FUELSNews 360° Q4 2018 by FUELSNews

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I N F O R M A T I O N

Table of Contents FUELSNews 360° Quarterly Report Q4 2018 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

Overview 6

Alternative Fuels 23

October through December 2018

Economic Stress Could Weigh on Oil

Fundamentals Markets Depart from Fundamentals

Back to the Fundamentals

Crude Fundamentals Disconnected from Price

Fuel Fundamentals

Gasoline Stocks Surge to Seasonal Highs

Diesel Fundamentals Suggest Tight Supply in 2019

Rocky Mountain

West

Best Practices for Government Fuel Operations

Josh Epperson

Why Industry-Leading Fleets Choose Mobile Fueling

Billy Lawder

Gabe Aucar

DEF Best-Practices: Centralizing to Save

Jim Timmer

Northeast, Southeast & Gulf Coast

Central

Logistics Trends: Planning for 2019

Nikki Booth

Regional Views

Natural Gas

Supply, Demand, Storage

Viewpoints 26

Renewables

Sara Bonario

Martin Trotter

Economy & Demand 11

Dan Luther Nate Kovacevich Sara Bonario

FUELSNews 360˚ National Supply Team Contributors

Q4 2018 Executive Summary Oil Market Summary The fourth quarter of 2018 brought a sharp break from the rising

At a regional level, local economics have been driving national

control, spiraling lower and causing crude oil prices to fall 40% within

this quarter led suppliers to redirect supplies northward, pulling

trends. For instance, seasonally higher prices in New York Harbor

market seen in the first three quarters. The market seemed out of

the span of just three months.

fuel from the Southeast and Midwest to meet heavy heating oil

demand. The result was higher fuel prices not just in the Northeast,

Contributing to the significant loss was an oversupply of crude oil

resulting from Trump’s Iran sanction waivers. After the rest of the world had stepped up to fill the supply void, the waivers allowed up to 75%

of Iran’s crude to remain on the market, immediately sending prices

lower. Once prices crashed below $60/bbl, technical factors took over,

which are covered in the Fundamentals section on page 12.

A broader decline in financial markets accompanied crude oil’s crash, with equity markets responding to economic concerns ranging from emerging economy weakness to US-China trade talks. The US economy is on track to set a new record-long expansion period in July 2019, surpassing the 10-year tech-driven boom of the 90s. As the expansion continues, economists are bracing for deceleration and a

but in surrounding areas as well. Simultaneously, Mexico’s

faltering oil sector has also created a demand sink to the south,

leaving Gulf Coast refineries to choose whether to send product

north to New York, south to Mexico, or keep it in the Gulf/Southeast region. Gabe Aucar writes about these trends on page 18.

Biofuel economics have remained tied to political fluctuations.

Small refinery exemptions and a conservative EPA have biofuel

producers concerned about future demand. Although petroleumbased diesel prices fell in Q4, biofuel prices remained steady,

shifting economics to favor lower bio blends. Turn to page 22 to

read Sara Bonario’s explanation of renewable market dynamics.

potential recession either this year or next which would push oil prices lower. On page 10, economic trends are covered in greater detail.

Market Insights

Looking ahead to 2019, factors appear overall bullish for oil prices. With crude prices ending 2018 at just $45, there’s significant room for prices to rise in the coming months. OPEC, Canada and other producing countries appear to be pushing for higher prices, and the expiration of sanction waivers in May should bring the market tighter, as well.

ways to sustain lower fuel costs throughout the year. These efforts

Fuel Price Trends

With prices so low, many fleets around the country have sought

have been especially important for government fleets, who have an obligation to taxpayers to minimize costs. Josh Epperson,

Mansfield’s VP of Strategic Accounts, explains how government fleets can optimize their fueling programs and meet agency objectives on page 29.

Whether you run a large fleet or a small one, you’ve probably

Fuel prices have also seen sizable losses in the past few months as oil prices plummeted. Both diesel and gasoline prices have fallen roughly 70-80 cents per gallon, to the benefit of consumers nationwide. Of the two products, however, gasoline saw steeper losses, with diesel rates maintaining relative strength in Q4.

considered mobile fueling, a growing trend in fuel logistics.

Transparent pricing, simplified logistics, and labor savings are just

some of the reasons why consumers are turning to mobile fueling. On page 32, mobile fueling expert Billy Lawder explains how to determine whether mobile fueling is right for you. •

OVERVIEW October through December 2018 The final quarter of 2018 saw a sharp break from the rest of the year, though not for lack of a strong start. WTI Crude prices surged to a multi-year high in the beginning of October, on the heels of steady growth all year long. That would prove too much for markets to bear, though, and prices tumbled for the remainder of 2018. The quarter’s strong early start was largely driven by Iran politics. Trump’s impending Iran sanctions had markets panicking that an extreme shortage was nigh. The U.S.-Canada-Mexico trade deal signed early in Q4 contributed further to concerns that 2019 demand might be higher than expected.

Amid all of these bullish signals, OPEC grew concerned that they may have tightened markets too much and, therefore, loosened production quotas. This helped ease prices a bit, though few could have foreseen how low prices would drop. Many suspect that the murder of Washington Post journalist Jamal Khashoggi contributed to Saudi Arabia’s decision to increase output. Trump’s decision not to push the issue with the kingdom may have given him leverage to seek concessions on oil prices.

Q4 Market Summary

$1.6808 $1.3237

$45.41

23,327.46

Source: New York Mercantile Exchange (NYMEX)

Overview

Q4 2018 Crude Prices

Source: New York Mercantile Exchange (NYMEX)

Even the promise of production cuts could not curtail the downturn. Canada announced a mandatory 300 Kbpd production cut in 2019 in an attempt to balance supply with limited export capacity. Canada’s cuts are more significant locally than globally – the pipelines shipping crude from Canada to the U.S. are still quite full, but now there’s less excess to sit in Canadian storage. OPEC brought a more robust commitment to the market shortly after Canada’s announcement, with the OPEC+ members choosing to cut November production levels by 1.2 MMbpd in 2019. Of course, this functionally just returned the group to their previous production quota; which may not do more than keep markets balanced in 2019. Markets responded to OPEC’s announcement with a very brief rally that again turned into more losses. As traders began vacating for holiday vacations, the Federal Reserve’s decision to hike interest rates caused prices to slide further still, sinking below $45/bbl before stabilizing around $45 for the remainder of the year.

With the U.S.’s political cover, the market moved beyond the Khashoggi incident and began to brace for the upcoming Iran sanctions, speculating how many countries would comply with American sanctions and who would push the envelope. Trump surprised markets, however, by announcing in early November that eight countries – together accounting for 75% of Iran’s output – would be able to continue buying Iran crude oil, effectively adding 1 MMbpd of supply (which was expected to disappear) to the market in an instant.

From a macro perspective, Q4 brought a steep reversal to the regular quarterly increases in oil prices. Since Q2 2017, average quarterly prices had been rising steadily, from $48/bbl to a peak of $69/bbl in Q3 2018. The final quarter of 2019 saw prices fall by $10/bbl overall – a nearly 15% decline.

