, the entire oil complex felt the downward pressure. The IMF reported that global Gross Domestic Product is forecast to shrink 3% this year. This newest forecast, the first since the coronavirus’ effect began to take center stage, compares to the January forecast of a 3.3% expansion. This contraction would mark the biggest decline since the Great Depression, far greater than the 0.1% contraction in 2009 during the financial crisis.

On April 20, WTI Crude prices fell into negative territory for the first time in the crude futures market’s history as traders unloaded positions ahead of the May contract’s expiration. The historic $55.90 per barrel drop (-305%) to -$36.73 indicated that sellers would pay to give away their crude. But no other product had such a historic day, not even Brent Crude. The market was most concerned with Cushing, OK crude storage rather than a broad oil glut. The June 2020 WTI Contract barely moved throughout the day, closing above positive $20/bbl. To close April, prices remain weak as the world runs out of storage. Reuters reported that South Korea had run out of commercial storage space for oil. All of the 38 MMbbls of onshore commercial capacity owned by state-run Korea National Oil Corp. and Oilhub Korea Yeosu Co. has been rented out. Some sources have estimated that global oil storage capacity currently stands at 85% full. The only remaining alternative for some countries is floating storage or ship-borne storage. In the US, oil producers are also running out of space to store oil. The Energy Department finalized contracts that had been announced earlier in the month for companies to rent around 23 MMbbls of oil storage capacity in the Strategic Petroleum Reserve (SPR). In April, 1.1 MMbbls were delivered to the SPR for storage by US companies. •

ECONOMY & DEMAND Global GDP Growth The world economy underwent massive upheaval throughout the ﬁrst few months of 2020, with one of the deepest depressions in world history compressed into a few weeks of social distancing. Unlike national economies, which can be characterized by considerable swings in GDP, world GDP tends to rise fairly consistently. Since World Bank data began in 1961, world GDP has contracted only once, declining 0.1% in what became known as the Great Recession in 2009. During that same period, US annual GDP has contracted seven times.

Source: International Monetary Fund

In 2020, global GDP is expected to decline by 3% according to the International Monetary Fund (IMF), the worst economic environment since the Great Depression. While the recession has affected all countries, advanced economies have been impacted the most. Advanced economies are set to decline by 6.0% in 2020, compared to a –1% drop for emerging economies. America’s social distancing policy, though valuable for public health, has taken its toll on the world’s largest economy. The US is forecast to track other advanced economies closely, dipping 5.9% lower over the course of 2020. Projections for Q2 suggest that the short-term slowdown could have thrown off US GDP by 20-30%, with some calling for even steeper short-term losses. Though the hardest-hit industries include public transportation and service industries, virtually all industries have been hit to some degree. Reduced consumer activity has a ripple effect throughout the economy; in this case, the slowdown eventually resulted in a broader effect on industrial and ﬁnancial institutions. With so many businesses closed, unemployment has skyrocketed. US jobless claims set several record levels in March and April, sending overall unemployment to 14.7% in April – the highest level since records began in 1948. Over 30 million Americans ﬁled for unemployment between March and April.

US Unemployment Rate

Source: US Bureau of Labor Statistics

Economy & Demand With so many Americans losing their livelihood, consumer sentiment naturally suffered. The index, published by the University of Michigan, tumbled in April to its lowest level in eight years, marking the most substantial drop since before the Global Financial Crisis in 2009. Consumer sentiment measures opinions on future economic activity, and it ties closely with consumer spending. Sentiment can quickly become a self-fulﬁlling prophecy. With consumers more anxious about future conditions, they begin putting more money into savings rather

Index of Consumer Sentiment

than spending it. The drop in spending creates a ripple effect for businesses, which are then forced to lay off workers, contributing to an even more pessimistic view of the future. Looking ahead, the road to recovery is far from clear. Although economies will inevitably reopen, consumers will not ﬂock back to restaurants, bars, and gyms with the rigor they once had. COVID-19 will fundamentally change many aspects of business, reshaping industries and the way people work. As always, uncertainty is the enemy of business investment. With the future so murky, businesses may be hesitant to invest capital in risky investments, choosing instead to save for a better economic climate. Like a slowdown in consumer sentiment, this risk-averse behavior will have second-order effects that permeate the economy and result in further disruptions.

Source: University of Michigan

In short, recovery is likely to be slow and painful. While some ﬁnancial markets quickly recovered from their drops, the broader economy will trudge along slowly to regain lost ground. Even with a hefty Q3 jump in activity, the destruction done in Q1 and early Q2 will cause longterm damage to companies and economic activity. •

Economy & Demand

Petroleum Product Demand Economic destruction was nowhere more evident than in oil markets. As GDP faced historic declines, fuel demand cratered even more.

US Product Supplied of Motor Gasoline, Distillate, and Jet Fuel

Gasoline and jet fuel were the ﬁrst two products to see hefty demand drops. Gasoline demand fell from well above 9 MMbpd to a low of just 5 MMbpd— nearly cut in half. Jet fuel suffered even deeper cuts, falling from around 2 MMbpd to 0.5 MMBpd. Many consumer airline routes were shut down altogether in the US, but packaged good transportation ensured that some jet fuel remained in demand. Diesel was the hold-out in demand, holding steady for longer than jet fuel and gasoline as trucks and farms continued operations throughout the pandemic threat. But social distancing and the resulting unemployment upheaval eventually limited consumer demand enough to bring truckload deliveries to a crawl. The last to succumb to demand pressure, diesel will also be the last to recover, as it remains linked to broader economic activity. During the peak of social distancing, the EIA estimates liquid fuel demand fell from over 20 million barrels to below 15 million barrels per day, a drop of nearly 30%. While consumption will rebound in the second half of the year as economies reopen, the net effect on 2020 demand cannot be ignored.

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

US Liquid Fuels Product Supplied (Consumption)

Fuel demand is expected to fall by 2.2 MMbpd in 2020. Demand also fell slightly last year, so negative demand growth isn’t highly unusual, but the size of the drop is meaningful. As importantly, all product categories are affected – gasoline, diesel, jet fuel, HGLs, and other liquid fuels. As the world rebounds from the economic malaise, 2021 demand growth is forecast to be 1.5 MMbpd, with growth also spread among all petroleum liquids. •

Components of Annual Change

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

F U N D A M E N TA L S

The first quarter of 2020 was characterized by fear, uncertainty, and chaos as producers scrambled to find an appropriate solution to the unparalleled demand destruction caused by COVID-19. Although the quarter began with the usual trickle of trade news and geopolitical uncertainty, by late January, markets had fixated on China’s growing disease threat.

