FN360 - Q1 2015 Edition by Wes Ledford

M A R K E T

N E W S

I N F O R M A T I O N

JANUARY – MARCH Q1

1st QUARTER Q4

2 0 1 5

1st QUARTER Q44

Q1 2015 Executive Summary Considering the previous quarter evolved into possibly the most pivotal since the 2008 financial collapse, the first quarter 2015 seemed almost boring! Gone were the daily 10-cent-per-gallon declines. Gone were the weekly cries for OPEC action. Gone were the bullish “just around the corner” predictions. Instead, typical cold-weather demand, a non-threatening strike, and political debate filled the news. First quarter headlines lingered on the nation’s growing crude oil supplies. Falling fourth-quarter crude led buyers to stockpile discounted barrels in the nation’s increasingly-scarce tanks. The practice became so popular inventories eclipsed 80-year highs, maintaining pressure on WTI crude and widening Brent-WTI spreads. At last count, Cushing inventories, the nation’s benchmark for crude oil, registered near full with more than 58 million barrels in storage. With roughly six weeks until inventories reach capacity, market watchers speculate a second downturn waits in the coming quarter. Prolonged winter weather across the eastern half of the nation coupled with a six-week steelworker strike — affecting roughly 20 percent of domestic refining capacity — pushed refined products well beyond the comparatively sideways gains of crude oil futures, which added only 11 percent during the same timeframe. Fortunately, with warmer March temperatures, strikes faded much like the snowdrifts lining New England city streets and prices eased. Persian Gulf oil producers were once again in the news this quarter. While fighting in oil-producing regions continued, crude --= deflated values cut deeply into the spoils of war, discouraging rebel seizures of government facilities and allowing Libyan and Iraqi producers to resume exports. Meanwhile, undeterred by falling crude, Shiite rebels in Sunni-controlled Yemen threatened to pit their Iranian benefactors against Yemeni allies in Saudi Arabia. At the close of the quarter, control of the strategically-significant Bab el-Mandeb Straits passed to rebels, which Iran then reinforced with naval vessels. Finally, the financial sector proved its significance to the petroleum market this quarter, contributing to an early-February rally and its subsequent March decline. Weak economic indicators abroad, ongoing conflicts in Ukraine, and Syriza’s victory over pro-EU leaders in the Greek parliament generated upward momentum in the U.S. dollar, propelling it to multi-year highs against several key foreign currencies, but most importantly, the euro. As a dollar-denominated commodity, crude oil exhibits an inverse correlation to the currency — rising as the dollar falls and waning as the currency strengthens. In fact, most of the quarter’s movement stemmed from the dollar’s improved strength against foreign currencies. Moving into the second quarter of 2015, bloated inventories should continue to be the focus as both OPEC and domestic producers showed little interest in reducing production to benefit their competition. Soon, the imbalance will prove too much and production — likely domestic — will fall. Expect the market to find its floor in the second quarter before preparing for its recovery in the second half of the year.

Index FUELSNews 360° Quarterly Report Q1 2015 FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain.

Overview

Regional View

January through March, 2015

PADD 1A, Northeast

First Quarter Summary

PADD 1B & 1C, Central & Lower Atlantic

PADD 2, Midwest

PADD 3, Gulf Coast

PADD 4, Rocky Mountain

PADD 5, West Coast, AK and HI

Canada

Economic Outlook 6

Global Economic Outlook

U.S. Economic Outlook

Fundamentals 10

Domestic Crude Oil Inventories

Upstream Players get Creative

Retailer Pass Profits Back to Refiners

U.S. Dollar Weighs Heavily on Crude Oil Values

Steelworkers Strike Slowly Resolves

Crude-by-Rail Confidence Shaken

Renewable Fuels

Natural Gas

Electrical Power

Transportation & Logistics

Diesel Exhaust Fluid (DEF)

FUELSNews 360˚ Supply Team

FUELSNews 360° Commentaries 18

Commentaries; Dan, Evan S., Chris and Fernando

Commentaries; Andy, Jessica and Nate

Overview January 2015 through March 2015 While traders, oil ministers, and industry watchers speculate the market’s direction, producers have done little to slow its decline. Though rig counts fell by nearly half, production rose steadily through the first quarter, approaching long-standing record-highs of 9.6 million barrels a day. Since the supply side of the equation refused to alter its course and demand remained flat, the financial sector’s influence could be felt throughout the quarter as rising interest in the U.S. dollar weighed on crude oil values.