Quarterly WTI Crude Prices

Trump’s announcement helped sustain an already prolonged downturn in prices, which continued days after the announcement and turned into the longest streak of consecutive down days in NYMEX WTI Crude history. The whopping 12-day decline saw prices fall from $66.80 down to $55.70. Markets weren’t done yet. While the rest of the quarter brought relatively bullish news, prices still continued falling. The midterm elections resulted in a divided Congress, with the House controlled by Democrats and the Senate remaining under Republican control. For oil markets, a split Congress means a slight slowdown in Trump’s pro-fossil fuel agenda; though the impacts will likely be marginal. Yet markets continued falling lower, sinking to $50/bbl within weeks. 7

Source: New York Mercantile Exchange (NYMEX)

Overview Fuel consumers enjoyed the benefits of lower prices, though the enthusiasm likely varied depending on the product. Gasoline buyers enjoyed a hefty drop in prices during Q4. Gas prices actually peaked in Q2 2018, falling slightly to $2.06 in Q3 before tumbling 20% to $1.65 in Q4 2018. Seasonal factors played a major part in this – gasoline prices are much higher during the summer due to EPA emissions requirements and strong demand, while winter prices are typically weaker.

Quarterly Gasoline Prices

Diesel presented a very different picture in Q4, much to the dissatisfaction of large, dieselburning fleets. Diesel peaked in Q3 at $2.18, but on a quarterly basis fell just 11 cents in Q4 down to $2.07. Diesel held on to high prices long after crude began its dip, keeping the average price for the quarter higher than its base commodity cost would suggest. Still, from peak to trough, diesel prices fell roughly 75 cents per gallon in Q4 – as compared to gasoline prices which fell almost 90 cents. •

Quarterly Diesel Prices

Source: New York Mercantile Exchange (NYMEX)

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Overview

Retail Prices Relatively Unchanged

Gasoline Rack-to-Retail Spreads

For retail fuel consumers, falling prices were not quite as impactful. We’ve written before about “sticky pump,” a tendency for retail stations to move prices down slowly to mitigate volatility to consumers and capture wider margins. Unfortunately for retail consumers, when NYMEX prices fall quickly, retail stations are slow to pass on the savings. In Q4, rack-to-retail spreads, the difference between OPIS Average and the EIA’s average retail price, swelled to annual highs. Gasoline spreads, which tend to fluctuate between 20-30 cents, leapt up to almost 50 cents. Diesel spreads, normally 30-40 cents, rocketed to surpass 70 cents!

Source: Energy Information Administration (EIA)

Diesel Rack-to-Retail Spreads

Putting that change in context – if a fleet uses mobile fueling to fill its trucks with diesel, based on an OPIS Average, they saw prices decline 75 cents in Q4. A fleet buying with a fleet card saw prices fall just 25 cents! •

Source: Energy Information Administration (EIA)

ECONOMY & DEMAND

Throughout Q4, oil markets were closely linked to economic performance, with traders using the S&P 500 as a proxy for overall economic activity. The period saw significant stock price volatility, driven predominantly by the three top threats to the global economy – interest rates, trade tightening, and China’s growth.

1. Interest Rates and the Boom/Bust Cycle

The Q4 bearishness that hit the stock market was largely driven by interest rates. Interest rates impact available credit, which in turn drives the boom and bust cycle we all know as expansion periods and recessions. Low interest rates make it easy to borrow money – more money, more spending. At some point, however, interest rates become too low, and inflation kicks in (caused by too much available money). The Federal Reserve manages interest rates by setting the base lending rates to banks, lowering them to drive economic activity and raising them to curb inflation. Higher interest rates make borrowing more expensive, meaning less money is available for purchases. Right now, the Fed is hiking interest rates, sometimes called “deleveraging,” because buyers have less available credit (leverage) to buy goods. In addition to the interest rate hikes, we’re seeing quantitative tightening. You may remember back in 2008 when the Fed chose to start buying trillions of dollars in government bonds and mortgage backed securities to inject more cash into the financial system. Now, they’ve stopped buying, so the government and banks are seeking other investors to buy their bonds – leaving less leftover cash for consumption which leads to lower spending and demand. Between higher interest rates and quantitative tightening, the economy is taking a double-hit. 10

In December, the Fed hiked interest rates one final time for the year, but the group also changed its tone for 2019. While 2018 saw four rate hikes, the Fed expects just two in 2019, which will ease the effect of higher interest rates. This dovish turn brought strength to the stock market, facilitating an end-of-year rally for equities that spilled over to commodities.

2. Global Trade

In addition to tightening interest rates and quantitative tightening, global trade has been slowing as countries implement protectionist policies. Leading the charge here is President Donald Trump, who has famously challenged conventional wisdom on trade. Trump has put numerous new tariffs in place, ranging from product-specific tariffs on aluminum and steel to country-specific tariffs on China. Global trade is deflationary, which customers enjoy since it causes prices to decline. Imagine that China can produce the cheapest electronics, Florida produces the cheapest oranges, and Japan produces the cheapest cars. Global trade allows consumers to buy from the cheapest country in each category. Less money spent on necessities means more money left over, and as before, more money equals more spending. Trade barriers halt this low-cost opportunity. Tariffs on China, for instance, make electronics more expensive for American consumers, meaning they have less money remaining to spend on other products. Tariffs do have some benefits, however. Higher prices allow domestic companies to compete and thrive while making larger profits. Those profits still equate to more spending (and therefore local economic growth), but at the expense of domestic consumers.

Economy & Demand Looking at tariffs in the context of the U.S. economy, steel tariffs drive more business to American steel producers, but also create difficulties for the user (pipeline companies, automotive manufacturers, etc.). Tariffs on China benefit U.S. manufacturing as well, but translate to more expensive products for consumers and land a severe blow to the Chinese economy. Tariffs are generally neutral or slightly positive for the company implementing them, but bad for global growth. In the example of U.S.–China tariffs, Chinese businesses are making fewer sales, leaving them with less money to buy American goods.

3. China Economy

China’s rapidly developing economy, which encompasses nearly 1.4 billion people and $12.2 trillion, is nearly as integral to the global economy as that of the U.S. China’s hefty 6.9% GDP growth in 2017 was nearly three times the size of America’s GDP growth of 2.3%. The U.S. Federal Reserve, which is required only to evaluate the U.S. economy to enact policy changes, referred to China many times in their November note, making clear the importance of China’s economy on U.S. growth. Reliably measuring China’s economic activity is difficult given government data controls, but some indicators point to declining growth. A decline in China’s Shanghai Composite Stock Market Index has been weighing on global equity markets. Official data shows a general year-over-year slowdown of retail sales and industrial activity. The U.S.–China trade war has weighed heavily on the Chinese economy since China relies on exports to drive growth. Trump is correct about one thing – tariffs hurt China more than they hurt the U.S., and domestic pressure has been building for the Chinese government to give in to trade negotiations. The Chinese government was targeting 6.6% growth for 2018, a downward revision from 2017. If the U.S.-China trade war continues to escalate in 2019, China could see a very poor performance this year. •

Economic Stress Could Weigh on Oil With interest rates rising and federal banks tightening their balance sheets, there’s less cash and less credit available to consumers in this precarious global economy. At the same time, protectionism is curbing global trade, driving prices higher at a time when consumers are already cash-strapped. One of the largest contributors to global growth, China, is already experiencing weakness.

The EIA predicts global oil demand growth to remain relatively stable in 2019 and 2020 growing each year by roughly 1.5 million barrels per day. Although economic weakness is expected to limit demand, relatively low prices (well below the $100/bbl of years past) will help keep demand from tapering much lower. If weak economic activity mixes with high oil prices, expect a strong tapering off in oil demand. •

As the economy tightens, the impact on oil prices should not be overlooked. Economic slowdowns leads to fewer trucks transporting goods, fewer barges shipping internationally, and fewer consumers driving and flying to vacation destinations.