World Liquid Fuels Production and Consumption Balance

Over the following several weeks, the whole world shut down, causing rapid demand destruction. An OPEC+ disagreement in March fueled the flames of fear, turning markets upside down. When markets fall into a panic, prices can fluctuate with extreme volatility despite relatively little change in fundamental factors. Panic was evident in the first few months of 2020, with prices plummeting below $20/bbl – and even briefly turning negative.

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

When the world is grasping at straws, however, there’s value in maintaining focus on the fundamentals, tracking basic supply and demand trends to determine what truly has changed and what remains the same. Overall supply/demand balance was thrown askew in Q1 2020, with the deviance widening heading into Q2. The EIA projects oil demand falling 14

below 90 MMbpd in Q2, a loss of more than 10% compared to Q4 2019 demand. Supply will fall slightly, but not nearly enough to keep up with plummeting demand. Still, demand is expected to perform a V-shaped recovery beginning in Q3, with demand catching up to trend levels by Q4. Many question whether a prolonged recession may cause oil demand to take longer to return to normal. •

Fundamentals

Crude Inventories Inventories of different petroleum products typically vary widely based on seasonal patterns, but the strange events of Q1 caused much sharper deviations between various products. Crude inventories, which held steady for much of Q1, began rising quickly as the quarter continued, eventually catapulting towards the upper end of the ﬁve-year range. As of April, crude inventories are rapidly heading towards record highs, putting heavy pressure on oil prices. The EIA estimates that total US crude storage capacity is roughly 780 million barrels, though inventories have never come close to reaching that maximum level.

For WTI crude oil, no storage data is more meaningful than Cushing, OK, the delivery point for WTI crude futures contracts. While total US storage still has room to run, Cushing storage is quickly moving towards full, with inventories nearly doubling from 35 million barrels in February to over 65 million barrels in late April. Tightening Cushing storage availability was a major factor behind the brief negative price occurrence in late April. With nowhere to store crude, traders were willing to pay for others to take their crude contracts off their hands, rather than attempting to ﬁnd storage for their contracts.

Crude Stocks 5-Year Range

Cushing, OK Crude Inventory Levels

Source: Energy Information Administration (EIA)

Around the world, crude inventory limits are being tested. Total storage capacity is estimated by the IEA to be around 6.7 billion barrels of oil, though prices would fall to virtually nothing long before all storage is full. As of April, world inventories stand at roughly 60% of total capacity, but unfortunately that does not mean 2.6 billion barrels of space are available. Total storage capacity is a misleading figure since tanks cannot be filled to 100% for operational reasons. Estimates indicate roughly 1-1.6 billion barrels of useable storage remain around the world. Assuming a global net supply overhang of 10 million barrels per day, world inventories would reach full within 100 days. At the worst points of the COVID-19 crisis, the supply glut rose as high as 30 million barrels per day. It’s easy to see why traders are so concerned about global inventories, since just 30 days of maximum demand depression would be enough to fill the world’s oil reserves. OPEC’s production cuts will help slow the builds but cannot overcome such severe demand depression. • Unavailable Space Contingency Space Maximum Operating Inventory Level

Inventory Level

Working Storage Capacity

Net Available Shell Capacity

Suction Line Tank Bottom

Source: Energy Information Administration (EIA), Today in Energy

Fundamentals

Fuel Inventories

Gasoline Inventories 5-Yr Range

Fuel inventories told the story of the American economy in Q1. Gasoline tends to correlate with consumer demand, while diesel follows more closely with business activity. In Q1, the two products were both affected by COVID-19, though at different times. Gasoline inventories traced their standard patterns early in the quarter, rising in January before beginning the long drop due to increased spring and summer demand. But this year, quarantines around the globe kept consumers indoors, cutting gasoline demand nearly in half. Refiners acted quickly to limit the outflow of new gasoline supply, but not fast enough to prevent record-high gasoline inventories. Gasoline inventories rose rapidly as the quarter came to a close, reaching a record 262 million barrels in early April before beginning to drop. Diesel inventories were unaffected early on during the crisis. In March, diesel inventories sank below the five-year average. Fuel suppliers seriously considered a scenario in which refiners, frightened by soaring gasoline inventories, cut back on total throughput – resulting in a simultaneous drop in diesel production. With diesel demand holding steady but production falling, suppliers were concerned that some markets could experience shortages.

Diesel Inventories 5-Yr Range

Diesel demand, though, eventually succumbed to the market panic. Refiners also began prioritizing diesel output over gasoline, leading distillate yields to a record high 40% of production. Traditionally, diesel output is half of gasoline output, but refineries reconfigured their equipment to produce more diesel, in part by routing some jet fuel streams into the diesel supply. The result was rapidly climbing diesel inventories, which shot past the five-year average in April and quickly sped towards the upper limit of the five-year range. •

Source: Energy Information Administration (EIA)

Fundamentals

Reﬁnery Utilization

US Reﬁnery Utilization

When demand collapsed, refiners had to cut back on their output to stem the tide of rising inventories. While this created even more pressure for crude inventories, the quick drop in refinery utilization helped to prevent an even faster escalation of product supply increases. The dominant output from the refining process is gasoline, which typically accounts for around 60% of the end product from a barrel of crude. With gasoline among the most heavily affected products, refiners tapped the breaks to ensure gasoline inventories did not exceed national capacity.

Source: Energy Information Administration (EIA)

Refinery utilization plummeted below 70% in mid-April, surpassing the outages experienced during Hurricane Harvey in 2017. By mid-April, usage fell to a new record low of 67.6%, surpassing the previous low seen during the 2008 financial crisis. Refinery utilization began climbing higher as April came to a close, which many interpret as the bottom of the market. Still, refineries have a long way to go before throughput returns to normal. In the meantime, crude is sitting unrefined, building up in storage areas all around the US.

3:2:1 Crack Spreads

Reﬁners faced strong disincentives with continuing production during the quarter. Crack spreads historically ﬂuctuate between $10 to $25 per barrel; when prices fall to the high or low end of that range, a correction is likely around the corner.

