FUELSNews 360° - Q3 2020 Market Report

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Table of Contents FUELSNews 360° Quarterly Report Q3 2020 FUELSNews 360°, published four times annually by Mansfield Energy Corp, analyzes and summarizes the prior quarter’s activity in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and reporting—both domestically and globally—to provide insight into upcoming challenges facing the energy supply chain.

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Executive Summary

Regional Views continued

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Overview

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July through September 2020

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Prices in Review

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Rack-to-Retail Spreads

Mathew Smith

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Global Economy Trends

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US Economy

29

Alternative Fuels 29

Unemployment 14 15

Global Demand Forecasts

Renewables Killing Me Smalls—Small Refinery Exemptions and Why They Matter Sara Bonario

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Natural Gas Fundamentals

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After Years of Growth, LNG Suffers Pandemic Setbacks

Fundamentals 16

Crude Production Stalls at Pre-2018 Levels

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Crude Inventories Remain Above 5-Year Range Fuel Inventories Show Different Realities

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PADD 5 West Coast Brent Fergeson

Economy & Demand 12

PADD 4 Rocky Mountain Nate Kovacevich

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PADD 3 Gulf Coast

35 36

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PADD 1A, B & C East Coast Gabe Aucar

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PADD 2 Midwest Chris Carter

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Nartural Gas Storage

Viewpoints 36

Refineries Slow to Increase Utilization

Regional Views 21

Martin Trotter

Supply Team Forecasts End-of-Year Crude Prices

FUELSNews 360˚ National Supply Team Contributors

Q3 2020 Executive Summary Although 2020 has developed a reputation for volatility and

remain stubbornly low, causing refinery utilization to remain low.

uncertainty, the third quarter brought a stay for oil markets,

Many refiners face financial pressures due to high crude costs

with prices remaining range-bound while fundamentals slowly

and low output, and refinery closures, restrictions, and

subsided to normal levels.

conversions increased during Q3.

Oil markets fundamentals are at an impasse. The OPEC+

Forecasting the future of energy prices is challenging,

alliance has committed to setting a floor for oil prices, and their

considering the many moving factors such as public health,

historic cuts earlier this year show they will follow through.

government stimulus measures, economic lag, and geopolitical

Conversely, worldwide oil demand remains well below pre-

challenges. There are plausible scenarios in which prices

COVID levels, keeping a lid on upward price movements.

experience another bear run to $20/bbl or less. Conversely, a quick recovery and a rally to $50/bbl is not out of reach. Absent a

World GDP has become a particularly challenging item to

major deviation from current trends, though, expect prices to end

forecast, and agencies differ widely on their expectations for

the year within the same range maintained in Q3. For more

2021 and beyond. While some agencies expect an expedient

analysis on where prices will end 2020, check out the Mansfield

recovery, others suggest the lingering impacts of lockdowns

Supply Team’s forecast on page 36.

will cause tepid growth for years to come.

Around the US, regional challenges added to uncertainty. The Whichever analysis is correct, all signs point to global

Gulf Coast experienced one of the most active hurricane seasons

conditions eventually returning to normal. OECD oil days of

on record, but plenteous inventories and weak demand kept

supply exploded above 80 days during the pandemic, but

markets appeased despite prolonged refinery closures. For more,

forecasts show days of supply falling back to a more typical

Matt Smith describes PADD 3 Gulf Coast fuel trends on page 24.

65-day level by early 2021. For consumers, normalizing inventories suggest higher prices could be on the way in 2021.

Pipeline challenges also caused some short-term scares during the quarter. On the East Coast, the Colonial Pipeline experienced

Despite improving fundamentals, some pockets will inevitably

a small leak in North Carolina, requiring it to close its gasoline

experience prolonged setbacks. US oil producers could fit that

line north of Atlanta and co-mingle products beyond that point.

description; crude output remains low despite WTI crude

Gabe Aucar shares more details on page 21.

recovering to $40/bbl. Oil & Gas companies will focus on cash flow preservation and maintaining production over the coming quarter, rather than adding new supplies.

Pressured by low crack spreads, refineries are seeking novel ways to remain profitable. On page 28, Brent Fergeson, Supply Director, describes the latest trend of West Coast refineries

At the same time, suppressed fuel prices caused by low

switching to renewable diesel production to take advantage of

demand present a challenge for refineries. Crack spreads

local blending economics and tax credits. •

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OVERVIEW July through September 2020

Q3 Market Summary

$1.2008 $1.1454

$40.22

27,782

Source: New York Mercantile Exchange (NYMEX)

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Overview

July – September 2020 WTI Crude Prices

Source: New York Mercantile Exchange (NYMEX)

July The third quarter of the year began with oil prices recovering from their historic lows, though the world faced significant uncertainty on what the recovery would look like.

To start July, a federal judge made headlines by shutting down the 570 kbpd Dakota Access Pipeline, which transports crude for refining from the Bakken crude basin in North Dakota to the Chicago market. Pipeline-owner Energy Transfer Partners argued the shutdown would cost over a billion dollars and significantly disrupt crude outflows from the Bakken. The judge, however, ruled that an environmental impact assessment is urgently needed because the risk of a spill outweighs the economic implications.

Despite significant uncertainty, the EIA’s July forecast showed several positive trends, which kept prices from sliding amid higher coronavirus cases. The agency projected net crude oil inventory draws would be 3.3 million barrels per day globally in the second half of 2020, with 1.1 MMbpd withdrawals in 2021. By the end of 2021, crude stocks would be close to the five-year average. US liquid fuel consumption will fall 2.1 MMbpd in 2020 compared to 2019, but by 2021 that gap will narrow to a meager 0.5 MMbpd.

News from the European Union of a 750 billioneuro ($859 billion) fund to assist EU economies hurt by the coronavirus helped lift markets as July continued. The unprecedented deal allows the 7

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European Commission to raise billions of euros on capital markets on behalf of all twenty seven member states. This stimulus action in Europe affected the broader international equity and commodity markets.

To close out July, the Federal Reserve followed expectations and held interest rates steady. The central bank kept rates near zero, as they have been since March 15. Rates have not changed since the early days of the pandemic, and the Fed continues to pledge support for the economy as this pandemic continues. “We are committed to using our full range of tools to support our economy in this challenging environment,” stated Fed Chairman Jerome Powell.

Overview

August After extending historic 9.7 MMbpd cuts through July, OPEC+ slowly unwound its production cuts, moving to 7.7 MMbpd to start August. That level will hold through December, downshifting again in January to 5.8 MMbpd.

With global oil demand still well below normal levels and coronavirus cases rising globally, OPEC’s increasing supply became a key test for oil market stability – could global markets absorb another two million barrels of oil per day? The answer seemed to be “yes” since prices remained range-bound for most of the quarter.

In August, a US appeals court said the Dakota Access Pipeline does not need to be shut as had been ordered by a lower court in July. The lower court said the Army Corp. of Engineers broke the law when they granted an easement to construct a pipeline under a lake that provided drinking water for the Standing Rock Sioux tribe. The pipeline will remain operational while the parties return to the lower court for further proceedings.

Saudi Arabia once again limited oil exports to the US, seeking to lower inventories in the world’s most transparent energy market. The move came after Saudi exports peaked at sixyear highs amidst global demand issues.

While Saudi Arabia cannot unilaterally control US inventories – global oil flows will simply shift around – the short-term implication would be lower inventories for several weeks as the quarter closes.

The August IEA Oil Market Report reported, “Global oil demand is expected to be 91.9 mb/d in 2020, down 8.1 mb/d y-o-y. In this Report, we reduce our 2020 forecast by 140 kb/d, the first downgrade in several months, reflecting the stalling of mobility as the number of Covid-19 cases remains high, and weakness in the aviation sector.” In addition to demand concerns, the IEA pointed out that OPEC+ relaxing production cuts could alter supply balance and cause rising inventories once again.