Annual Change in World Liquid Fuels Consumption

The aggregate effect contributes to a significant reduction in oil demand, but the result is not one-for-one. Six percent global growth does not require a commensurate 6% increase in oil demand. That’s because developed economies like the U.S. and the EU can add economic growth without more fuel – for instance, Netflix doesn’t use fuel to deliver more online products. On the other hand, developing countries in East Asia and other areas are more energy intensive. China grows by moving products to other countries, requiring fuel to get it there. Agrarian economies need fuel to grow more crops and fuel to transport them to other countries. When those developing nations slow down, there’s a significantly larger impact on fuel demand than if the U.S. experiences a slowdown. For that reason, all eyes are on China and emerging economies in 2019 – if those countries cannot pick up the economic pace, oil demand may decline, causing prices to plummet. 11

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

F U N D A M E N TA L S

Markets Depart from Fundamentals Reviewing Q4, it’s hard to see the direct relationship of price with its fundamental drivers. The long streak of down days from October through November was driven by fundamental changes in the market; but the break below $60, then $55, and then $50 seemed more technically driven.

In late October and early November, prices fell steadily. After prices dipped below $70, they took weeks to reach $65. Another week passed before prices hit $60. Then the market changed pace and began dropping more rapidly. The day after prices dropped below $60, they fell to $55. That pattern of holding at psychological (not fundamental) thresholds continued until prices hit $45. Why did prices fall so quickly after hitting those psychological thresholds? There was significant trading activity that occurred as soon as prices hit $59.99, $54.99, etc. Producers had puts (options to sell) as soon as prices crossed a certain threshold, so prices crossing the threshold triggered a

wave of selling. This isn’t a fundamental factor; oil companies would have produced oil either way, so no physical supply or demand was affected.

The market was moving on a purely technical basis, which leaves ample room for a correction higher to more fundamental-supported levels. Most major banks and analytics groups expected a strong rally in Q1 2019 to get prices back to more normalized levels. •

OCT NOV NOV NOV DEC

17 1 12 20 17 Prices drop below

$70 Fall to $65 two weeks later

Prices drop below

$65 Fall to $60 a week later

Prices drop below

$60 Fall to $55 the next day

Prices drop below

$55 Fall to $50 in two days

Prices drop below

$50 $ 46 $45 Fall to $46 the next day

Fall to $45 two days later

Back to the Fundamentals

Fundamentals

So what happened to the fundamentals in Q4? At the highest level of supply and demand, the general story throughout Q4 was that demand growth prospects were dwindling while supply kept rising. Trump’s sanctions on Iran were expected to take significant portions of supply off the market, but waivers allowed a large chunk of that supply to continue flowing. The economy seemed faulty. These factors changed, however, towards the end of the quarter.

From a global supply and demand standpoint, it took much of the quarter to convince analysts the market would be balanced. Both Q3 and Q4 brought hefty daily builds in crude oil stocks, apparently outstripping demand. Looking ahead to the rest of 2019, though, the EIA’s latest forecast now shows a more balanced view – Q2 2019 stands alone with moderate gains before giving way to heavier demand later in the year. •

World Liquid Fuels Production and Consumption Balance

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

Crude Fundamentals Disconnected from Price The rapid decline in prices corresponded to a run-up in crude inventories above the five-year average. For most of 2018, inventories tracked very close to the historical average, even though demand was rising. This changed in Q4 as OPEC ramped up its production to compensate for Iran’s anticipated reduction in supply. Waivers meant those Iranian export reductions would be smaller than expected, leaving the world awash in crude.

Crude Stocks 5-Yr Range

As inventories rose, countries took action to reverse course and trim production. Canada, suffering from extreme oversupply caused by pipeline constraints, set production limitations of roughly 325 Kbpd. OPEC+, the combination of OPEC with a few non-OPEC countries, agreed in December to a 1.2 MMbpd production cut during 2019. After allowing production to rise in the latter half of 2018, OPEC’s quotas should bring a return to balance for oil markets in 2019. Of course, while inventories did rise above the five-year average in Q4, they remained roughly 50 million barrels below the seasonal high set in 2016. Crude prices fell to 2016 levels despite inventories remaining well below those record highs, which shows the disconnect between market fundamentals and prices.

Source: Energy Information Administration (EIA)

Fundamentals While the rest of the world was cutting its crude production, the U.S. continued setting new record levels of production each month. U.S. oil production has doubled since 2010 and is expected to continue rising in the decades ahead as fracking and other new drilling technologies make oil more accessible. In the Permian, America’s most prolific oil basin, producers generally need prices at just $45/bbl to break even. At a national level, $50/bbl is the most often-cited number needed to keep American production profitable, though some areas need higher prices still. Because America has become the largest swing producer globally – opening the tap when prices are high, closing it when prices fall too low – our breakeven prices set a floor on global oil prices.

U.S. Crude Oil Production

Source: Energy Information Administration (EIA)

The leap in oil production in the latter half of 2018 contributed significantly to the downturn in global oil prices, particularly because it was accompanied by a significant increase in petroleum exports. At the end of 2015, former-President Obama legalized the export of crude oil internationally. Prior to this time, only very specific crude blends could be exported, and most of those exports went to Canada. The industry took time to adapt to the change, and export growth was small until the back half of 2017, when exports doubled almost overnight. In 2018, exports continued climbing, reaching a high point at just over 3 MMbpd in November. Analysts expect that America will remain an export powerhouse in future years, keeping American oil prices intimately linked to global oil price fluctuations. As pipeline constraints from the Permian Basin are alleviated later in 2019, expect exports to make even more sizable gains. •

U.S. Crude Oil Exports

Source: Energy Information Administration (EIA)

Fundamentals

Fuel Fundamentals

Refinery Utilization 5-Year Range

With crude inventories rising and prices falling, refineries have seen their supply costs fall; yet their economics remained relatively strong. Strong crack spreads (the difference between fuel prices and crude prices) incentivized heavy production throughout 2018. Refinery utilization, a measure of refinery output compared to overall capacity, tracked above the five-year range for most of 2018. Peaking at 98% in the summer (and even surpassing 100% in some regions), refiners worked hard to convert as much crude stock as possible into fuel for consumption. Even during refinery maintenance season, when utilization typically drops to 85% or so, refiners maintained nearly 90% utilization. •

Source: New York Mercantile Exchange (NYMEX)

Gasoline Stocks Surge to Seasonal Highs Strong refinery utilization rates have had very different effects on diesel and gasoline stocks. Gasoline supply was plentiful throughout 2018. Refiners, focused on profitable diesel output, processed far more gasoline than was required by the market. Gasoline and diesel refining generally has a 2:1 relationship, meaning three parts of crude yield two parts gasoline and one part diesel.

Gasoline Inventories 5-Yr Range

In Q3 and Q4, gasoline inventories were above the five-year range – higher than 2015 when gasoline prices were heading towards $1.00 per gallon. Elevated inventories caused gasoline-diesel spreads to swell also. Gasoline went from trading at parity with diesel over the summer to 50-cent discounts in November. In Q4, gasoline stocks averaged 229 million barrels, 10 million barrels above the five-year average. Looking ahead, continued focus on diesel is expected to keep gasoline supply plentiful. Most refineries plan to keep refinery utilization high in 2019, exporting whatever gasoline cannot be sold domestically. • 15

Source: Energy Information Administration (EIA)

Fundamentals

Diesel Fundamentals Suggest Tight Supply in 2019 Diesel Inventories 5-Yr Range

Diesel inventories, under pressure from strong demand locally and internationally, have struggled to catch up to the five-year average level – even falling outside the five-year range over the summer. We had less diesel available this summer than we did in 2013, when wholesale diesel prices were $3 per gallon! Lack of diesel supply has kept diesel prices elevated relative to crude oil, contributing to the strength in crack spreads. Although Q4 saw some improvements in diesel stocks, the market remains tight. Inventories in the last quarter of the year averaged 124 million barrels, compared to the five-year average 134 million barrels.