Source: CME

This year, however, the typical range could not contain weak fuel prices. Crack spreads fell as low as $2.40 per barrel in April, meaning a refinery would make just $2.40 by converting a barrel of crude into gasoline and diesel fuel. Extremely low 3:2:1 crack spreads received a quick reaction from refiners, leading to the record-low refinery utilization levels seen in April. •

Fundamentals

Crude Production In response to cratering demand, oil producers around the world rushed to eliminate their output. The OPEC+ agreement unraveled at the beginning of the crisis as Russia forced Saudi Arabia into a battle for market share. Both countries believed the demand destruction from the virus would add additional pain to their production hikes, ﬂooding the world with crude and driving US shale producers to bankruptcies. The plan worked too well, sending prices spiraling too low even for low-cost producers like Saudi Arabia and Russia. The group was forced to reconcile their differences, agreeing to re-instate deep supply cuts on April 12. The production accord includes steep cuts by the groups two leading producers, with Russia and Saudi Arabia each cutting 2.5 MMbpd from their heightened levels. In total, the group cut short-term production by 9.7 MMbpd, though cuts slowly phase out over two years. In July, the group’s agreed cut will fall to 7.7 MMbpd, then drop again in January 2021 to 5.8 MMbpd. Although the sizeable short-term cut comes nowhere close to offsetting the world’s massive demand dip, the deal is expected to help bring markets into balance over the long-term.

While OPEC chose to reduce its output, other market-based producers were inﬂuenced to limit their production as well. For instance, Canadian production fell 0.6 MMbpd, or 13%, in April relative to February levels. Between January and April 2020, US rig counts were cut in half, falling to the lowest point since Baker Hughes began data collection in 1975. Rig counts are a leading indicator of future production – fewer rigs in operation mean fewer new wells developed, which generally takes a few months to show in production data. By late April, the US had just 374 rigs deployed across the country. During the 2015-16 OPEC price war, rig counts only fell to 404 rigs. On the other hand, rigs are now roughly 30% more productive than they were in 2016 thanks to technology improvements, so even a record-low rig count can sustain more production than in the past.

Baker Hughes US Rig Count

OPEC Production Cuts (MMbpd)

Source: Baker Hughes

Source: Organization of the Petroleum Exporting Countries (OPEC)

Along with declining rig counts, near-term production was also shut-in where possible. WTI crude oil prices plummeted, even turning negative in late April as the May 2020 contract expired and traders sprang to liquidate their positions. With virtually no storage available in Cushing, OK, the country’s largest crude oil storage area, producers scrambled to ﬁnd a place to put their output. Although the US remains the world’s largest producer, few expect recordhigh levels to last for long. Within a few months following oil’s price collapse, American producers began tapping the breaks on output. Hitting a record high of 13.1 MMbpd in early March, production quickly fell to 11.9 MMbpd in late April, with most of the losses coming from shale producers.

Fundamentals For the remainder of 2020, the EIA projects US crude production will average 11.7 MMbpd, falling even further to 10.9 MMbpd in 2021. Many American producers were struggling ﬁnancially even before COVID-19, making them more susceptible to succumb to economic pressure. Banks, already wary of lending to capital-intensive producers, will be even more strict in the future, putting additional constraints on producers. The industry will take time to recover from historically low oil prices, and many companies will either go bankrupt or be acquired before production turns around and attains record levels again. •

US Crude Oil Production

Source: Energy Information Administration (EIA)

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Fundamentals

Exports & Imports

Year-Over-Year US Crude Exports

One fundamental factor which seemed relatively immune from pandemic concerns was the crude export market. Oil production climbed to record highs early in Q1, pushing companies to export more oil to the world. Yet even as the pandemic progressed, American crude exports remained above 2019 levels. In part, exports were propped up by wide spreads between WTI crude oil and Brent crude. Even amid a global upheaval, markets are reactive to price spreads, and suppliers will always take advantage of arbitrage opportunities. Throughout Q1, Brent-WTI spreads held steady around $5-$6 per barrel, enough to incentivize exports to other areas. As prices collapsed, though, the spread between the two crude grades did narrow to just $1-$2 for a brief period. That period correlated with over a 1 MMbpd drop in weekly exports, though the drop was small relative to the overall noise in weekly export data. Hovering near 3 million barrels per day, crude exports remain a few hundred thousand barrels per day above 2019 levels. •

Source: Energy Information Administration (EIA)

REGIONAL VIEWS Dan Luther, Director, Supply Optimization See his bio, page 38

PADD 1A & B East Coast

Overview Fuel buyers escaped the winter with relatively warm temperatures and few, if any, diesel supply disruptions. Looking ahead to Q2, June brings low RVP gasoline season to the region with this year being the ﬁrst without the PES reﬁnery operating the full summer. Supplies of the summer grade regular and premium gasoline could get especially tight on any unexpected disruptions. •

Northeast Distillate Inventories Continue to Trend Below Recent Historical Ranges As forecasted in the Q4 2019 FuelsNews, diesel stocks in the Northeast continued trending below recent historical averages to start 2020. PADD 1A and 1B distillate inventories trended lower through Q1, reaching a bottom of around 27 million barrels as measured by the EIA on February 28th.

EIA Weekly Northeast Distillate Inventory

The region continues to feel the impact of the July closure of the 335,000 bpd Philadelphia Energy Solutions reﬁnery. Consequently, buyers in Eastern and Central Pennsylvania experienced higher local pricing compared to regional NYH Barge values despite relatively moderate winter temperatures keeping a lid on home heating demand. Northeast fuel consumers should consider themselves lucky; barring a late season cold snap the region averted an extreme pinch in distillate supply and pricing this winter. • Source: Energy Information Administration (EIA)