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In mid-August, the Trump administration released plans to allow drilling in the Arctic National Wildlife Refuge (ANWR), a contentious area that has long been the source of debate between oil lobbyists and environmentalists.

Although ANWR opened to oil leasing back in 2017, lease sales have been slow. The latest update will open up 1.5 million acres along the coastal plain.

Although ANWR is a hot button politically, the announcement will have little effect on oil prices in the short- to medium-term. Very little oil exploration has occurred in the Arctic, meaning that oil companies will first have to search for oil, then begin the long process of drilling in an inhospitable climate, and finally complete infrastructure to carry the oil from reserves to key markets. This scenario also assumes no major litigation emerges against drillers. Two years ago, the EIA estimated that oil drilling would not be feasible until at least 2031, adding that peak production of 880 kbpd (roughly 6% of America’s pre-COVID output) would come in 2041.

Overview As August closed, the US and China announced plans to move the Phase One trade deal forward as planned. Trade negotiators agreed to continue forward progress with the deal. Concerns had been growing regarding the pace of Chinese purchases of US goods. Despite mounting tensions on both sides, they agreed to continue unwinding the trade war. “Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement,” the Office of the United States Trade Representative said in a statement.

September As September began, Saudi Arabia lowered its official selling price for October Arab Light crude, a product that sets the tone for Middle Eastern producers and signals weak demand in Asia.

China is already showing a slowdown in purchases, with product exports rising while crude imports slow. OPEC+ will meet later to discuss market trends and what actions are necessary to take.

President Trump gave direction to the Environmental Protection Agency (EPA) to deny

requests for retroactive waivers from US biofuel laws to dozens of oil refiners in a move that some say will garner support from Farm Belt voters ahead of the November election. The waivers have been a source of contention between corn and oil lobbies.

Under current US law, oil refineries must blend biofuels into their products or buy blending credits. Those opposing waivers suggest they harm demand for corn-based ethanol, while supporters argue that the program causes unnecessary financial hardship for oil refineries.

In September, militant factions in Libya came to a preliminary agreement allowing the return of Libyan crude production. Libya’s oil fields have been a source of volatility for years.

Militant forces led by Khalifa Haftar have attempted to control oil flows, forcing Libya’s National Oil Company to declare force majeure on their output. Before the shutdown, Libya’s oil production was 1.2 MMbpd, and it’s fallen to less than 0.2 MMbpd since January. There is some concern that the return of Libyan crude will exacerbate the already over-supplied market situation.

According to the EIA Short-Term Energy Outlook for September, despite expected inventory draws in the coming months, the EIA expects high inventory levels and surplus crude oil production capacity will limit upward pressure on oil prices. EIA’s forecast for growth in 2021 is 0.5 million b/d less than in the August STEO. The downward revision is largely a result of lower expected consumption growth in China, which the EIA now forecasts to grow by just 1.0 million b/d in 2021.

Climbing coronavirus cases in Europe are once again stoking fears of an economic lockdown.

Infections in France and Spain have climbed, and Prime Minister Boris Johnson stated that he was considering a second lockdown, instituting a stopgap measure of 10:00 pm curfews for pubs and restaurants in the UK along with other measures to slow the spread of the virus. As of the end of September, more than 31.32 million people had been infected

by Covid-19. •

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Overview

Prices in Review

Quarterly Diesel Prices

While prices have been on a roller coaster ride all year long, the quarterly view of prices shows a quick snap back to historically average oil prices in Q3.

After averaging just $28/bbl in Q2, WTI crude rose to $40.92 in Q3, marking a 46% gain in oil prices during that period. Although the third quarter was closer to historical price levels, it is still nearly 30% below the levels seen during Q3 2019.

During Q3, prices maintained a surprisingly tight range of $6, hitting a low of $36.76 and a high of $43.39 at different points of the year. Compared to the extreme price volatility in Q2, the third quarter brought a period of calm.

On one side, high inventories kept a steady ceiling over prices, preventing a rally higher. Conversely, OPEC+ cuts ensured that prices could not fall too low, either.

Quarterly WTI Crude Prices

Source: Energy Information Administration (EIA)

Gasoline saw a bit more volatility in Q3, with a stronger recovery paired with a wider trading range.

Gasoline began Q3 at $1.21 and closed the quarter at $1.20, virtually unmoved. Yet during that period, the product saw prices swing by 30 cents, or roughly 25% at different points.

The average price for Q3 was not far from the opening and closing price.

Q3 saw prices average $1.23, up 30% from the previous quarter but down 30% from Q3 2019. •

Quarterly Gasoline Prices

Source: Energy Information Administration (EIA)

Diesel prices were comparably calm, rising from an average price below a dollar in Q2 to $1.20 in Q3 – a 22% gain. Consumers enjoyed a reprieve from pre-COVID levels, which fluctuated closer to $2/gal throughout 2018 and 2019.

Diesel prices ranged from $1.08 to $1.28, a range of 20 cents for the quarter. Compared to 2019, diesel prices have fallen by over 35%.

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Source: Energy Information Administration (EIA)

Overview

Rack-to-Retail Spreads Rack-to-retail spreads, the difference between wholesale fuel prices and gas station prices, returned to normal levels in Q3. Earlier in the year, spreads exploded as prices plummeted.

When wholesale prices fall rapidly, retail prices tend to remain stable, a phenomenon known as “sticky pump” which causes retail margins to expand. While bulk fuel buyers enjoyed lower prices, retail consumers only saw prices fall moderately.

Gasoline Rack-to-Retail Spreads

Source: Energy Information Administration (EIA)

In Q3, gasoline saw retail margins return to historically normal levels. Gasoline spreads averaged 24 cents, slightly above the pre-COVID average of 18 cents. Bulk and retail prices remained remarkably stable, with retail gas prices fluctuating less than 6 cents.

Diesel Rack-to-Retail Spreads

Source: Energy Information Administration (EIA)

Diesel saw rack-to-retail spreads normalize as well. Like gasoline, though, diesel spreads were slightly higher than the average. In Q3, diesel spreads averaged 52 cents, roughly 25% above more typical levels of 42 cents.

For heavy fuel consumers, rack-to-retail spreads represent the ROI per gallon on installing a bulk tank or switching from fuel cards to mobile fueling. For instance, a customer buying retail diesel who installed a bulk tank would have saved 52 cents per gallon in Q3. For a customer consuming a million gallons over that period, that represents a savings of half a million dollars – quickly paying for the cost of a tank installation. • 11

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ECONOMY & DEMAND The global economy spent most of Q3 recovering from the financial woes seen in the first half of the year. But even with a quarter of improvement, there’s still a long road ahead. Financial struggles usually accumulate over multiple quarters, not mere months, so the demand destruction of 2020 could spill over to 2021 in some industries. For instance, transit companies–burdened by high capital costs – cannot recoup lost revenue from the year. Companies that survived by burning through their financial coffers may struggle to keep up even after demand resumes. E-commerce companies, and the logistics companies delivering their goods, never experienced a slowdown and will continue prospering as the economy improves. •

Global Economic Trends The OECD expects global GDP to contract by -4.5% in 2020, but 2021 will see a robust 5.0% rebound for economic activity, bringing the world back to pre-COVID levels before the end of the year.

The IMF’s Q3 report largely concurs with the OECD forecast, noting that the world’s economy will be 0.6% ahead of 2019 levels by the end of 2021. Such moderate growth would functionally create a “lost” two years of global growth, merely returning to previous market levels. Lost years can be detrimental to companies and countries running large budget deficits, as these groups rely on expansion to shrink the scale of old debt.