Source: Energy Information Administration (EIA)

In the months and years ahead, diesel supplies are expected to grow even tighter. With IMO 2020 approaching in less than a year, markets are concerned about the potential impact on diesel demand. IMO 2020 is a regulatory change by the International Maritime Organization requiring that all global maritime vessels switch from fuels containing 3.5% sulfur to fuel containing just 0.5% sulfur. The marine industry consumes 4% of global oil demand, or roughly 3 million barrels per day. Today, that demand is met almost exclusively by high-sulfur fuel oil (also called bunker fuel), which is the cheapest, lowest quality fuel available. On January 1, 2020, vessels will need to cut off usage of high-sulfur fuel oil and switch to diesel fuels. The EIA expects diesel demand will rise as marine vessels blend in diesel to meet spec in the short-term. This increased demand is projected to last through 2022, when scrubbers and other solutions should help alleviate some of that diesel demand.

Ocean-Going Marine Vessel Bunkering

Stronger diesel demand and increased U.S. diesel exports will put even more pressure on prices. The EIA forecasts that the latter half of 2019 will bring higher diesel refining margins – meaning that, even if crude prices remain unchanged for the remainder of the year, diesel prices are expected to rise. Price volatility will continue into 2020 and beyond, creating significant uncertainty for diesel consumers during this time. •

Source: Energy Information Administration (EIA), AEO 2019 Reference Case

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

Gulf Coast & East Coast

Overview

After a strong end to the third quarter, reformulated gas in the Northeast was quiet in the fourth quarter relative to futures, and we expect the same headed into Q1 during the slower driving season. Diesel price volatility vs NYMEX HO was also muted, though any colder weather should be watched throughout Q1 as that may increase heating demand. To the south, cheap WTI crude and high refinery output have kept prices low, producing arbitrage opportunities to ship from the South to the North. The arbitrage to ship diesel into the Northeast will last into 2019, though we expect that to close sometime in January. •

Diesel Up/Down

Gulf Coast vs NY Harbor Arbitrage (Up-Down)

The fourth quarter saw an arbitrage open for diesel shippers on Colonial Pipeline. The diesel up-down, colloquially used to describe the spread between New York Harbor futures and Gulf Coast diesel, traded well above shipping costs. As a result, Colonial Pipeline shippers with diesel line space were able to buy cheaper diesel in the Gulf and ship it to the Northeast to capitalize on higher values. The wide spread illustrates the ample distillate supply in the Gulf Coast on strong refining margins and constrained shipping space on Colonial Pipeline. Gulf Coast values relative to NYMEX HO reached discounts not seen on oversupply since 2017. Additionally, Colonial line space values touched a nickel as more traders tried to capitalize on the up-down arb by buying capacity. For consumers, this helped to narrow the price spread between the two areas while also keeping steady pressure on Southeast supplies. •

Source: Platts

Regional Views

Mexican Energy Sector Overhaul Could Reduce U.S. Export Demand An ambitious plan to boost Mexico’s oil and gas production could slow the country’s energy sector reforms and hinder trade opportunities for U.S. refiners and pipeline companies that have ramped up exports to meet growing Mexican demand. Mexican production has been struggling over the past several years, falling from 2.6 MMbpd in 2014 to just 1.9 MMbpd last year. During this time period, American companies covered much of the shortfall.

Over this same time period, U.S. exports of finished gasoline products and diesel to Mexico have more than tripled amid a boom in oil and gas production in West Texas and elsewhere. More broadly, U.S. exports of gasoline in the week ended October 5 averaged 1.029 MMbpd, which set a new record high for the month of October. The previous high for October exports occurred in the week ended October 20, 2017 when they averaged 0.9 MMbpd. This year’s number marks just the seventh time U.S. weekly gasoline exports averaged above 1 million b/d going as far back as 2010. Among other factors, exports appear to be supported by brimming U.S. gasoline inventories. U.S. gasoline exports have also been supported by suboptimal gasoline production in Latin America, most notably in Mexico and Venezuela. •

High Crack Spreads Signal Refineries to Maintain High Output

Gasoline crack spreads, the price difference between crude oil and gasoline, at key refining locations have fallen recently, while diesel crack spreads have remained relatively high. In the U.S., gasoline crack spreads are declining not only because demand for gasoline has fallen more rapidly than is seasonally normal, but also because inventories have remained high. The average gasoline crack spread from January–October in the US Gulf Coast (calculated by subtracting the price of Brent crude from Gulf Coast gasoline prices) was $0.09/gal lower at $0.22/gal in 2018 compared with the same period 2017. U.S. market trends of falling gasoline demand, high gasoline inventories, and high refinery runs can explain the recent drop in U.S. gasoline crack spreads and are likely indicative of wider global trends. Gasoline crack spreads tell refiners how much product the market needs. High gasoline crack spreads signal large margins for refiners, incentivizing them to refine more fuel. Declining crack spreads, though, tell refiners to pull the plug. With gasoline crack spreads falling, refineries are being told to stop supplying so much gasoline; however, diesel crack spreads remain high. Refineries are still sorting through these mixed signals, but so far this year refinery utilization rates make it clear that the message they’re hearing is, “Keep on going!” Continued high production will ensure plenty of supplies available from the Gulf for export, local consumption, or shipment to the North. • 19

Regional Views

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

Central

Overview

An ample supply situation should remain into early Q1 2019 with gasoline and diesel prices remaining weak in the Midwest relative to NYMEX futures. One rather unprecedented development to watch is the Government of Alberta’s mandated 325,000 bpd cut in oil production in the province’s oil sands. Many Midwest refineries run cheaper Western Canadian Select crude oil produced in Alberta; if production is cut they may be forced to buy alternative, more expensive crudes. If so, this would lead to higher PADD 2 fuel prices as refiners' input costs increase. •

PADD 2 Refinery Maintenance Gives Way to Abundant Supply

Weekly Midwest Refinery Utilization

Buyers in the Midwest experienced two very different supply situations during the latter part of the year. Fall kicked off with significant refinery maintenance at several facilities, limiting supply and driving up regional prices. Downtime occurred at six refineries from Kansas to Michigan during the quarter, including planned maintenance at the large 430,000 barrel per day (bpd) BP Whiting, IN facility and unexpected downtime at P66’s 330,000 bpd Wood River, IL plant. The extent of the downtime was so severe that Midwest refinery utilization, the percentage of total refining capacity that is operational, dropped in mid-October to the lowest level since the agency started recording region-specific utilization in 2010.

Source: Energy Information Administration (EIA)

Midwest Bulk Gasoline Basis Q3 & Q4

Lower production strengthened refined products prices, driving Midwest gasoline values to some of the most expensive premiums in the country. During the first trading session after the Labor Day Holiday – when gasoline demand is typically very strong – prices surged over $.13 per gallon in one day. Midwest premiums kept climbing through September trading up to $.16 per gallon more than the futures market. Once refinery production came back online, buyers experienced some relief. By early December, gasoline prices in PADD 2 decreased by roughly $.25 per gallon from their September highs relative to NYMEX. Diesel values followed a similar pattern, with Chicago falling $.20 per gallon to Q4 lows. •

Source: Oil Price Information Service (OPIS)

Regional Views

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

Rocky Mountain

Overview

The price of both gasoline and diesel fell sharply in the Mountain region at the end of Q4, on the heels of a decidedly weaker NYMEX as well as normal seasonal demand patterns that trailed off at the end of November. We anticipate that Q1 will start pretty slowly from a price standpoint but gain strength in the back half of the quarter. Normally, demand starts to pick up as temperatures get closer to 60 degrees. We are near-term neutral for January and February, but bullish for the March/April timeframe. •