Regional Carbon Initiation Continues to Develop While the North American West Coast has traditionally led the way regulating carbon emissions from transportation fuels, many Northeast and Mid-Atlantic states are working toward their own regional agreement. The Transportation & Climate Initiative (TCI) welcomed the State of New Jersey on January 1, 2020, moving the collective to twelve states and the District of Columbia. The initiative is working towards a goal of developing a clean economy and reducing emissions from the transportation sector. One of TCI’s proposals includes a cap-and-trade program for CO2 emissions from cars and trucks creating a regional carbon market for gasoline and on-road diesel fuel. The group is seeking a 20 to 25 percent reduction in emission over 10 years, while TCI’s estimates forecast a possible increase in gasoline prices of 5 to 17 cents per gallon as a result. But as New Jersey was added to the group, Vermont’s governor Phil Scott made less than supportive remarks in early January stating he did not want to raise gasoline prices on Vermonters. For similar reasons, lawmakers in Pennsylvania, while keeping an eye on TCI proposals, have yet to commit to the TCI since they also do not want to raise taxes on gasoline in the commonwealth. Fuel buyers throughout the Northeast and Central Atlantic will want to keep an eye on the program’s ultimate design to understand regulatory and price implications. • 22

Regional Views

Gabe Aucar, Senior Supply Manager See his bio, page 38

PADD 1C Lower East Coast

Colonial Pipeline Issues Line 3 Allocation

Nominations to ship on Line 3 are exceeding capacity, and demand has been at or very close to capacity. The 504,000 b/d Line 4 also carries products from Greensboro to terminals in Virginia and Maryland. The value of space on Line 2 was assessed at plus 3.85 cents/gal. The line space market for Line 3 was assessed ﬂat, unchanged for several years on lack of a true spot market.

In January, the Colonial Pipeline, a refined products pipe connecting Gulf Coast refiners and New York Harbor consumers, issued an allocation notice to shippers for its Line 3 – the first such notice since 2016. Line 3 is the co-mingled segment of pipeline carrying diesel, jet fuel, and gasoline from Greensboro, NC to Linden, NJ. The arbitrage to ship USGC products up to the Atlantic Coast has been profitable for gasoline, diesel and jet fuel to start the new year. With all three products viable candidates for arbitrage supply shipments, demand on the co-mingled line exceeded its capacity.

Ironically, just a few weeks of the unusual allocation of Line 3, the Colonial Pipeline announced plans to potentially cut flow rates in response to dampened demand caused by coronavirus and social distancing practices. The company noted they could cut flows up to 20% as refiners cut back throughput to avoid oversupply markets. Later, however, the company noted that diesel demand remains persistent despite the overall market slowdown. •

GC Diesel Basis Should Continue to Strengthen Into Q2

PADD 3 Outage by Volume The first half of Q2 should continue to see strength in the Gulf Coast as refiners in PADD 3 go into heavy turnaround season. This will most likely cause the updown, the arbitrage opportunity to move fuel from the Southeast to New Your Harbor, to close, leaving less product headed to NYH and more dumped in the Southeast. This flood of product in the Southeast will cause netbacks to also suffer – meaning local fuel costs may fall below the cost of shipping to those areas. At the time of writing, diesel netbacks have started moving from positive territory to -$.0125 cpg in a matter of weeks as GC basis has strengthened all the way up to -$.0375cpg. •

Unit capacity and outages calulated based on ENT reports, EIA Reﬁnery Capacity Report and Journal publications Source: Energy Information Administration (EIA)

Regional Views

Dan Luther, Director, Supply Optimization See his bio, page 38

PADD 2 Midwest

Overview Tight supply and elevated diesel prices will continue in the Midwest through the start of Q2 on strong demand from the agricultural sector as spring planting gets underway. Expect a strong April and early May before demand subsides and prices ease relative to NYMEX futures. •

Refinery Profitability Takes a Beating Before Prices Rebound Relative to Futures Refining margins in the Midwest started the new decade at lows not seen in over seven years amid weak regional diesel and gasoline prices. The value of a midcontinent Western Canadian Select (WCS) crack spread – the overall pricing difference between crude oil and the petroleum products refined from it – fell to $7.35 per barrel in early January, the lowest level since pricing services started tracking the spread in the early 2000’s. Market participants use WCS crude to measure midcontinent refining margins, as many of those refineries have been retooled over the last decade to blend the heavier crude coming from Canada’s western oil sands. Due to the thick, high-sulfur spec and land-locked location of Canadian crude, it often sells at a significant discount to the more common U.S. West Texas Intermediate (WTI) crude benchmark.

Chicago Basis Prices

The low crack spreads were driven by depressed regional diesel and gasoline values. In Chicago, diesel opened the quarter trading $.33 per gallon lower than NYMEX ULSD futures while CBOB gasoline was also weak, trading more than a dime lower than NYMEX RBOB futures. Regional product prices rebounded in late January and, at least on the diesel side, held ﬁrm through much of the quarter. That strength was seasonally unusual as lower diesel prices often persist through February or early March; but it was welcome news for area reﬁners looking for better margins. •

Depressed Midwest Product Prices Find Their Way into the Southeast

Discounted Midwest diesel values not only crimped the profits of area refiners but also Southeast pipeline shippers within trucking distance of the Midcontinent region. For instance, diesel netbacks in Nashville were crushed to start the year – just as Chicago diesel basis reached its lows – as many fuel suppliers identified trucking arbs into southern Kentucky and northern Tennessee from Tennessee or Ohio. As more supply entered the extended Nashville market, the area became oversupplied and discounts were necessary to move product. Nashville low rack diesel posted as much as 8.5 cents per gallon under shipping costs from the Gulf Coast in early January. The arb closed in early February as Chicago diesel strengthened and less product left the region. Netbacks in Nashville corrected to settle above shipping costs for much of the remaining quarter. • 24

Source: New York Mercantile Exchange (NYMEX)

Regional Views

Matthew Smith, Manager, Supply Optimization See his bio, page 38

PADD 3 Gulf Coast

Overview The Gulf Coast saw a strengthening diesel basis during Q1, starting at a spread of -.0750 to NYMEX HO and trading as high as -.0375 in March. With March often beginning seasonal refinery maintenance, output is hindered and reflected in the basis value. Refinery utilization began around 97% at the beginning of Q1 and will end March in the high 80’s. Even with concern of falling demand due to COVID-19, PADD 3 is holding strong, with a higher basis spread to NYMEX. Gulf Coast diesel stocks remain consistent with 2018 and 2019 levels. Imports and exports did experience heavy delays in February and March as the Houston Ship Channel had occasional delays or closures due to fog. At times the line exceeded 35 vessels waiting to enter or exit the Houston Ship Channel. These delays cause a ripple effect on supply levels in markets dependent upon replenishment by vessel, such as Florida. •