Beyond 2021, the IMF expects world GDP to grow at roughly 3.5% annually over the medium-term, below pre-pandemic levels but not lethargic. Even with this growth, however, the fund expects 90 million people

worldwide to be thrown into poverty (income below $1.90/day), and slow growth will be a setback to lifting them back out of poverty.

At the beginning of the year, trade policy was expected to be the dominant topic in financial headlines. In January 2020, the US and China signed a historic Phase One deal to unwind the trade war that began in 2018. The pandemic quickly eclipsed any progress, so markets never had a chance to see how it would affect trade flows. According to the Peterson Institute of International Economics, China has not significantly increased its US product purchases since January.

Overall, China has achieved roughly 50% compliance for year-to-date purchases of goods covered under the deal. China has purchased roughly $56.1 billion in goods through August, compared to a year-to-date expected amount of $115.1 billion. Total year-to-date purchases were also just 75% of 2017 imports, the baseline of pre-trade war levels.

Both countries have accepted the reduced trade flow as a natural byproduct of the pandemic and have vocalized plans to reinvigorate the deal once the crisis has passed. US-China trade policy will almost certainly be a critical economic factor in 2021, though the subject will hopefully bring less volatility than it did in 2019. •

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Economy & Demand

US GDP Growth

US Economy The US economy grew by a historic 35.2% in Q3, according to estimates from the Federal Reserve. After the profound dip earlier in the year, the hefty growth helped bring the US closer to pre-pandemic levels. The rebound was driven primarily by personal consumer expenditures (+37%), equipment manufacturing (+43.9%), and residential investments (+48.2%).

Looking ahead, the future for US GDP is far from clear. Goldman Sachs expects GDP to rebound strongly in 2021, assuming a vaccine is approved and distributed in the first half of the year.

In this scenario, GDP would surpass 2019 levels in the first half of 2021, returning close to the pre-COVID trend by the end of the year. *Estimate

More pessimistically, Deloitte forecasts negative GDP growth in 2020 and 2021, with consumer spending cratering from a second wave of quarantines in late 2020 and not improving until a vaccine is distributed later in 2021. In their baseline

Source: Bureau for Economic Analysis, Federal Reserve Bank of St. Louis, Federal Reserve Bank of Atlanta

scenario, US GDP will not surpass 2019 GDP until 2023. Much of the world’s economic future hinges on a vaccine, so expect market volatility until more is known about the vaccine’s availability and distribution. •

Unemployment

US Unemployment Rate

As GDP has improved, unemployment has also fallen from its temporary highs, falling to just 7.9% in September. While this is still more than double the record-low unemployment data seen before COVID, it represents a significant improvement from April’s 14.7% levels.

Despite historic unemployment and record GDP losses, consumers were overall more comfortable throughout the COVID-19 pandemic than during other financial crises. Thanks to stimulus measures and bolstered unemployment insurance, the Consumer Sentiment Index never fell below 70. By comparison, the index fell below 60 during the ’08-’09 Financial Crisis.

Source: US Bureau of Labor Statistics

Consumer Sentiment Index

Source: University of Michigan

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Consumers may be more optimistic due to the brevity and clarity of the Q1 2020 downturn. Unlike most financial crises, which are often hard to identify until after the fact, the pandemic had an obvious beginning point. It also has a clear(ish) end date tied to the development of a viable vaccine.

While many things are unknown, consumers have no doubt the pandemic will end, and normal growth will resume. •

Economy & Demand

Global Demand Forecasts The future of global demand has been called into question like never before. In September, BP became the first oil major to forecast that oil demand might never fully recover from the coronavirus crisis, instead declining slowly as renewable energy gains a more dominant position in global energy markets.

S&P Global Platts takes a more conservative approach, estimating that peak oil demand will occur later in the 2030s.

The concept of peak oil demand has been an on-going debate for years.

Traditionally, the argument focuses on the transition to renewable energy along with engine efficiency, certainly two important demand factors. The pandemic, however, has introduced a new angle: economic malaise. Global demand fell by 8.4 MMbpd in 2020 according to the IEA, and the agency expects 2021 to bring just 5.5 MMbpd growth.

Without a noticeable uptick in demand in 2021 and beyond, global consumption may struggle to regain its 2019 peak of 101.5 MMbpd.

US Liquid Fuels Product Supplied

US fuel consumption is expected to fall by 2.1 MMbpd – roughly 10% – for the entirety of the year, though Q1 demand fell by more than 25%.

Virtually all products have seen reduced demand this year, and none will fully recover on an annualized basis heading into 2021.

Components of Annual Change

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

US Diesel Demand

Source: Energy Information Administration (EIA)

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Diesel demand, which typically correlates with the economy as a whole, showed weakness in the third quarter. Unlike Q2, however, demand managed to stay within the historical range during most weeks. Still, several weeks set seasonal lows, including a week in September when demand fell below 3 MMbpd for the first time since May. In Q3 2020, US diesel demand averaged 3.6 MMbpd, off nearly 8% from the average third quarter level of 3.9 MMbpd. •

F U N D A M E N TA L S

Oil markets slowly moved towards normal during Q3.

After a large glut in the first half of 2020 that averaged +6.5 MMbpd, the EIA forecasts global supplies flipping to a -3.7 MMbpd undersupply. OPEC’s steep cuts, combined with diminished production worldwide, kept the oil market in check. Consumption is making something like a V-shaped recovery, though many question whether global oil consumption will ever reach pre-COVID levels.

World Liquid Fuels Production and Consumption Balance

Global inventories remain elevated, but balance is slowly improving as supply reductions force markets to pull from stocks to meet demand. Over the past five years, the world has generally maintained roughly 60-65 days of crude oil supply in inventories. By March, days of supply swelled to more than 85 days of supply– 36% above normal levels for that time of year.

Estimates from the IEA suggest that OECD countries added 325 million barrels of crude inventories during the first half of the year, propelling days of supply to incredible highs. The surge in days of supply has been improving since March, falling an average 2.7 days each month since peaking. While the pace of withdrawals will decelerate in the months ahead, the EIA forecasts that global crude stocks will be back within the normal seasonal range by January 2021. It’s worth bearing in mind, however, that the top of the seasonal range was set back in 2016 when oil prices struggled to rise above $45/bbl.

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

Organization for Economic Cooperation and Development (OECD) Commercial Inventories of Crude Oil and other Liquids

Most market forecasts point to burgeoning inventories as proof that prices cannot rise precipitously above the $40 level. While this is certainly true in the short-term, if the EIA’s forecast proves correct, then oil markets may be close to “normal” by early 2021. Still, no forecast knows the future, and any number of surprises – Libya, OPEC, new lockdowns, US producers, and more–could send days of supply climbing once again. •

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

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Fundamentals

Crude Production Stalls at Pre-2018 Levels At the forefront of the stabilization was OPEC, which remained true to its committed cuts. Although member countries varied widely in their participation, Saudi Arabia has consistently pushed countries to remain compliant. Iraq failed to comply in early months of the deal, but they were compelled by the Saudis to make steeper cuts in future months to make up for excess supplies. Overall, the group has achieved strong compliance levels with the world’s largest production cut agreement.

Production from exempt OPEC members (Iran, Venezuela, and Libya) pushed total production above the compliance levels, but those countries have held relatively steady and were not intended to be captured by the deal. The wildcard will be Libya, which in September was finally able to begin pumping oil again. The country lost over one million barrels of supply from their peak capacity, so resuming crude flows could have a material impact on oil markets.

OPEC+Monthly Production January–August 2020

The EIA in September produced data that compared January 2020 production levels to those achieved in later months. Overall, compliance was nearly 100% in May and has exceeded 100% in the months following.

Source: Energy Information Administration (EIA)

Beyond OPEC+, other countries, including the US, also kept their production limited.