Oil Activity on the Rise in the Mountain Region

Oil and gas permitting has strengthened over the past few months, led by increased activity in the Mountain region in Wyoming and Colorado. Despite a significant drop in crude oil prices during Q4, the Baker Hughes rig count report shows Colorado currently maintains 33 rigs, while Wyoming has 30. While Colorado rig activity is flat year over year, the Wyoming rig count has increased by 20%. Both states are still well below Texas, which currently has 529 active drilling rigs located predominantly within the Permian basin. Although the Mountain region is far smaller, local growth is still an important development, demonstrating an increased interest in expanding oil production in the Rockies despite headwinds from low oil prices and environmental groups. The Federal Government has tried to encourage drilling activity by opening up more federal land for companies to lease for oil and gas drilling. •

Refining Capacity Constraint Boosts Rocky Prices

PADD 4 vs U.S. Weekly Retail Diesel Prices

Over the last 12-18 months, supplies in the Rockies have grown tighter, especially when a refinery goes down for an unplanned issue. The area simply does not have the same spare refining capacity to handle surprise outages, so prices have been more susceptible to demand-driven spikes. As drilling activity increases local fuel demand, refining capacity has struggled to keep pace. The coming year is sure to bring some interesting dynamics. Last year, prices began below the national average, swung above the national trend, and ended the year nearly at parity. Since Q2 2018, retail diesel prices have strengthened sharply in the Mountain region. Expect this strength to continue throughout Q1 2019. •

Source: Energy Information Administration (EIA)

Sara Bonario, Supply Director See her bio, page 34

West

Regional Views

Overview

Diesel and gasoline demand is expected to remain strong as we enter 2019. U.S. West Coast refiners are actively eyeing opportunities to export products from California and Washington State into Western Mexico due to the liberalization of Mexico’s fuel markets. Exports will create a more balanced supply picture, adding to the magnitude of price spikes when unplanned outages occur. Imports tend to be limited into California due to the unique quality specifications required by the state. Diesel demand should also continue to be supported within California. Although electric cars are all the rage, markets are expecting a slower electrification transition for the heavy trucks transporting goods across California. •

Pipeline Shutdown Boosts PADD 5 Prices

Gasoline and diesel prices were stronger than expected in Q4 and experienced volatility associated with unplanned refinery outages and pipeline issues. West Coast gasoline basis spiked to levels not seen in over two years when news of Kinder Morgan’s SFPP pipeline servicing Arizona from the Gulf Coast was shut down unexpectedly due to a leak.

The SFPP pipeline system moves fuel from El Paso, Texas to Tucson, Arizona. With supplies from the east cut off, Arizona was forced to bring in product from Southern California refiners in the west. The system restarted on December 21 after being offline for over a week. •

Tucson, AZ vs U.S. Average Wholesale Diesel Price

Source: Oil Price Information Service (OPIS)

Tucson, AZ vs U.S. Average Wholesale Gasoline Price

Source: Oil Price Information Service (OPIS)

A LT E R N AT I V E F U E L S RENEWABLES

Sara Bonario, Supply Director See her bio, page 34

RIN values have been on the rise over the fourth quarter of 2018 after losing more than 60% of their value at the beginning of the third quarter this year. There are many factors which contribute to price direction in the RIN market; however, the behavior of obligated parties is a key driving force.

smaller refineries from these blending requirements by providing a Small Refinery Exemption (SRE), which is intended to be a hardship waiver that is granted when refineries prove that complying with the regulation would cause them financial stress.

According to the EPA, “Obligated parties under the Renewable Fuel Standard (RFS) are defined as refiners or importers of gasoline or diesel fuel. Compliance is achieved by blending renewable fuels into transportation fuels, or by obtaining credits [Renewable Identification Numbers, or RINs] to meet an EPA-specified Renewable Volume Obligation [RVO].”

Under Scott Pruitt, the EPA this past summer roughly tripled the number of exemptions granted to small refiners, sending RIN values tumbling. According to Reuters, the waivers exempted the equivalent of 1.46 million compliance credits. SRE applications for 2018 are currently listed as 22, compared to the 37 applications filed for 2017 and 29 exemptions granted.

Under the RFS, the EPA sets annual requirements for the volume of renewable fuels that oil refiners must blend into their petroleum-based products. The EPA also has the power to waive or exempt

Diesel vs Soybean Oil Prices

Source: www.macrotrends.net and New York Mercantile Exchange (NYMEX)

2018 RINs Prices

RIN values began to recover in November following news of the EPA and DOE agreement to work together to possibly define a new process for evaluating and granting small refiner exemptions. RIN market participants are in a “wait and see” pattern, although sentiment is that no new waivers will be granted until these groups have had an opportunity to discuss and work through the legal challenges that have already been filed. Another important driver of obligated party behavior is simple supply and demand economics. Refiners prefer to purchase RINs in lieu of blending ethanol and biodiesel when the cost of purchasing the RIN is less than the physical commodity. Using biodiesel as an example, over the last quarter of 2018, the primary input cost (soybean oil) has remained fairly constant while the index against which biodiesel is sold, the NYMEX HO contract, has lost value. RIN generation reported for November 2018 showed a month-over-month decrease in RIN generation across all categories. This is consistent with less product being produced and less blending occurring. As biodiesel production falls, obligated parties purchase RINs, thus supporting the RIN price. •

Source: Argus

Alternative Fuels

NATURAL GAS

Martin Trotter, Pricing & Structuring Analyst See his bio, page 34

SUPPLY

Enbridge Outage Highlights Reliance on Imported Nat Gas

Despite the growing domestic production increase that permeated 2018, the U.S. is still susceptible to hiccups in natural gas imports. This weak spot reared its head in early October when Enbridge’s BC pipeline, which transports gas from the Canadian market to Oregon, Idaho, and Washington, experienced a disruption. In the following days, imports dropped from 1.1 Bcf/d to zero, forcing end users in the area to curtail usage and multiple refineries to shutdown prior to a secondary pipe’s restarting.

Enbridge pipeline rupture and explosion northeast of Prince George, B.C.October 9, 2018

While some of the displaced supply was routed from other areas, natural gas is still the second largest source of electricity in each of the affected states, and price action for natural gas and related products jumped as a result of the outages. Retail gasoline in the Seattle area rose 9 cents per gallon in the aftermath, and natural gas utilities filed for adjusted increases to Purchase Gas Agreements in British Columbia and Washington state of around 9% and 17% respectively. Though the utilites cited the Enbridge rupture in the filed increases, at least one U.S.-based utility was considering pulling their filing, as it would have raised prices during what is already traditionally the most expensive time of the year for gas. After months of urging consumers to limit their usage, suppliers noted that the supply situation had stabilized mid-way through December. •

Select Energy Infrastructure in Canada and the Pacific Northwest

DEMAND

2018 Brings Increased Gas Demand, At Home and Abroad

Preliminary reports from the EIA indicate consumption of U.S. natural gas increased throughout the 2018 calendar year. Domestically, coalfired generation plant retirements continued contributing to natural gas consumption, with 21 of the 44 units, totaling 4,422 MW of generation, anticipating near-term closure dates. At least four retiring coal plants are slated to be converted to natural gas. Source: Energy Information Administration (EIA)

The residential and industrial segments saw additional burn, driven by low prices resulting from additional production. A pop of colder-thanaverage temperatures in mid-November caused a brief uptick in weather-related demand as well. Internationally, exports continued. Additional trucks commissioned at Sabine Pass have boosted the output of Liquefied Natural Gas to the north. Despite very public delays, several new pipelines are serving Mexico from both the Eagle Ford and Permian Basin. Mounting production in those southern production basins makes it imperative that infrastructure serving Mexico continues to develop; so gas can flow south without prolonged downward pressure on prices. •

STORAGE

14-Year Storage Low Generates Price Volatility

Weekly Lower 48 Working Natural Gas in Underground Storage (2004–2018)

The fourth quarter kept traders’ eyes fixed on the weekly EIA storage reports. The November 8th release confirmed that natural gas working inventories ended the 2018 injection season not only lower than the five year average, but also at the lowest levels since October 2005. And while November saw an extra week of injections, an early cold wave produced a November withdrawal of nearly 135 Bcf, the largest since 2014.