Gulf Coast ULSD Basis – Q1

Gulf Coast ULSD Basis Gulf Coast Diesel vs. NYMEX USLD

Something to watch: Jones Act Vessels, a mandate of the Merchant Marine Act of 1920, requires a vessel transporting between US ports to meet specific criteria: • Must be US owned (minimum 75% ownership) • Must have been built at a US shipyard • Must be operated by US citizens • Must be registered under the US flag These vessels and their capacity are the sole transportation method for markets such as Florida which rely on Gulf Coast production yet lack pipelines. The specific criteria required to qualify as a Jones Act Vessel mean supply and demand play a significant role in where Gulf Coast product is shipped, as well as how much the consumer pays. With fewer vessels coming online, be watchful if demand continues growing in coastal markets without access to pipe fed product. •

Source: New York Mercantile Exchange (NYMEX)

Modern Jones Act Petroleum Trade Routes

Regional Views

Nate Kovacevich, Senior Supply Manager See his bio, page 38

PADD 4 Rocky Mountain

Overview

PADD 4 Total Motor Gasoline Stocks

Last quarter in FN360, we covered the unplanned reﬁnery outages in northern Texas and the Mountain region that caused gasoline and diesel prices in Denver to shoot higher. For Q1, the markets took a turn as the bottom fell out of both products, with gasoline performing weaker of the two reﬁned products. Gasoline inventories in PADD 4 reached 9.5 million barrels in the middle of February, well above the 5year range. With that backdrop, Denver became a dumping ground for gasoline product, with heavy discounting taking place amongst physical players. The switch to LRVP will likely yield additional aggressive selling. Things appear to be slowly recovering heading into Q2, as inventory levels are slowly falling from historical highs.

Source: Energy Information Administration (EIA)

Furthermore, the Tesoro reﬁnery underwent a small turnaround in March, alleviating some of the pressure on gasoline stock levels. Prices between Denver and Salt Lake City dislocated quite a bit, with gasoline and diesel nearly 40-50 cents apart in early March. We anticipate those prices to tighten as we get closer to spring time and Tesoro returns from their planned maintenance schedule. •

Trump Appeals Court Decision on RFS Waivers Ruling The Trump administration and EPA plan to appeal a court ruling that overturned biofuel waivers for smaller refineries, who claim to require exemption from biofuel blending mandates for economic reasons. The move is a blow to the biofuels and agricultural communities, but the decision was made in an effort to save jobs for the refining sector. Refineries in the Mountain region that fall into this small refinery category could be hurt if waivers were removed. The Trump administration was expected to respond to the circuit court’s decision by scaling back the exemptions, but the EPA instead took a more aggressive approach to keep them in place. It will be interesting to see what happens in the coming months as the elections near and President Trump tries to find a happy medium to preserve key voting blocks for his reelection bid. • 26

Regional Views

Brent Fergeson Supply Director See his bio, page 38

PADD 5 West Coast

Q1 2020

PADD 5 Basis Levels Differential to NYMEX Price

The new decade brought a volatile start to the PADD 5 gasoline and diesel markets. Refinery problems, including a fire at a major Carson refinery and scheduled turnarounds in January and February, took a significant amount of supply off the market, contributing to widening differentials between LA wholesale fuel prices and NYMEX futures contracts.

Source: Energy Information Administration (EIA)

LA Gasoline basis started around 3 cents in early January and climbed into the high 30-cent range before settling back down into the 15-cent range. LA CARB diesel went from 6 cents to as high as the low 20-cent range before retreating into the 15-cent range. The spread widened substantially in February before narrowing.

PADD 5 Total Gasoline stocks fell to begin the new year, and the recent reﬁnery ﬁre and associated downtime may contribute to a continuation of lower inventories. It helps that PADD 5 stocks started off in early January at two-year highs of 33.8 million bbls. The industry believes lower demand was the key issue behind lofty inventories to start the new year.

The Paciﬁc Northwest gasoline basis widen from a penny to 32 cents by early February due to supply issues but has since started to fall, last trading in the mid 20-cent range.

Total ULSD stocks also started off at higher levels but fell during the ﬁrst few months. Demand has been lower than normal; paired with lower reﬁnery utilization rates, low demand has reversed the course and sent inventories falling as a result.

The RVP transition in LA helped hold up LA spot prices in an otherwise falling NYMEX futures market. The typical transition from high to low RVP gasoline in the LA market takes place between January and February every year. The market witnessed spot outages of gasoline, with a focus on premium gas, in the San Diego market due to the RVP transition. The San Francisco market will see the RVP switch start to happen a month later.

PADD 5 price dynamics can’t count out the lingering effects that the COVID-19 virus triggered. Bank analysts suggest the hefty slowdown in economic conditions will contribute to reduced energy production, which could slow down PADD 5 imports of gasoline and put further pressure on local gasoline prices if the problems continues into the second and third quarter of this year. •

PADD 5 West Coast

Regional Views

Weekly PADD 5 Total Finished Gasoline

Source: U.S. Department of Energy (DOE)

Weekly PADD 5 Total ULSD

Mexico’s demand for US petroleum continues to grow as US demand has declined moderately, attracting more US finished products to Mexico. Interestingly, this helped US Gulf and West Coast refineries find a home for their production and helped maintain inventory stock balances. In summary, we have already witnessed extreme volatility in the first few months of the year and with the Coronavirus issue still impacting global supply and demand, we may not have seen the end to price volatility in PADD 5.

Source: U.S. Department of Energy (DOE)

We expect the current reﬁnery downtime due to planned as well as unplanned issues to work itself out moving into spring, helping PADD 5 wholesale price vs. NYMEX spreads narrow. Fewer imports into the West Coast and any rebound in demand could ﬁght against weakening wholesale spot prices as we move into the spring. •

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

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

Contact Mansfield Today 800.695.6626 | www.mansﬁeld.energy | info@mansﬁeldoil.com 28

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

To Blend or Not to Blend. That is the Question.

See her bio, page 38

RENEWABLES According to the US Energy Information Administration, the US consumes more than 40 billion gallons of on-road diesel annually. Consumers of transportation fuel historically have purchased these billions of gallons based on cost alone. This remains true even today when the beneﬁts of biodiesel blends – reduced total hydrocarbons (TH), particulate matter (PM) and carbon monoxide (CO) – are well documented and understood.