Within the United States, COVID-19 undid two full years of production gains, sending American oil output to pre-2018 levels. Although output peaked at more than 13 million barrels per day early in the year, supply has remained at or below 11 MMbpd since early June. •

Crude Oil Production Year-over-Year

Source: Energy Information Administration (EIA)

Almost simultaneously with falling production, rig counts collapsed, leveling off in Q3 at a steady low level. Typically, rig counts are a leading indicator of production – rising rig counts signal more production in the future. For both to fall together suggests that producers cut both existing well production and rigs drilling to support future production.

Despite crude prices re-stabilizing in June above $40/bbl, both rigs and output have remained surprisingly low. Oil companies are licking their financial wounds – many were unprofitable before the pandemic hit, so they lack the capital to restart 16

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Fundamentals immediately. On top of lacking their own funds, producers are now seen as a dangerous customer for banks which limits access to loans.

The outlook for US shale producers is tough to predict. Over the past few years, American oil has become the world’s swing producer, increasing supply to meet demand or tapping the breaks when prices fall. America would never have become the swing producer without a certain level of agility and scrappiness. So, while the outlook for US producers seems bleak, don’t count them out just yet. Once banks and producers are confident that crude demand has stabilized and prices are solid, we may see yet another US shale resurgence. •

US Crude Production and Rig Counts

Source: Energy Information Administration (EIA)

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Fundamentals

Crude Inventories Remain Above 5-Year Range Crude inventories are a tidy depiction of this entire pandemic – while markets are far better off than they were in April and May, there’s a long way to go before “normalcy” is restored. During a normal year, crude stocks would typically fall by 40 million barrels from their spring peak.

Crude Stocks 5-Yr Range

This year, inventories did fall by 45 million barrels in Q3, but that was from a record high inventory level of 540 million barrels. Markets remain 78 million barrels, or 19%, above the seasonal average for this time of year. •

Fuel Inventories Show Different Realities Early on in the pandemic, many believed diesel fuel would be the sole petroleum product exempt from demand curtailment; after all, trucks still have to deliver all the goods people are ordering from ecommerce sites, right?

Source: Energy Information Administration (EIA)

While diesel inventories grew quite tight early in the year – even remaining low into April, after lockdowns began – they began climbing in Q2. Markets watched as inventories rose to the 5-year average, then blew threw the top end of the 5-year range. Markets continued floating higher and higher until nearing 180 million barrels in June. Traders assumed this was the peak, and diesel would follow other products back to normal ground. Diesel didn’t heed their instructions.

Diesel Inventories 5-Yr Range

Diesel inventories have remained persistently above the five-year range for months now, hovering around 180 million barrels since June with no sign of falling. During that time, diesel demand has largely recovered, so the problem is not a lack of demand. Rather, refiners have pushed every possible drop of jet fuel into the diesel stream to offset cratering airline activity.

Gasoline inventories were hit hard early on in the pandemic the pandemic, soaring to all-time highs in April. Since then, however, consumers eager to get back on the road have helped whittle down inventories, bringing total gasoline inventories within six million barrels of the five-year average by the end of Q3.

Source: Energy Information Administration (EIA)

Gasoline Inventories 5-Yr Range

The scale of the summer withdrawal is impressive. On average, from early year peaks to the September slowdown, gasoline inventories tend to experience a 29-million-barrel drop, but this year has managed to remove 31.7 MMbbls despite a pandemic. The large withdrawal is not unprecedented; in 2017, inventories fell nearly fourty three million barrels as OPEC cuts kept oil off the market and demand remained high. •

Source: Energy Information Administration (EIA)

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Fundamentals

Refineries Slow to Increase Utilization Refiners continued their slow rebuilding process in Q3, with utilization rising from 75% in July to over 80% in mid-August. Hurricane season temporarily sent refining utilization below 75% once again in September as Hurricane Laura knocked out Louisiana refineries for a brief period.

While such a dip in throughput would normally have massive price repercussions, abundant inventories blunted the impact. Refineries were hesitant to restart their capacity, taking their time to allow crack spreads to rebalance.

US Refinery Utilization

During Q3, production of various products remained below normal.

Refinery output of diesel averaged 4.5 MMbpd, roughly 8% below 2019 production levels. Gasoline throughput averaged 9.2 MMbpd, nearly 10% off from last summer. Jet fuel, unsurprisingly, stood out from the pack – refiners produced less than half as much jet fuel this quarter as they did in Q3 2019.

Across the country, refinery utilization has been quite volatile. The East Coast, which suffered a refinery shutdown in 2019, has long been running at suppressed utilization rates, and the West Coast saw just 71% utilization in Q3. Negative refiner margin earlier in the spring caused PADD 5 West Coast refiners to pull back their activity.

Source: Energy Information Administration (EIA)

Q3 Refinery Utilization by PADD

The Midwest and Rocky Mountain regions led the country in refinery utilization. While few refineries operate in the Rocky Mountains, the Midwest region (particularly around Chicago) has become a major hub for US fuel supply. The Midwest (PADD 2) is the second largest refining hub in the US, producing almost half as much as the Gulf Coast supplies.

Strong runs in the Midwest have helped keep fuel supplies flowing, even as the Gulf Coast and other regions operate below 80% utilization. •

Source: Energy Information Administration (EIA)

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

PADD 1A, B & C East Coast

Overview PADD 1 remains flush with ULSD even with refinery utilization below 70%. With crack spreads where they currently stand, utilization appears unlikely to rise for the foreseeable future. Demand continues to be the culprit in all of this; with PADD 1 states still in heavy lockdowns, it does not seem like demand will return any time soon. Despite the slowdown, two factors have kept the market slightly more stable than they otherwise would have been: refinery closures due to the last few hurricanes and issues with the Colonial Pipeline.

The coming quarter will be interesting for ULSD stocks. Although markets could see hefty stockpile draws if we experience a cold winter up in the northeast, there may not be an accompanying spike in prices given that the market has plenty of inventories to cushion the blow. •

Colonial Pipeline Line 2 Shipping Gasoline After Line 1 Product Release The Colonial Pipeline has had to make some operational changes following a gasoline leak on its gasoline-only Line 1 near Huntersville, NC. Upon notification, the pipeline shut down operations, and crews were dispatched to the site. Since then, Colonial has crossed Line 1 barrels into Line 2 north of Atlanta, Georgia. Line 1 transports gasoline from Houston, Texas, to Greensboro, North Carolina, while Line 2 carries distillates. Colonial kept all main lines and stub lines operational, except for Line 1 from Charlotte to Greensboro.

The pipe issued a nomination freeze for three cycles and allocated cycles thereafter, the first line allocation since mid-March. Line allocations occur when the pipeline is oversubscribed and limits shippers from moving all the product they initially scheduled, while a freeze means no new product can be scheduled for the cycle.

The temporary Line 1 crossover operations allowed the system to continue to operate at reduced overall rates. Fortunately, the pipe-fed gasoline and diesel markets showed a muted response, reflective of the current well-supplied situation in those markets. Rarely does such an event not significantly impact fuel prices, but we saw a similar reaction a few weeks after when Hurricane Laura hit a large refining area of the US. The market just shrugged off the supply damage. • 21 23

© 2020 Mansfield Energy Corp

Regional Views

Gulf Coast Strong Diesel Export Demand The Gulf Coast has seen a steady flow of diesel volume to Latin America this quarter. However, markets saw more volatility related to the European arbitrage opening up. The European arb was open for much of July, so incremental volume moved there instead of Latin America. Export prices for ULSD this past quarter averaged $1.15/gal, according to S&P Global Platts price assessments, up from the 88 cents/gal in the previous quarter.

About a third of the GC’s ULSD exports were sent to Europe, with the other two-thirds making their way to Mexico and other Latin American destinations.