Billion Cubic Feet (Bcf)

Early demand sent pricing haywire, with intraday changes in either direction upwards of 60 cents. With the one week snap, net November withdrawals were about double those of the same time last year. The combination of low storage inventories and divided weather models threatened to send prices into a whipsaw. As December materialized with warmer weather, withdrawals were some 50% of those experienced last year. •

Source: Energy Information Administration (EIA), Natural Gas Monthly and Weekly Natural Gas Storage Report. Note: Data for October 31, 2018, are an interpolated value based on the weekly Natural Gas Storage Report.

VIEWPOINTS By Nikki Booth, Senior Logistics Manager, Carrier Relations

Logistics Trends: Planning for 2019

of moving freight is expensive in regards to drivers, equipment, and technology. New regulations on drivers and fleets make it even more costly and complicated to manage a fleet, keeping new freight capacity from coming online.

Fuel Costs

Fuel costs have been a mixed bag for trucking companies; but the trend in 2018 (excluding November and December) was towards higher prices and more expense. The ATA expects fuel prices will remain high in 2019 as erratic political turmoil in the Middle East continues.

Tonnage Forecasts

Freight tonnage fluctuates yearly and seasonally, which in the trucking industry can create a “feast or famine” scenario if your business isn’t managed properly. According to the ATA, “trucking serves as a barometer of the U.S. economy, representing 70.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.” A temporary downturn in shipments (i.e. a hurricane blocking barges from offloading in a port for several days) can leave local truck assets stranded. On the other hand, a strong uptick (such as rushing in emergency supplies following a natural disaster) can put severe constraints on capacity.

The U.S. economy is dependent upon the trucking industry. Over 70% of all freight in the United States is managed through truck transportation. With so much of our economic activity tied to trucking logistics, businesses are realizing it’s time to get smarter in securing freight.

By understanding these freight trends, logistics-dependent businesses can effectively plan and adjust their operations to remain competitive. Companies need optimization and flexibility, real time data to know where their trucks are, live malleable logistics planning, and demand analysis to predict business feasibility and profitability. Understanding when freight capacity is too tight or abundant allows companies to capitalize by balancing contract and spot freight purchases, lowering their overall costs. •

The American Trucking Association (ATA) is predicting five trends in the upcoming year that will impact freight logistics and, in turn, will inform how businesses must evolve their freight procurement strategy:

U.S. Modes of Transportation

Industry Growth

As long as the economy remains strong, then so will industry growth. Truck transportation of goods is expected to grow at a rate of 3% per year to 2023. Other transportation modes such as air, rail, and vessel are also expected to grow but not at the same rate as over-the-road.

Driver Shortage

The driver shortage in the U.S. continues to be an issue. In 2018, the shortage swelled to 35,000 drivers; and conditions are expected to worsen in the next five years as drivers retire or move to other industries. To meet market needs, 100,000 new drivers need to be recruited every year to sustain industry demands. The driver shortage negatively impacts capacity in the market and will cause schedule challenges and rising freight costs.

Trucking Rates

In conjunction with the driver shortage, strong demand for truck haulers has been causing freight costs to rise recently. Additionally, the logistics 26

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 freight procurement, address logistical concerns, and identify cost-saving solutions. Nikki has been with Mansfield since 2007 and has over 14 years of experience in supply chain management, with 11 years focused on energy transportation and logistics.

Viewpoints By Jim Timmer, Director, DEF Product Management

DEF Best-Practices: Centralizing to Save

For diesel consumers, fuel is not the only product they are purchasing on a regular basis. Diesel exhaust fluid (DEF) has become a growing concern for procurement teams and fleet managers across North America. DEF is mandated in the U.S. for all on-road vehicles manufactured after 2010 and for off-road equipment produced after 2015. Annual North American DEF demand exceeds 800 million gallons – and that number is growing by 10-12% each year.

As consumption grows, customers are searching for DEF suppliers who can make their purchases cheaper, easier, and more operationally efficient. With 15% market share in the bulk DEF market, Mansfield works with DEF consumers of all shapes and sizes, and has seen a trend toward greater centralization in DEF procurement. In the early days of DEF, sites purchased their own jugs and drums. Some savvy users opted for larger totes to get better economics. Today, DEF purchasers are moving toward standardized equipment solutions across all sites. Here are four reasons why customers choose to centralize their DEF procurement:

1.Reporting & Analysis

With metrics and data becoming ever more important, businesses are monitoring every data point they can track. When each site purchases its own DEF, centralizing and reporting on the transactional data can be difficult. Consider the following questions: • Does DEF consumption change seasonally? • Is consumption generally increasing over time? • Are sites receiving optimal deliveries of DEF? • Could sites handle more storage, lowering their price per gallon? If each site in an enterprise buys its own DEF, the answer may not be readily apparent. With the proper aggregation of data and insights, operations can more effectively manage their purchasing efficiency and thereby reduce DEF costs.

2.Leveraging Total Spend

Hand-in-hand with aggregating data is aggregating and leveraging an organization’s spending power. If purchasing across multiple locations, centralizing DEF purchases enables decision-makers to leverage their total volume. Many sites, especially those with off-road fleets that are relatively new to DEF purchases, will simply buy at retail on their own, or perhaps order totes as needed from a local supplier. Leveraging the buying power of several DEF sites together allows for the purchasing of equipment in bulk and securing discounts on products.

3.Operational Efficiency

Limiting DEF procurement to a small group of vendors makes it much easier to control operations. When a site runs out of DEF, you should have to make just one phone call to get a solution. 27

A centralized vendor can not only serve as that single point of service but can also manage an enterprise-wide keep-fill schedule, functionally enabling consumers to outsource DEF inventory management responsibilities. When a local outage occurs, a centralized vendor has access to numerous supply points and delivery assets to make sure operations continue unabated. Local supplier’s often do not afford the same guarantee of supply – meaning sites may have to pay far more for retail DEF during outages.

4.Lower Equipment Costs

Leveraging volume with a national provider also enables organizations to standardize equipment across all locations. If trucks frequently move between sites, having standard fueling and DEF equipment can help streamline their refueling experience – the last thing you want is drivers taking time looking around for the DEF. Standardized equipment also provides economies of scale in purchasing. A centralized DEF provider can provide standard options based on the size of an operation, ensuring the best piece of equipment at the right price. The equipment costs can even be amortized and worked into the price of the DEF, to prevent having to pay for the equipment upfront. Outsourcing equipment purchases to a centralized vendor ensures each site has the right storage to meet their needs now and into the future. Some sites may not consider future consumption growth around their relatively small DEF demand. A sophisticated supplier can help forecast your demand and install the right equipment to prevent runouts, minimize product and equipment costs, and avoid spoilage.