"CARB Assessment of the Emissions from the Use of Biodiesel as a Motor Vehicle Fuel in California “Biodiesel Characterization and NOx Mitigation Study”." California Air Resources Board: Sacramento, CA (2011). Chart provided by Renewable Energy Group, ©2019.

Blender’s Tax Credit On December 20, 2019, President Trump signed into law a historic new budget deal that reinstated the $1 per gallon biodiesel tax credit for the period of January 1, 2018 – December 1, 2022. Covering four years, the recent extension is the longest duration of time the credit will be in place and known in its 15-year history. The last year during which the blender’s tax credit was in place at the beginning of the calendar year was 2016. Just over 2.09 billion gallons of biodiesel were consumed that year in the United States alone, the highest year on record. The current market expectation is that this record will be broken in the next 3 years as a result of the historic extension of the program that allows participants 36 months of certainty regarding the availability of the credit. The industry can now make investment decisions to support additional renewable fuel blending infrastructure, storage agreements, and feedstock purchases to support production at the plant level. The question remains: will the market support this incremental biodiesel blending even with the $1-gallon credit?

Alternative Fuels

Discretionary Blending The decision to blend biodiesel in a higher percent of fuel remains discretionary in markets where mandates or tax incentives are not in place. Discretionary blend economics differ by location and are subject to frequent changes in market dynamics. The cost of biodiesel (B100) depends on the relationship of feedstock cost, the value of an associated Renewable Identiﬁcation Number (RIN), and the strength of the Heating Oil contract on the NYMEX. Costs such as freight into a market as well as additional throughput and blending costs also impact the blend decision.

To understand the discretionary blending decision requires ﬁrst understanding the relationship of bean oil to heating oil. Although biodiesel is produced from a wideranging and expanding list of renewable feed-stocks (soybean and canola oil, corn oil, poultry and other animal fat, white and yellow greases and tallow), soybean oil as traded on the Chicago Mercantile Ex-change (CME) under the code ZL is the primary market instrument used when discussing the relationship between bean oil and heating oil, or the “BOHO.” Soybean oil futures is a fairly liquid market and allows biodiesel producers to estimate their future feedstock costs and provides a tool to reduce risk through hedging. Biodiesel is sold by producers most commonly as a differential to the NYMEX Heating Oil contract. Daily publications such as Argus, Opis and Platts have recognized the importance of biodiesel as a component of the fuel pool and have begun publishing biodiesel ﬂat price and as a differential to heating oil.

Source: CME

Source: Argus US Products Issue 20-43, 3/4/20, argusmedia.com

Alternative Fuels

BOHO Spread – Last 30 Days ($/gal)

Volatility of futures and signiﬁcant strength or weakness in Heating Oil futures impacts a producer’s margin and a buyer’s decision to blend or not. Low ULSD futures place biodiesels at a competitive disadvantage when there is not a comparable move in bean oil, as this causes the BOHO spread to widen. This widening negatively impacts the blend margins for biodiesel.

ULSD Futures Prices

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

In some markets, particularly Midwest markets and West Coast areas, biodiesel can present signiﬁcant savings for consumers, ranging from 1 cent to 20 cents per gallon depending on the time, geography, and blend rate. Biodiesel storage costs and blending fees must also be taken into consideration. Source: U.S. Energy Information Administration, (EIA)

This pricing variance measures the pricing distance between biodiesel and diesel fuel. The BOHO spread is one of the key pricing factors that biodiesel producers use to determine margins. Now that an understanding of BOHO is established, one may begin to determine when it makes sense to blend biodiesel and if so, evaluate the best / most advantageous blend ratio between petroleum diesel and biodiesel. Speak with your fuel supplier to determine whether bioblending makes sense for your business, and what blend ratios would be most advantageous. 31

Additional mandates and incentives are expected on a federal, state and local level in the future. Social activism and awareness about climate change and carbon neutrality will demand a transition from petroleum to biofuels, as transportation is the leading cause of GHG emissions worldwide. Even without legislative pressure, though, biofuels can offer both an economic and an environmental beneﬁt. While the decision to blend biodiesel may not be economical in all regions at all times, the adoption of the Blender’s Tax Credit provides the necessary certainty of $1/gallon tax credit to both buyers and sellers alike, eliminating one piece of the puzzle in the “to blend or not to blend” discussion. •

Alternative Fuels

Martin Trotter, Pricing & Structuring Analyst See his bio, page 38

NATURAL GAS

Natural Gas Price The production gains of the past few years has not only kept prices down but has also kept gas in the ground. With cheap gas readily available and heat sensitive load down, much of the gas accrued during injection season remained in the ground. Demand hasn’t grown as fast as supply and actually reversed course during the withdrawal season. Residential, C&I, and power gen combined are forecast to have experienced for a 4.4 bcf/d shortfall in demand in January versus the previous year.

Despite US natural gas consumption ballooning to a record 85 bcf/d in 2019, prices fell to their lowest level in the last three years. Bearish prices remained historically weak throughout Q1 2020. In February, both the forward and the cash markets posted their lowest values since March 2016.

Near-month NYMEX Natural Gas Futures Prices (2000–2020)

Source: U.S. Energy Information Administration, (EIA), based on Bloomberg, L.P. and Federal Reserve Economic Data (FRED)

Supply

In early March however, natural gas prices saw a brief lift after OPEC and Russia failed to reach an agreement regarding oil production cuts. Saudi Arabia cut prices to levels unseen in 20 years, and the resulting ﬁre sale saw West Texas Intermediate prices fall nearly 20%. The steep price drop followed demand destruction from the coronavirus outbreak. The concurrent events put both operational and ﬁnancial pressure on oil producing companies. Because natural gas is a by-product of shale oil drilling, fears of domestic oil production cuts and foreclosures suggested lower natural gas production, causing forward prices to jump. •

US Crude Oil and Dry Natural Gas Production (AEO2020 Reference Case)

In 2019, domestic natural gas production increased to nearly 10 bcf/day – an increase of roughly 10%. Despite ballooning domestic natural gas consumption, short-term production is estimated to continue outpacing supply. Though long-term energy projections harold renewables as the fastest growing source of production by 2050, the inflection point is unlikely to come within the next decade. Continued improvements in energy efficiency and energy reduction policies will slow rising domestic consumption. As a result, much of this natural gas will find its way out of the country. By as early as 2021, the EIA expects natural gas exports to double to nearly 9 bcf/day.