About one-third of the diesel produced in the Gulf Coast went out for export in July 2019. During the same time this year, the region exported closer to 50% of its production. Put another way, almost half of what US refineries produce is going to the export markets. While the impact of the pandemic and the ensuing global economic downturn so far this year has been significant, we have seen a rapid recovery in foreign demand for refined products moving through the quarter.

What has been more impressive is that even with the exports, ultra-low sulfur diesel stocks on the Gulf Coast and East Coast have built to a record high of 55 and 60 million barrels, respectively, marking the highest regional inventories since the EIA began recording the data during 2004. The next quarter will be interesting to watch as we go into colder weather and draw down on diesel inventories. •

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© 2020 Mansfield Energy Corp

Regional Views

Chris Carter, Senior Supply Manager See his bio, page 38

PADD 2 Midwest

Overview The big focus throughout the Midwest will be on agricultural demand during the fall harvest season. Harvest in the Midwest began strong in late September. Accordingly, the forward curve for diesel prices in the Chicago trading hub points toward weaker regional diesel prices for the harvest season.

Late in Q3, both BP’s and PBF’s Toledo refineries encountered short disruptions. The BP Husky refinery also announced they would perform an overhaul on an alkylation unit in early October. The maintenance was initially planned for early March but was delayed due to COVID. •

Polaris Pipeline Leak Could Impact US Refiners In early September, one of the top Canadian Oil Sands operations had to shut down operations due to a leak in the Polaris Pipeline. Kearl Oil Sands, owned by Imperial and Exxon, is a 220 kbpd operation based north of Fort McMurry, Alberta. The pipeline leak occurred north of McMurry and will only impact the oil sands in the northern region.

It is still unclear how this will impact US refineries.

When Kearl announced it would be shutting down operations, Western Canadian Select (WCS) traded at a discount of $9.60/bbl to WTI. A few days earlier, WCS traded at an $11/bbl discount to WTI. US refiners are still experiencing decreased demand due to COVID-19.

This shutdown also comes at a time when Midwest refiners typically begin lowering production due to seasonal demand declines.

The outage is expected to last for a few weeks; however, healthy Canadian crude inventories will help offset reduced supply. The Polaris Pipeline leak and Kearl shutdown are fundamental items traders and refiners will be watching closely to evaluate the impact. •

Chicago Margins Climb Higher Beginning the third quarter, Chicago refining margins started at a four-week high, driven by increased West Shore and Badger gasoline batches during the summer driving season. The Western Candian Select 6-3-2-1 crack spread rose in early July to $15.91 per bbl. With the Chicago refiners continuing to see higher refining margins, they will continue to push Chicago-based bbls into new markets. •

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© 2020 Mansfield Energy Corp

Regional Views

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

PADD 3 Gulf Coast

Overview

Balance is the key description in PADD 3 this quarter. The evolving balance of COVID-impacted demand, paired with above 5-year average inventory levels, required refiners to balance refinery utilization to maximize commodity values. Looking at Gulf Coast gasoline (CBOB and RBOB) and ULSD basis, refiners continue seeking this balance and are starting to see improved commodity values. Pair this with a short-term spike in demand from Hurricanes Laura and Marco in late August, along with lower refinery utilization post-hurricane (73% versus 83% the prior week) – balance continues to be the winning recipe.

Looking into the final quarter of 2020, I expect more of the balance strategy. Seasonally, the fourth quarter offers weaker demand and a declining cash spread to NYMEX (basis). A cold winter could be just what the doctor ordered to balance fuel market. •

Gulf Coast Fuel Basis

Source: Energy Information Administration (EIA)

Source: Energy Information Administration (EIA)

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Regional Views

PADD 3 2020 Atlantic Hurricane Season The 2020 hurricane season has lived up to forecasts and even strengthened activity predictions for the remainder of the season.

Consider the sequence below from relevant scholars and organizations with expertise in these weather patterns.

• April 2020: The Colorado State University Tropical Meteorology Team predicts an above-average season in the Atlantic.

September is historically the most active month of the season, but there’s plenty of time for hurricanes in Q4 as well. With warmer-than-average water temperatures in the Atlantic and Gulf of Mexico, be watchful of mid- to lateseason activity remaining active. For the end consumer, refined product inventory levels above 5-year averages will help soften small disruptions.

Large disruptions could still pose price and supply risk, depending on the impact. Stay tuned and stay safe! •

• Late May 2020: The National Oceanic and Atmospheric Administration (NOAA) strengthens the forecast, citing a 60% chance of above-average activity.

• Early August 2020: The NOAA updates their May forecast, calling 2020 an extremely active hurricane season.

So far, the Atlantic has vastly exceeded expectations, setting record after record for the number of storms year-to-date.

Mid-August’s combo of Laura and Marco had a temporary impact on operating rig counts in the Gulf of Mexico, with most exercising evacuation practices. PADD 3 origin pricing saw a temporary increase in value, with two storms pointed at refinery hubs, only to give it back shortly after landfall. Both storms bypassed refinery-heavy Coastal Louisiana and Houston, something that could have held longer-lasting price impacts. Instead, the 700 kbpd refinery base in Lake Charles, LA felt the strength of Laura and went offline for an extended period.

Gallup Refinery Closure

Source: National Oceanographic and Atmospheric Administration (NOAA)

New Mexico Product Supply

In August, Marathon announced plans to close its refinery near Gallup, New Mexico, removing approximately 15.4 kbpd of gasoline and 10.6 kbpd of distillates from local New Mexico production. Previously owned by Western Refining before the company was acquired by Marathon, the refinery did not connect to a refined fuels pipeline, so every gallon had to be trucked.

As a result, most fuel stayed local in northwestern NM, while some found its way down to Albuquerque.

The State of New Mexico has two refineries within the state: Holly Frontier’s 100 kbpd refinery and Marathon’s 26 kbpd refinery.

Petroleum products are also imported from Texas through several fuel pipelines.

This complex system of refineries and product import movements is constantly shifting, dictated by pricing arbitrage, refinery production rates, and customer supply contracts.

When one refinery goes into turnaround or experiences an unplanned disruption, other suppliers will coordinate to sell their fuel to cover demand. However, these disruptions almost always tighten local New Mexico supply, creating extreme price

Source: Energy Information Administration (EIA)

volatility with double-digit price moves. Conversely, when the market is over-supplied, prices can fall very quickly.

Refiners will likely react to Gallup’s closure by moving more product from south to north, shipping more barrels from El Paso, Texas up north to Bloomfield, NM, 130 miles from the Gallup refinery.

Holly is projecting that approximately 30 to 40 trucks/day will move from El Paso into Albuquerque after the closure to counterbalance increased product movements from Holly’s Artesia refinery.

This south-to-north shift will make the delicate balance of fuel supply even more precarious, subsequently increasing rack price volatility when supply disruptions occur. • 25

© 2020 Mansfield Energy Corp

Regional Views

Nate Kovacevich, Senior Supply Manager See his bio, page38

PADD 4 Rocky Mountain

Overview It’s still difficult to predict fuel demand over the next 2-3 months. There is a real possibility that PADD 4 refineries cut runs again, especially if margins continue to drop. While a return to economic growth may be in the cards, that may not translate into normalcy for the refining community and downstream folks. The work from home paradigm shift will likely cause ripples throughout the energy

sector for years to come, especially factoring in how long it will take for air travel to normalize and laggard jet fuel demand to approach where it was this past winter.

Normally, markets experience a sharp drop in both gasoline and diesel prices towards the end of the year. Given the current environment, the likelihood of that bearish seasonal trend continuing this year seems high. •

PADD 4 Demand Stalls, Refining Utilization Picks Up Last quarter’s big news was the announcement that HollyFrontier would convert its Cheyenne refinery into a renewable diesel plant. While this undoubtedly shook the Mountain region a bit and caused nervousness in the Denver market, the region may have needed rebalancing in a postCOVID environment. Denver is fed via pipelines from multiple areas, so lost local supply can be back-filled easily from the Midwest and northern TX refineries. Refinery utilization is back into the mid-80’s for PADD 4, with several smaller refineries running at full tilt to meet demand in areas less impacted by COVID, such as Wyoming and Montana.