Viewpoints

Moving to Centralization

These benefits aren’t simply theoretical. Many customers have opted for centralization to improve their reporting, simplify their operations, and reduce product and equipment costs. Consider the case of a large food distributor, who in 2017 made the decision to centralize their DEF purchases and save thousands of dollars. Before making the switch, the company had numerous distribution centers, each with its own approach to DEF. Some sites kept a drum in the maintenance bay to keep it warm, forcing drivers to make two stops to fill up with fuel and DEF. Others placed totes by the fuel island. Some equipment lacked dispensing controls, resulting in product theft. The resulting patchwork of totes and drums caused confusion, space constraints, and high costs for the company. The distributor selected three standardized equipment solutions: 1. Most sites received a 330-gallon tote 2. High-volume sites received a double-stacking tote 3. Northern sites received a heated single or double-stacking tote Each tank was equipped with a monitor so the supplier could manage DEF inventories, automatically dispatching a refill when stocks ran low. These storage solutions were amortized over time and blended into the DEF product costs – which still were lower than the company’s previous price. The benefits of centralizing and standardizing DEF purchases are real and sizable. As fleets’ DEF consumption grows, centralizing supply will help manage the challenge with simple, cost-effective solutions. •

Jim Timmer Director, DEF Product Management Jim is responsible for all aspects of Mansfield’s DEF business. Prior to Mansfield, Jim was the Chief Operating Officer for Additech, Inc., where he spent 15 years growing the company from startup into a $20MM company. Prior to Additech, Jim spent 10 years with ExxonMobil serving in a variety of roles in engineering, operations, corporate planning, rail management and pipeline.

Viewpoints By Josh Epperson, VP Strategic Accounts

Best Practices for Government Fuel Operations

When you work in procurement, every penny counts. When you work in government procurement… well, let’s see how many ways we can stretch that penny! Government procurement agencies have a particularly important job– ensuring taxpayers aren’t overspending for government services. They’re accountable to the public, meaning each bid is held to rigorous standards of accuracy and legality. Every line must be reviewed, and each price must be verified. Government fleets are incredibly diverse. Military agencies are transporting heavy equipment around the U.S. for testing, so they tend to have very high volumes. Transit authorities need fuel to keep buses on the road and on schedule – a run-out here may not be a national security concern, but is quite disruptive to residents and local businesses. Different still are state agencies, which have numerous groups such as DOT, State Police, and various other departments’ all burning fuel. Despite the multiplicity of needs, government agencies do have a few commonalities. Most issue complex fuel RFPs that require significant time and resource investments from procurement teams and suppliers. Across the widely variable government fuel procurement arena, though, there are a few best practices that have emerged as particularly useful for most government fleets. 29

Price Risk Management

Government agencies are given a fuel budget at the beginning of the fiscal year and are expected to stay within that budget. When governments exceed their budgets, funding must be appropriated from other spending areas, which often requires legislative intervention. A severe budget overrun may even cause a political controversy. Some commercial entities have the luxury of passing fuel costs on to consumers, whether through fuel surcharges or higher prices. Government agencies, on the other hand, cannot expect taxpayers to pay more than they already do. Unlike private sector companies where an expense overrun could be offset with other gains or simply result in negative profits, many states are legally prohibited from running at a deficit. Fuel price volatility can cause severe budget overruns, which is particularly concerning for agencies wherein fuel is a major operating expense. Because government agencies, both local and state, must closely adhere to their budgets, many agencies choose to lock in an annual fuel price for a large portion of their gallons. These agencies – transit authorities, fire and police stations, and state agencies among others – all often use fixed prices to mitigate their budget risk.

Viewpoints

Green Mandates

Data Collection, Monitoring & Reporting

After all the work of researching and selecting the right vehicles and fuels for a fleet, government procurement teams must then find suppliers who fulfill these unique energy requirements. Finding a reliable supplier who meets flexible biofuel or renewable diesel standards is an important part of the process, and the supply availability of specific fuel types should be considered when choosing green strategies.

A fleet card, for instance, might require odometer readings each time a driver fills up at a retail station. In addition to yielding valuable vehicle maintenance data, this repetitive record collection helps prevent fraud through automated variance analysis. Regularly transmitted reports identify anomalous MPG readings, which may indicate either fuel card misuse or vehicle efficiency concerns. The proper insights ensure that honest drivers remain honest and safe while preventing fraudulent purchases via government fleet cards.

Many government fleets operate with a mandate to reduce emissions and waste. State agencies in Illinois, Wyoming, and Minnesota, among others, have mandated the usage of biofuels or alternative fuels for their fleets. The Navy’s Great Green Fleet is a Carrier Strike Group launched in 2016 using energy efficient technology and alternative energy like biofuels.

Tracking vehicle efficiency is another way for fleets to achieve green mandates. For instance, Mansfield partnered with one northeastern state’s numerous agencies to provide transparency into fuel consumption, enabling the state to adopt efficiency policies and measure a 0.5 miles per gallon improvement across all state fleets in 2016. Agencies looking to meet strict carbon mandates might consider using a carbon offset program such as Arsenal Zero to make quick gains toward greenhouse gas reductions. These programs mitigate the effects of greenhouse gases through investments in carbon sequestration, reforestation, and other clean initiatives. Governments can fully offset carbon emissions for pennies on the dollar with a simple solution that meets strategic priorities, without the expensive capital investments.

Transparency and accountability are quite important in the government arena, even more so than for private fleets. After all, every citizen is a stakeholder in the agencies that provide public services. With clear transparency into fuel transactions, fleet managers are empowered to hold drivers accountable and promote more efficient fueling practices.

As mentioned above, the insights from fuel reports could be used to drive efficiency. Enhanced data and accuracy enable agencies to monitor significant increases or decreases in fuel consumption. Without transparency into fueling transactions, a government fleet cannot reliably improve its efficiency. Collecting data from back yard fueling equipment is equally as important as tracking retail activity. Installing card readers on bulk fuel tanks ensures that all transactions are authorized and capture the same level of detail as at the retail pump. Tank monitors make inventory management feasible, allowing fuel suppliers to time deliveries and take advantage of market moves. When all of this information is readily available through an online customer portal such as FuelNet, fleet management becomes easier than ever before.

Simplifying Fuel Supply and Logistics Across North America Mansfield Energy partners with the nation’s largest organizations and government agencies to improve operational efficiency and lower the total cost of procurement through comprehensive fuel management solutions.

Contact Mansfield Today

800.695.6626

www.mansﬁeld.energy 30

Viewpoints

Standardization & Collaboration

Government fleets benefit by leveraging their fuel spend together with other agencies to create one standardized program. For example, many state agencies operate within a few miles of each other – ambulances, fire trucks, police cars and more, each with their own bulk fuel tank and fleet card program. If those agencies are not already coordinating on fuel procurement, they likely are using a patchwork of retail fueling, mobile fueling, and backyard fuel tanks. The agencies pay widely varying fuel prices, lack the ability to leverage their combined volume for cheaper products and services, and all spend more time and resources administrating their respective programs. Why act separately when a combined approach would be better for all parties? By using fleet cards that work at any backyard tank owned by a participating agency and at retail stations, fuel consumption is monitored by consuming agency and billed accordingly. Cooperatives allow disparate agencies to leverage their entire fuel spend, utilize otherwise idle tank assets, and secure steeper discounts at retail stations. Mansfield architects and manages these “mini-networks” all over the U.S.

Emergency Services

Finally, while we all hope for the best, it’s crucial that government fleets prepare for disasters with emergency fueling plans. Natural disasters such as hurricanes may come with advanced warning, or they may be as sudden as earthquakes or wildfires. Regardless, government fleets must have a strategy and a plan to keep their equipment running during a disaster event.

The ideal solution employs dedicated fueling assets contracted during a storm. These assets haul in fuel from the closest safe market, which can be hours away. When a local terminal is taken offline by power outages, this solution ensures back-up options in other available markets. For fleets in disaster-prone areas, having a reliable emergency fueling plan is crucial.