Source: U.S. Energy Information Administration, (EIA) Annual Energy Outlook 2020

Exports to Mexico, both by pipeline and to LNG facilities to be shipped overseas, continue growing as several additional facilities are set to come on line and increase outlets for supply. Last year, LNG made up nearly 70% of all natural gas exports. Monthly exports peaked in December 2019 for both LNG and pipeline transport. With nine additional liquefaction units across the Gulf Coast and at least two more pipelines into Mexico set to come on line during 2020, it stands to reason these exports will continue to grow.

Monthly US Natural Gas Trade (Jan 2016–Oct 2019)

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

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

Alternative Fuels

Storage The ﬁrst quarter of 2020 proved to be disappointing for those holding long positions in natural gas inventories. Despite beginning the 2019 injection season with inventories below the previous 5-year range, incremental production allowed injections to rebound to the upper band of the 5-year average. Mild temperatures through the withdrawal period depressed demand. With the 11-15 forecasts consistently calling for colder weather, heating degree days, a measure of how temperatures deviate above normal levels, consistently ﬁzzled prior to physical market trading and burns. Between mild temperatures and increased production, price markets in early 2020 often operated at summer season prices and below. As such, suppliers that could keep storage in the ground purchased incremental gas to serve daily load rather than withdrawing, even injecting more gas into storage throughout the winter strip.

Lower 48 States Working Natural Gas in Storage (Jan 2010-Dec 2020)

The lack of weather volatility showed in the weekly storage reports as well. Modest withdrawal numbers fell on deaf ears and resulted in little price action, indicating they may have been viewed as a result of operational ratchets and already priced in the market views. At time of publishing, it is estimated that storage levels will end the heating season with nearly 2 Bcf in the ground, more than 10% above the previous season. • Source: U.S. Energy Information Administration, (EIA), Natural Gas Pipelines Projects Tracker Source: U.S. Energy Information Administration, (EIA), Natural Gas Monthly, Weekly Natural Gas Storage Report, and Short-term Energy Outlook

VIEWPOINTS By Nikki Booth, Senior Logistics Manager, Carrier Relations

Nuclear Verdict

There has been a lot of chatter in the trucking industry in recent years about “nuclear verdicts.” What is a nuclear verdict and why should transportation companies be concerned?

declining by double digits year-over-year. The American Transportation Research Institute (ATRI) reports insurance rates for truck ﬂeets have risen 40% since 2013.

Nuclear verdicts refer to jury awards in which the penalties exceed $10 million for accident cases against the trucking industry. The rise in nuclear verdicts is alarming; juries are favoring plaintiffs and making examples of trucking companies with excessive penalties in accident cases. In addition, attorneys who specialize in nuclear lawsuits are expanding advertisements.

Nuclear verdicts are changing the face of the trucking industry. Trucking companies need to consciously do their part to combat the rise of nuclear verdicts:

Defense attorneys for the trucking sector are usually unprepared to deal with these cases, constrained by limited budgets compared to the abundant resources of the prosecuting attorneys. Previously, trucking companies utilizing independent owner operators were insulated from direct liability, limiting the risk of litigation and nuclear verdicts. The rules, however, have now changed. Lawyers suing trucking companies ﬁnd juries to be sympathetic to the victims and willing to place blame directly on carriers, even if the driver wasn’t an employee.

3. Keep commercial truck insurance credit score in good standing

The growing trend of juries awarding nuclear verdicts has forced some insurance providers to exit the trucking industry altogether. AIG and Zurich International are recent examples. Not only does this limit the available insurers in a tough market, but remaining insurers can now afford to be more selective about who to insure, applying additional premiums when required. The result has been rising insurance premiums for many trucking & logistics companies.

1. Instill sound safety programs for ﬂeets 2. Pay close attention to safety ratings on FMCSA

Following these guidelines will limit the likelihood of a ﬂeet facing a nuclear lawsuit. If such a lawsuit is ever ﬁled for negligence due to an accident involving one of their trucks, these three principles provide a foundation to show the jury that the defendant is a responsible operator. Companies following these guidelines will also demonstrate to the public that the trucking industry can be an advocate for a strong safety culture while providing vital jobs and support for its community. •

Rising insurance premiums and nuclear verdicts are often cited in carrier bankruptcies as the primary causes for ceasing operations, despite the number of deaths and injuries from accidents involving large trucks 34

Nikki A. Booth Senior Logistics Manager, Carrier Relations Nikki manages the strategic direction of Mansﬁeld’s Full Truck Load network across the U.S. and Canada. Her team works closely with fuel transport companies to handle vendor procurement, address logistical concerns, and identify cost-saving solutions for Mansﬁeld Energy and our customers. Nikki has several years’ experience in supply chain management, with the majority of that focused on energy transportation and logistics.

Viewpoints By Cindy Moblo, Technical Services Manager, O’Rourke Petroleum

Comparison of Maintenance Regimes

It’s not just in these economically uncertain times that companies evaluate their production costs and their bottom line. A knee-jerk reaction to the economic slowdown has been to control maintenance expenses – but these measures often end up costing far more. It’s critical for any business, whether it be a trucking company, manufacturing facility or a chemical plant, to evaluate their maintenance program and determine its alignment with their financial and operational goals. There are four basic regimes of maintenance, each with their benefits and drawbacks. Lubricants suppliers should be ready and able to assist customers in evaluating cost versus benefit of each type of maintenance listed below.

Reactive Basically, ﬁx/replace things when they break. Based on a study conducted by GE Digital, 82 percent of companies have experienced unplanned downtime over the past three years. Those outages lasted an average of four hours and cost an average of $2 million. In fact, the best estimate is that reactive maintenance costs the average company 2-5 times more than a well-managed proactive program. Sadly, the reactive regime is all too common, either due to a lack of resources or a lack of understanding related to the high cost of unplanned downtime, not including the cost of the repairs.