26

We are at the end of low RVP gasoline season in Denver, and prices have calmed down over the last month after starting the summer decidedly higher. The sharp increase in demand seen on Memorial Day leveled off, and demand hasn’t rebounded to preCOVID levels just yet. This, along with increased refining activity through the region, has kept a lid on rising prices at the pump.

After September 15, Denver moved back to a higher RVP, and we’ll likely see prices continue to fall through the winter in a normal seasonal pattern. •

© 2020 Mansfield Energy Corp

Regional Views

Brent Fergeson Supply Director See his bio, page 38

PADD 5 West Coast

Overview The third quarter supply/demand scenario witnessed a delicate balancing act between refinery production and overall wholesale and retail demand. In our last West Coast update, we talked about how the OPEC+ supply war and the onset of COVID-19 pandemic caused an over-supplied market and record-setting demand destruction at the same time. The result was negative gasoline crack spreads and LA gasoline spot prices below $.50/gallon in April.

Since July, markets have experienced a slow recovery in overall refined products demand, with jet fuel lagging the product groups. West Coast distillate exports also fell as Latin America was hard hit by COVID-19 demand destruction. Countries such as Mexico, Chili, and Guatemala traditionally import refined products from the West Coast, but numbers hit 10-year lows in June and have only slightly recovered since. •

West Coast Fuel Production

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

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© 2020 Mansfield Energy Corp

Regional Views

Price Rally Weakens in August

Los Angeles Spot Prices & Basis

Refinery production inched up to meet the slow recovering demand, surpassing 70% by the end of the quarter. Overall, gasoline stocks are about 4% below levels for the same quarter last year, while diesel stocks are slightly higher relative to Q3 2019.

Spot prices have rebounded since March, when prices began their downward descent. Prices rose until August, when rising inventories and slowing demand induced weakness. •

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

Pacific Northwest Spot Prices & Basis

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

Renewable Diesel Has Its Moment The most intriguing news on the West Coast has been announcements of companies converting their refineries to renewable diesel production. P66 recently announced plans to convert their Rodeo, Bay Area refinery into the world’s largest plant of its kind, producing more than 800 million gallons annually of renewable diesel, gasoline, and jet products.

Marathon announced they would do the same with their Martinez refinery. Others include Holly Frontier’s plans to convert their Cheyenne , WY refinery and Global Clean Energy Holding’s purchasing the Delek refinery in Bakersfield to convert it. Exxon has inked a deal to market a portion of the production.

Renewable diesel is a drop-in replacement for diesel fuel, unlike biodiesel, which generally must be blended at B20 or less to prevent engine damage.

Because of California’s tax incentives for greener fuels, many consumers are searching for supply sources to begin using renewable diesel in their fuel program.

As more refineries make the switch, RD economics will improve, and more consumers will be able to make the switch to the increasingly popular low-emission fuel. • 28

© 2020 Mansfield Energy Corp

A LT E R N AT I V E F U E L S Sara Bonario, Supply Director See her bio, page 38

Killing Me Smalls — Small Refinery Exemptions and Why They Matter

RENEWABLES

Background The Renewable Fuel Standard (RFS) was initiated as part of the Energy Policy Act in 2005 and expanded as a result of the Energy Independence & Security Act (EISA) signed on December 19, 2007 by President George W. Bush. Per the EPA, the goals of the EISA program include: • Move the United States toward greater energy independence and security; • Increase the production of clean renewable fuels; • Protect consumers; • Increase the efficiency of products, buildings, and vehicles; • Promote research on and deploy greenhouse gas capture and storage options; • Improve the energy performance of the Federal Government; and • Increase US energy security, develop renewable fuel production, and improve vehicle fuel economy.

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© 2020 Mansfield Energy Corp

The RFS is a national program implemented as part of the Clean Air Act that requires US transportation fuel to contain a minimum number of renewable fuel gallons, intended to replace or reduce petroleum-based molecules. There are four renewable fuel categories regulated under this policy: biomass-based diesel, cellulosic biofuel, advanced biofuel, and total renewable fuel.

The EPA has the responsibility to review and publish annual renewable fuel blending targets, by fuel category, to ensure total program goals are met. This review process is currently underway for 2021, and volumes are due to be announced November 30, 2020.

Alternative Fuels Refiners and importers of gasoline and diesel fuel are required to show that they have blended the requisite number of renewable fuel gallons each year by retiring Renewable Identification Numbers (RINs) through an online repository, EMTS. If these "obligated parties" subject to RFS compliance are not able to physically blend enough renewable gallons to meet their targets, they must purchase and retire RINs from other parties.

Congressional Volume Target for Renewable Fuel

The Clean Air Act includes "temporary" RFS rule-making language allowing the EPA to grant certain waivers or exemptions to operators of refineries who process 75 kbpd or less of crude oil. Small refineries must petition the EPA and demonstrate that complying with the RFS would cause a "disproportionate economic hardship" to the facility in the year in which the refinery has requested the exemption. Congress also provided a vehicle for an extension of an exemption based on a petition to the EPA. These exemptions are known as Small Refinery Exemptions, or SREs.

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

Discussion

REFINERY

CITY

STATE

CAPACITY (bpd)

According to data from the EIA, 48 refineries in the continental US and Hawaii fall under the "small refinery" threshold of 75,000 barrels per day (Alaska refineries are already exempt).

American Refining Group Inc Big West Oil Co. (FJ Management) Blue Dolphin Energy (Lazarus Energy LLC) Buckeye Partners, L.P. Calumet Lubricants Co LP Calumet Lubricants Co LP Calumet Montana Refining LLC Calumet San Antonio Refining LLC Calumet Shreveport LLC Cenex Harvest States Coop Chevron USA Inc Continental Refining Company LLC Countrymark Cooperative Inc Cross Oil Refining & Marketing Inc CVR (Wynnewood Refining Co) Delek US Holdings Delek US Holdings Ergon West Virginia Inc. ExxonMobil Refining & Supply Co Foreland Refining Corp Goodway Refining LLC HollyFrontier Cheyenne Refining LLC HollyFrontier Tulsa Refining LLC HollyFrontier Woods Cross Refining LLC Hunt Refining Co Hunt Southland Refining Co Husky Energy (Superior Refining Company LLC) Island Energy Services Downstream Kern Oil & Refining Co Magellan Terminal Holdings LP Marathon Marathon Marathon Marathon Par Pacific Holdings (Hermes Consolidated LLC) Petromax Refining Co LLC Phillips 66 Company Phillips 66 Company Placid Refining Co San Joaquin Refining Co Inc Silver Eagle Refining Silver Eagle Refining Sinclair (Little America Refining Co) Sinclair Wyoming Refining Co United Refining Co US Oil & Refining Co Valero Refining Co World Oil (Lunday Thagard Co)

Bradford North Salt Lake Nixon Corpus Christi Cotton Valley Princeton Great Fall San Antonio Shreveport Laurel Salt Lake City Somerset Mount Vernon Smackover Wynnewood Big Spring Tyler Newell Billings Ely Atmore Cheyenne Tulsa East Woods Cross Tuscaloosa Sandersville Superior Honolulu Bakersfield Corpus Christi Salt Lake City Mandan Dickinson Gallup New Castle Houston Billings Santa Maria Port Allen Bakersfield Woods Cross Evanston Evansville Sinclair Warren Tacoma Wilmington South Gate

PA UT TX TX LA LA MT TX LA MT UT KY IN AR OK TX TX WV MT NV AL WY OK UT AL MS WI HI CA TX UT ND ND NM WY TX MT CA LA CA UT WY WY WY PA WA CA CA

11,000 30,500 13,765 60,000 13,020 8,300 24,000 20,000 57,000 59,600 53,200 5,500 28,800 7,500 74,500 73,000 75,000 22,300 61,500 2,000 4,100 48,000 70,300 39,300 46,000 11,000 38,000 54,000 26,000 42,500 58,500 73,800 19,500 26,600 18,000 25,000 60,000 44,500 75,000 24,300 15,000 3,000 24,500 75,000 65,000 40,700 6,300 8,500

The EPA granted very few Small Refinery Exemptions in the early years of the program. All small refineries were granted a blanket exemption through 2012. Beginning in 2013, the EPA again began limiting exemptions granted.