Making Government Procurement Simple

Government fuel procurement is a complex endeavor, requiring significant labor hours from procurement teams. A 2017 study by Onvia found that 40% of government procurement staff feel “stretched” or must work overtime to complete their workload. The RFP process itself can be slow and cumbersome, and interacting with multiple fuel vendors requires close attention to detail. When selecting a fuel supplier, suppliers must be vetted to ensure they can meet an agency’s holistic fueling needs. Buying fuel is about more than a price and a commodity – considering price risk management, reporting capabilities, innovation and sophistication, as well as emergency preparedness is imperative. A reliable fuel partner should make it simple to do business, bringing expertise and unique solutions to save governments – and their tax-paying stakeholders – from overpaying on fuel. •

Many government fleets maintain a secondary fuel supplier, who is set up and ready to deliver fuel at a moment’s notice. This situation works well for localized emergencies, when fuel is available to some –but not all – suppliers. However, during widespread natural disasters such as a major hurricane, more redundancy is required. 31

Josh Epperson VP Strategic Accounts With over 27 years of experience in the petroleum industry including 19 years with Mansfield and 8 years with BP Oil, Josh brings deep experience from both a customer and a supplier perspective. His experience includes leadership roles in supply, transportation, sales, marketing and operations supporting both commercial and government fuel programs.

Viewpoints By Billy Lawder, Director, Sr. Director LTL

Why Industry Leading Fleets Choose Mobile Fueling In a world driven by convenience and simplicity, fuel procurement is changing. Years ago, nearly all fleets either had their own backyard bulk fuel tanks or were forced to pay retail margins at the gas station. Today, fleets are moving more frequently to mobile fueling – pumping fuel directly from the fuel truck into the asset’s equipment tank.

Mobile fueling in past years had a reputation for being a “premium” service. Today, it has become a regular consideration in a balanced portfolio of fueling modes. Sophisticated procurement teams now evaluate mobile fueling in line with the other fueling methods, bulk fuels, card locks, and retail purchases. There are three primary reasons why fleets choose to forego their bulk tanks or retail purchases and utilize mobile fueling:

1. Indexed, Reliable Pricing

For fleets that have already chosen not to install a tank, mobile fueling is one of the most convenient and reliable ways to purchase fuel. When your drivers are out on the road, they have more important priorities than searching for the lowest street price at a retail station. Many drivers fill up at the most convenient store, not realizing they could save 10 cents per gallon at the station around the corner. Those small, suboptimal purchases add up to a significant price premium in the aggregate. Mobile fueling is priced against a local fuel index – typically OPIS Average; so fuel costs for the whole fleet are measurable, transparent, and relatively predictable. Although businesses might pay slightly more for a delivery fee, the cost overage is often offset with time savings and greater asset utilization.

wholesale and the local retail prices) soared from 25 cents to over 75 cents. To put that in context, if you received OPIS pricing during that time, you saw your diesel prices fall an astounding 80 cents in two months. If you bought at a retail station, prices dropped just 27 cents!

2. Reduced Environmental Concerns

Although bulk fueling is often the cheapest way to buy fuel, there are many environmental compliance complications that come with owning and maintaining a fuel tank. Underground tanks represent both a significant expense and a significant logistical challenge to install. Once in place, they must be registered with the EPA and monitored regularly for leaks and malfunction. Aboveground tank management is somewhat less stringent in terms of compliance, but still runs the inherent risk of potentially large spills caused by overflow or leak. In contrast, with mobile fueling, a professional fills each vehicle with a controlled nozzle, minimizing the risk of a large spill. In crowded cities, many customers have made the switch to mobile fueling to avoid the headache of permitting and environmental compliance.

Mobile fueling customers also benefit disproportionately when retail prices fall thanks to a phenomenon known as “sticky pump.” When the cost of fuel falls rapidly, retail stations are slow to drop their posted prices. In November and December 2018, as prices were falling rapidly, rack-to-retail spreads (the difference between the OPIS Average

Diesel Rack-to-Retail Spreads 2018

Source: Energy Information Administration (EIA)

Viewpoints Moreover, mobile fueling avoids the expensive overhead costs associated with a tank. Installing a tank is a lengthy, cost-intensive process. Renting a tank comes with its own fees and is not without environmental obligations. The agility of mobile fueling makes it particularly well suited for fast-growing companies opening new sites or frequently changing site addresses. Forget the hassle of emptying rental tanks and transporting them to a new area. Simply tell your vendor the new address, and you’re back to focusing on what matters most – your business.

3. Labor Savings

Finally, the labor savings from mobile fueling have caused many fleet managers to convert. Although mobile fueling may not always represent the lowest available product price, reduced fueling time for drivers can present an enormous hidden cost savings opportunity for fleets. Consider the time spent monitoring fuel levels, searching for a gas station with the best price, and exiting/entering traffic – not to mention the time spent pumping the fuel itself. At a mere 20 minutes per fill-up for a medium-sized vehicle, drivers could be spending the equivalent of 55 cents per gallon! Even with a backyard bulk tank that eliminates some of the distractions of retail fueling, there’s added fueling time when a driver is not being productive. Just 10 minutes to drive straight up to the tank (assuming no wait) and pump the fuel adds 28 cents per gallon to the cost of fuel. And those dollar amounts don’t include the opportunity cost of a truck’s sitting idly at the pump, not generating revenue.

Retail Fuel 20 Minutes

55¢/gal

Labor Cost per Gallon Bulk Fuel

10 Minutes

28¢/gal

Bulk Fuel 0 Minutes

0¢/gal

Based on 15-gallon average fill and $25/hr labor cost

4. Making the Switch

Once fleets have made the decision to convert to mobile fueling, the transition is smooth. The most important information to gather is fleet location, vehicle count, delivery frequency, and average fill size. Once you have that information, you’re ready to begin mobile fueling. Of course, like all delivery methods, mobile fueling must be administered in an optimal fashion to ensure the desired benefits are realized. In a previous FN360 article, "Four Steps to Creating a World Class Mobile Fueling Program," (https://issuu.com/fuelsnews/docs /fn360_issuu_q416/48) we covered important components of a mobile fueling program, including: 1) Aggregate and Consolidate, 2) Validate Costs Upfront, 3) Audit Transactions Regularly; and 4) Report and Analyze the Data. I’d be happy to furnish a copy and discuss an optimal mobile fueling program upon request. Mobile fueling has come a long way over the past few years, shifting from a premium service to one that many fleets ought to consider as a significant savings opportunity. It is simple, easy, and cost-effective once the proper controls are in place. Has your fleet considered mobile fueling? • Billy Lawder Sr. Director LTL Billy was recently appointed to lead Mansfield’s LTL division, where he’s responsible for LTL business development, procurement, and operations. He brings a breadth of transportation execution experience to Mansfield, having previous logistics experience with companies such as Home Depot, Simmons Bedding, XPO Last Mile, and Anheuser-Busch.

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

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. •

Senior VP of Supply & Distribution

Supply Director

Gabe Aucar

Senior Supply Manager

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

Nate Kovacevich Senior Supply Manager

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

Martin Trotter

Pricing & Structuring Analyst

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

Alan Apthorp

Dan Luther

Chief of Staff

Director, Supply Optimization

Alan is the lead author and editor for FUELSNews Daily and FUELSNews 360. He is responsible for providing insights to the executive team, including market trends and analysis. Before his appointment to Chief of Staff, Alan worked in data analysis and visualization as a Market Intelligence Analyst. •

Teamwork

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Innovation

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Integrity

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

Excellence

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Conscientiousness

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Personal Ser vice

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FUELSNews 360° M A RKE T N EW S & IN FORMATION

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

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