Just as we all (hopefully) change the oil and ﬁlters in our vehicles in a timely manner as speciﬁed by the manufacturer, preventative maintenance should be a bare minimum done to extend equipment life. Just as the quality of preventative care and products used in car care varies, preventative maintenance performed incorrectly can be worse than no maintenance at all. Many have received that call (often in the middle of the night!) when someone grabbed the wrong grease gun or pail, and the cross-contamination led to a failure. Maintenance individuals should be trained in methods put in place to prevent contaminants (like dirt and water) from being introduced with the correct product. If done correctly, there are several advantages to performing Preventative Maintenance, including: 1. Increased equipment lifespan 2. Reduced unplanned downtime 3. Cost-effective repair costs

Predictive Long gone are the days when a Maintenance Manager had to experience sleepless nights, worrying if critical assets were on the verge of failure because of age or unexpected wear. Today, there are countless technologies that allow for the monitoring of equipment health.

Hidden costs of reactive maintenance include: 1. Greater repair costs For equipment allowed to run to failure, the damage done is usually much worse than if repairs were performed before the failure occurred. 2. Lost production time This includes labor issues and overhead time without production. 3. Delay in order delivery and customer dissatisfaction There are situations where run-to-failure is either unavoidable (like with a sealed-for-life electric motor) or of little consequence (like downing a centrifugal pump with a redundant backup), so reactive measures are not always negative. However, it’s important to understand all possible costs before choosing to let equipment fail before ﬁxing it. 35

Preventative

1. Ultrasound equipment – Known as the “Swiss Army Knife” of the reliability world because of its many functions, ultrasounds are also one of the most affordable and efﬁcient ways to identify equipment issues. Ultrasound works on the simple principle of identifying high-frequency sounds which are converted into sounds that can be heard with headphones. Some of the critical components monitored by ultrasound include: a. Proper greasing of electric motor bearings b. Identiﬁcation of air leaks c. Early detection of failing bearings

Viewpoints Comparison of Maintenance Regimes, continued

2. Oil Analysis – Much like blood work can assess the health of a human patient, oil analysis can assist in identifying the health of equipment and lubricants, helping a plant move from time-based maintenance to condition-based maintenance. While it’s often used to evaluate Root Cause Analysis, it’s best used consistently to identify trends that may affect the health of the equipment, allowing interventive maintenance to be performed. 3. Vibration – Vibration in some equipment, including many compressors, electric motors, pumps, gearboxes and rotating shafts, can be a sign of trouble. Vibration monitoring equipment can identify loosening, wear, misalignment and imbalances. 4. Infrared Thermography – A certain amount of heat is to be expected with most rotating equipment, but only within certain baseline limitations. Spikes in temperature can be an indication of misalignment, wear, or other issues.

Proactive Maintenance Case Study: As one example of proactive maintenance, take for example one of O’Rourke’s chemical plant customers which provides feedstock for several other plants. Critical to their process are several large agitators (mixers) which are driven by gearboxes. This maintenance manager’s nightmare scenario was the failure of just one of these gearboxes, which would shut down not only the plant’s production, but also every plant reliant on their product. To make matters worse, the agitators were difﬁcult to maintain as they were located 8 feet above the platform, and the oil level was impossible to see. To resolve this nightmare, the plant purchased and installed the following products: a. A high-capacity silica media breather to prevent moisture and dirt contamination.

Baseline Comparison

b. A projecting 3D bullseye to replace the varnished one. c. A non-staining, dual-port site glass level indicator. This allows for the easy evaluation of oil condition and level from the ground and provides a way to remove any contaminants. The dual port will eventually include a valve with a pitot tube to allow for consistent pulling of oil analysis samples. These improvements cost the plant a tiny fraction of the cost of a failure and improved the sleep of many plant employees.

Proactive Proactive Maintenance is focused on eliminating failures - period. Impossible? Think of military (or civilian, for that matter) aircraft. This type of maintenance is initially more costly upfront in terms of time, money and labor, but can be justiﬁed with greatly improved reliability. That’s a great thing when one’s ﬂying at 30,000 feet! And it’s far more achievable than one would think. Proactive Maintenance includes implementing Preventative and Predictive Maintenance but takes the information a step further. Companies can determine sources of failures through root cause analysis and by implementing methodologies, products and training to prevent them from reoccurring. These include, but aren’t limited to: 1. Contamination control related to lubricant storage, handling and in-service use – There is a direct correlation between premature equipment failure and dirty and/or wet oil. Assuring the lubricant is clean and dry dramatically increases equipment life. 2. Color-coding and tagging – Another source of lubricant-related equipment failure includes misapplication of the lubricant. For example, different grease thickeners often don’t like each other and react by softening when mixed. Lithium-complex, found in most multi-purpose greases, and polyurea, the thickener in grease used in electric motor bearings, are incompatible. Many motors have suffered a premature death because of grease mixing. By color-coding the grease guns, with corresponding color-coded labels at the zerks, motors can be saved.

Converting a facility that has historically been implementing Reactive Maintenance to a Proactive Maintenance program is challenging. There will be some upfront cost of money and resources. However, the payoffs are considerable. O’Rourke and Mansﬁeld can provide a roadmap to help customers accomplish just that. Let us know how we can support your equipment maintenance program. •

3. Reliability products – Adding products for redundancy and protection and signiﬁcantly reduce the probability of failure. 36

Cindy Moblo STLE CLS & OMA1, ICML MLT1 Technical Services Manager, O’Rourke Petroleum Cindy holds a Certified Lubrication Specialist and Oil Monitoring Analyst certification from the Society of Tribologists and Lubrication Engineers, and a Machinery Lubrication Specialist certification from the International Council of Machinery Lubrication. She has been in the industry since 2003, and with O’Rourke since 2014.

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

Andy Milton

Sara Bonario

Senior VP of Supply & Distribution

Supply Director

Andy heads the supply group for Mansﬁeld. During his tenure, the company has grown from 1.3 billion gallons to over 3 billion gallons per year. His industry experience spans all aspects of the fuel supply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Andy’s expertise in purchasing via pipeline, vessel, and the coordination via futures and options for hedging purchases enables him to successfully lead a team of experienced and motivated supply personnel at Mansﬁeld. His team handles a wide geographic area of all 50 states and Canada, including all gasoline products, ULSD, kerosene, heating oil, biodiesel, ethanol, and natural gas. •

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

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

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

Brent Fergeson Supply Director

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

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

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

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

* Some of the information provided is owned and licensed by OPIS. In no event shall any user copy, modify, publish, retransmit, or otherwise reproduce information from OPIS. Copyright 2020. All rights reserved. Disclaimer: The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures, or options contract.

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