However, the pace of Small Refinery Exemptions granted dramatically accelerated in 2017.

The EPA granted a total of 85 SREs for the 2016-2018 compliance year, representing 38.31 billion gallons of exempted gasoline and diesel volume.

A cursory review of the list of refiners receiving waivers shows that some of the world's largest refining companies are represented, including Chevron, ExxonMobil, Marathon, Phillips 66, and Valero. The inclusion of these small refinery locations owned by massive, highly profitable companies created much debate over the RFS program's tenure. Opponents of the SRE program argue that small refinery locations are beneficiaries of windfall profits – not economic harm – because they can pass along the cost of compliance to their fuel customers.

Therefore, a waiver contributes profit directly to the bottom line, at the expense of cleaner air.

The apparent change in the Renewable Fuel Standard (RFS) interpretation, which resulted in a significant increase in SRE petitions granted, is the subject of multiple lawsuits. One such lawsuit filed in 2017 by the Advanced Biofuels Association (ABFA) argued that the Department of Energy failed to continue evaluating the hardship applications on a two-prong matrix that considered whether the RFS posed a disproportionate hardship and whether the refinery plant could remain viable if required to comply.

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© 2020 Mansfield Energy Corp Source: RBN Energy

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

Alternative Fuels

10th Circuit Court of Denver & Gap Petitions

EPA Considering 67 New “Gap Year” SRE Petitions

In January 2020, the 10th US Circuit Court of Appeals ordered the EPA to revoke three SREs that it had granted for 2016 and 2017 compliance years after finding the EPA had exceeded its authority in approving the waivers.

Under the Clean Air Act, the EPA cannot grant waivers to companies that failed to maintain a continuous string of exemptions dating back to 2011. Therefore, locations that had not requested and received an exemption in prior years would not be considered for 2019.

This determination triggered the submission of 68 retroactive "gap-filler" SRE petitions. Prior-year gap filings were submitted by refineries in an attempt to meet the Tenth Circuit court criteria for continuous exemptions, thus preserving the refiner's ability to apply for current and future exemptions.

Source: Renewable Fuels Association (RFA)

EPA Ruling On Monday, September 14, the EPA announced its decision on the body of "gap filler" SRE requests. Out of 64 petitions, 54 were denied.

The remaining 14 petitions will be decided upon once the US Department of Energy (DOE) completes its review and delivers its recommendations to the EPA. The decision was published in a memo from EPA Administrator Andrew Wheeler. The 54 denied petitions were received after March 2020 and were either already dismissed or not filed at all. Mr. Wheeler went on to say, "Refiners seeking relief failed to offer any new information that

would have justified a change in the earlier decisions to reject the petitions.

DOE and EPA thoroughly and carefully evaluated the petitions for those years at that time, and EPA has found nothing in those new submissions that would merit a change in those previous decisions." Further, he said the refiners failed to show they had suffered disproportionate economic hardship, given they had already met their RFS obligations in the previous years for which they were seeking relief.

Any small refinery seeking an extension of an exemption must first have had an exemption in prior years. The court made it clear the EPA couldn't grant an extension of an exemption that wasn't already in place.

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Alternative Fuels

Market Reaction - RINs As mentioned, the EPA requires that each gallon of renewable fuel be assigned a unique number for volume accounting and tracking – a Renewable Identification Number or RIN. RINs are the currency for RFS compliance. Obligated parties must have RINs for a certain percentage of gasoline or diesel they sell each year, which is established by the EPA when they publish the Renewable Volume Obligation (RVO) report. Obligated parties can blend renewable fuel to obtain the RIN or buy RINs from others in the marketplace.

The 10th Circuit Court ruling in January 2020 provided a supportive environment for RINs this calendar year as obligated parties faced the uncertainty around small refinery exemptions.

Current Year RIN Prices

$0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00

1/1/19

4/1/19

D6

7/1/19

10/1/19

1/1/20

4/1/20

7/1/20

9/1/20

D4 Source: INTL FCStone

News that the petitions were denied sent the RIN market higher. Market participants understand that the EPA's upholding effectively ends the SRE program since no more than three refineries can demonstrate continuous exemptions. Therefore, previously exempted gasoline and diesel volumes will now return to the pool of gallons for which RINs must be submitted to demonstrate compliance with the RFS. The decision was a win for the renewable fuel industry, signaling to growers and producers that the EPA's mandated volumes will remain effective and demand will remain. •

Exempted Volume of Gasoline and Diesel Each Compliance Year* Compliance Year

2011** 2012** 2013 2014 2015 2016 2017 2018 2019 2010 Last updated date: September 17, 2020

Estimated Volume of Gasoline and Diesel Exemption (million gallons)

Estimated Renewable Volume Obligations (RVO) Exepmted (million RINs)

n/a n/a 1,980 2,300 3,070 7,840 17,050 13,420 0 0

n/a n/a 190 210 290 790 1,820 1,430 0 0 Source:Environmental Protection Agency (EPA)

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© 2020 Mansfield Energy Corp

Alternative Fuels

Martin Trotter, Pricing & Structuring Analyst

Nat Gas Fundamentals

See his bio, page 38

Despite continued natural gas demand destruction resulting from the ongoing COVID-19 response and rolling brown and blackouts in the West, late July still managed to produce record-setting demand.

NATURAL GAS

Stockpiled gas inventories, low prices, and high temperatures combined to exceed the existing power burn record – 45.4 Bcf/day, set last year – seven times

Daily US Electric Power Sector Consumption of Natural Gas (June 2015 – Aug 22, 2020)

Source: U.S. Energy Information Administration, (EIA), based on S$P Global Platts

Valid July 2020

Source:DTN

during July and once again in August. On July 27, the US set a single-day power burn record of 47.2 Bcf, and natural gas filled 45% of this demand. Throughout July, above-average temperatures affected nearly all of the continental United States, with the Southwest and Northeast exceeding average temperatures by almost five degrees all month.

Cooling Degree Days, the difference between daily temperatures and a comfortable 65-degree day, exceeded the 30-year average by almost 20% and the 5-year average by 12%. Despite elevated demand, prices at Henry Hub remained 30% lower than this time last year.

Even amidst a global pandemic, natural gas is setting many records this year. As consumption was setting record highs, nat gas supply also rose to its second-highest day of production. • 33

© 2020 Mansfield Energy Corp

Alternative Fuels

After Years of Growth, LNG Suffers Pandemic Setbacks After record-breaking LNG growth in 2018 and three weeks. Cameron is one of the largest LNG facilities in the United States. Though damage to 2019, global demand skidded to a halt amid the facility was less severe than originally thought, continued power outages left many facilities Covid-19 concerns and economic slowdown. The in the area dark, hindering damage assessments and restoration efforts. • global effect can be seen reverberating into US energy markets, with LNG exports falling nearly Daily US Liquefied Natural Gas (LNG) Exports and 5 Bcf per day from January levels. Instead of the Export Capacity (January – July 2020) exorbitant 8 BCF per day to which exporters had grown accustomed, volumes heading offshore for international consumption fell to mirror levels of the then-fledgling 2016 nat gas market.

Between June and September, each month saw cancellations of cargo shipments ranging between 30 and 50 cargoes a month. The abrupt halt in demand completes the triple threat along with continued liquefaction expansion and already burgeoning storage inventories resulting from a mild winter last season. The combined effect put severe downward pressure on global LNG prices, rendering US LNG offerings an uncompetitive.

Adding insult to injury, the late August landfall of Hurricane Laura knocked the Sempra Energyowned Cameron LNG facility offline for more than

Source: US Energy Information Administration, (EIA), Liquified Capacity Table; US Department of Energy, LNG Reports.

Note: Daily US Liquefied Natural Gas (LNG) exports and export capacity are calculated as a 30-day moving average.

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© 2020 Mansfield Energy Corp

Alternative Fuels

Storage Lack of demand and dirt cheap prices continue forcing US caverns to test the limits of their storage capacities, with every region currently holding inventory beyond the historical 5-year average. As of early September, storage inventories increased by 70 Bcf, bringing the national total to 3.525 Tcf. With inventories near the upper band of the anticipated seasonal injection, prices dipped slightly.

Working Gas in Underground Storage, Lower 48 States Historical Comparisons Stocks Billion cubic feet (Bcf)

Region

Year Ago (09/04/19

Year Ago (09/04/19

09/04/20

08/28/20

Net Change

Implied Flow

Bcf

% of Change

Bcf

East

805

789

16

16

732

10.0

756

6.5

Midwest

953

924

29

29

853

11.7

849

12.2

Mountain

216

212

4

4

181

19.3

194

11.3

Pacific

308

304

4

4

275

12.0

297

3.7

1,243

1,225

18

18

955

30.2

1,021

21.7

Salt

335

331

4

4

198

69.2

246

36.2

Nonsalt

908

895

13

13

756

20.1

774

17.3

3,525

3,455

70

70

2,997

17.6

3,116

13.1

South Central

TOTAL

% Change

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

With the additional injections, markets are now 17% over last year’s storage levels and 13% above the five-year average. Current estimates call for end-of-season levels to top 4 Tcf. Looking at the Midwest this winter, elevated storage levels will offset a projected supply reduction in the region. Declining power generation from nat gas will contribute to the lower need for supply; last winter saw power demand hit an exceptionally strong 2.8 Bcf per day. •

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© 2020 Mansfield Energy Corp

VIEWPOINTS

Supply Team Forecasts

End-of-Year Crude Prices With so much volatility in the world, it’s hard to know what the future holds. Mansfield’s FUELSNews and supply team members each took a stab at forecasting the closing WTI crude prices on December 31, 2020. All price forecasts are as of September 23, 2020.

45

$

.00

Gabe Aucar

34

$

.00

Andy Milton I’m bearish for the remainder of 2020. I think the value of the dollar will make a comeback later in November/December, and we will still be very long product due to weak global demand. This sets us up for a bullish 2021. I think prices could rise into the $50’s later in the summer on a strong economic recovery lead by a rebound in demand. I can’t tell if my thoughts are led by desire or fundamental news, but let’s hope the economy (and a normal market condition) comes back.

We are not back completely, but definitely enough to justify a $50/bbl price on WTI. I went a little lower on my forecast because of what may happen with demand if we see a second round of closures in states due to COVID.

40

$

.51

Alan Apthorp

41

$

At the last OPEC meeting, the Saudi oil minister warned speculators against gambling in the market. Along with crude imports hitting a five-year low, the Saudis will not let WTI prices fall too far. You can see this reflected in the EIA numbers: US crude oil stocks dropped 40 million barrels in the last couple weeks of Q3 and levels are almost back into the five-year historical range. On the demand side of the equation, we are seeing demand for gasoline and diesel grow stronger after the COVID-induced drop.

.50

There's a fierce battle between the bulls and the bears.

There's a strong chance prices remain the same, a low chance of a huge move (>$10) lower, and virtually no chance for a major (>$10) rally.

Wayne Lee

Whether or not COVID is on the mend come end of year, consumers may be hesitant to travel for the holidays - a threat to end-of-year demand. On the other hand, OPEC has shown a commitment to keeping prices at least near $40/bbl, limiting downside risk. US oil producers are still licking their wounds and haven't been quick to bring back American oil supply. Absent OPEC flooding the market to punish cheating members or another major bearish surprise, crude prices will likely hold steady, so I'd expect that that WTI crude ends the year close to $40.

OPEC and the Saudis will help to maintain a floor, but, because of the election and the continuing supply glut caused by the pandemic, we will not see prices rise very much as we end the year.

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Nate Kovacevich Crude oil will not be able to regain its footing until 2021. Weak product demand and refinery output will keep a lid on prices going into year end. COVID and political uncertainty heading into winter will continue to be an anchor that keeps prices from moving higher. My year-end price target for WTI crude is $37.50 with an overweight rating.

Chris Carter Crude oil will continue to hold at current levels or slightly lower for the remainder of 2020. Between refiners still realizing the full impact of COVID on their business and the politics around an election year, crude will not gain momentum.

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Brent Fergeson The continued opening of local economies attributed to falling COVID death and ICU statistics will increase demand for crude and refined products.

Refineries will continue raising their utilization rates in a controlled manner in anticipation of stronger demand, while domestic crude production will need time to open wells and increase domestic production. The unknown factors will be OPEC +’s reaction to their production rates as well as anticipated/known election results.

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Matt Smith

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With so many variables in the near future impacting the price of WTI (OPEC, presidential election, COVID’s impact on global demand, low US refinery utilization, sustained weak crack spreads), 2020 is living up to its reputation. One thing is for certain: nothing is certain right now. I forecast a weak attempt by the market to improve WTI’s commodity price, but nothing substantial enough to move the needle.

Cheers to a (possible) cold winter.

Sara Bonario World oil demand will not recover until late 2021 and may not ever return to prepandemic levels as obsolete and inefficient refineries globally close or are converted to renewable fuel producing facilities.

OPEC+ countries will take an active role in managing the supply demand balance over 4Q20 but will find that a lack of underlying fundamental demand for refined products and technical resistance at $40/barrel will keep the market in check.

New consumer behaviors such as working from home and drone delivery of small packages will continue to depress gasoline and diesel demand in the future. This, combined with a push by multiple states to reduce or eliminate internal combustion engine auto sales in favor of electric vehicles (EVs), will continue to impact consumer behavior as the world recovers from COVID-19.

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Mansfield National Supply Team Contributors

Mansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel, renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge required to manage today’s complex national fuel supply chain.

Although they work as a national team, each member’s regional focus enables Mansfield to deliver geographic-based supply solutions by more efficiently managing market-specific refining, shipping and terminal/assets.

Andy Milton

Sara Bonario

Senior VP of Supply & Distribution

Supply Director

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

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

Chris Carter Senior Supply Manager

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. •

Chris is responsible for refined product purchases, including contracts, day deals, and rack purchases in the Northeastern United States. His responsibilities also include supply contracts and current bids. Chris joined Mansfield in 2009 as a Supply Optimization Analyst. •

Brent Fergeson

Wayne Lee

Supply Director

Market Intelligence Analyst Wayne is responsible for generating market insights and data visualization at Mansfield. He collaborates closely with supply and customer support teams to ensure customers receive relevant updates each day via FUELSNews Daily. •

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. •

Nate Kovacevich

Gabe Aucar

Senior Supply Manager

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

Matthew Smith

Martin Trotter

Manager, Supply Optimization

Pricing & Structuring Analyst

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. •

Martin is responsible for handling natural gas and electricity pricing, deal flow, and analytics for Mansfield’s Power & Gas division. Before his current role, he served as the Sales Analytics Supervisor and held various roles on the Risk & Analysis Team. •

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