WTI Crude Futures Baker Hughes reports lowest crude oil rig count in five years ... but EIA still reports rising production USW deal struck United Steelworkers (USW) strike

Favorable exchange rates boost WTI crude values ... before driving them lower once more

FN360

Source: New York Mercantile Exchange (NYMEX)

Overview First Quarter Summary Refined products struggled in the first quarter as the United Steelworkers strikes threatened refinery output and cold weather demand pushed heating oil futures — the base for distillate products — to 40-cent premiums over subsequent months. Meanwhile in the south, refinery output held strong, but fog in the Houston shipping channel and rising demand on the Colonial pipeline led to lean supplies in Florida and other barge-fed markets.

Summary, 1st Quarter 2015

Heating Oil ($/gal) 1.7800 1.7179

RBOB (Gasoline, $/bbl)

47.59

Crude ($/bbl) DJIA 17832.99

FN360o Source: Bloomberg Finance L.P.

IIIII II

Global Economic Outlook

IIII II I

Athens, Greece; Jan. 25, 2015 — Supporters of Greece's left-wing party, Syriza, celebrate party leader Alexis Tsipras' victory over pro-European opposition, securing the Prime Minister's seat while promising to repeal unpopular austerity measures.

In the first quarter, ongoing violence in Ukraine, mounting tensions in the Middle East, and the ever-present “Grexit” threat each contributed to a stronger U.S. dollar, driving crude oil values lower. At the same time, the International Monetary Fund (IMF) lowered its 2015-16 global growth forecasts this quarter by 0.3 percent, citing “lingering legacies” of the 2008 financial crisis, weak investment in struggling nations, and shifting economics favoring energy importers while crippling many oil-producing nations. Advanced economies should grow by 2.4 percent in both 2015 and 2016; though the Fund reduced its expectations for European growth to 1.2 percent and Japan to 0.6 percent after their economies technically fell into recession in Q3 2014. Emerging markets will likely hold fast to their 4.3-percent growth rate in 2015 before climbing to 4.7 percent next year, but economists believe growing pains finally caught up to Chinese manufacturers last year, earning it a sub-7-percent forecast from the Fund and possibly translating to weaker crude oil demand in the world’s second-largest oil-consuming nation. Despite an official ceasefire between pro-Russian separatists and government forces in Ukraine’s eastern Donetsk region, sporadic fighting continues, displacing nearly 1.2 million residents and costing the Ukrainian government — and, therefore, its EU supporters — an estimated six million dollars a day. Meanwhile, the conflict cost Russia an estimated $150 billion last year and sent its currency into a tailspin. Representing one of the EU’s most 6

significant trade partners, Russian sanctions proved equally detrimental to both sides, weighing heavily on the European economy, limiting consumer demand, prompting nervous investors to seek opportunities abroad, and ultimately boosting the U.S. dollar’s value against the euro to near parity for the first time in over a decade. Religious zealotry again fueled Middle Eastern conflicts between the haves and have-nots, spreading violence to Saudi Arabia’s southern neighbor, Yemen, near the close of the first quarter and adding significant risk premium to an already volatile market. Early on, Libyan production suffered under rebel assaults, shutting in nearly a million barrels of daily crude oil production. Meanwhile, ISIS forces in Iraq fled to the north as the nation’s military reclaimed oil assets seized late last year. Finally, late-March negotiations between the world’s leading powers and Iran regarding their controversial nuclear program drove energy markets, preparing for the flood of Iranian oil held at bay by international sanctions. Finally, newly-minted Greek Prime Minister Alexis Tsipras angered his European creditors with pro-Russian commentary and campaign promises to abandon EU austerity measures. Talk of Greece’s exit from the Eurozone (“Grexit”) appeared in headlines nearly every morning as Tsipras argued for debt forgiveness, generous social programs, and long-forgotten World War II reparations owed by Germany. Of course, his boisterous demands quieted as the quarter ended and a default of the nation’s debt became a more realistic possibility, which is expected to happen in mid-April without the EU’s financial lifeline. •

â&#x20AC;&#x153;Advanced economies should grow by 2.4 percent in both 2015 and 2016; though the Fund reduced its expectations for European growth to 1.2 percent and Japan to 0.6 percent after their economies technically fell into recession in Q3 2014.â&#x20AC;?

IIIII II

U.S. Economic Outlook

IIII II I

The International Monetary Fund (IMF) credits the United States for leading global economic growth in advanced economies last year and expects more of the same this year, raising its 2015 growth expectations to 3.6 percent largely due to more robust private domestic demand. However, chilling winter temperatures brought the nation’s ﬁrst quarter economic growth to a standstill, according to the Atlanta Federal Reserve Bank. Interest rates became a headline topic during the ﬁrst quarter as the Federal Reserve members wrestled with the decision to increase rates from their six-year, zero-percent low. In March, “patient”

language was removed from the Federal Open Market Committee (FOMC) meeting summary. While failing to establish a date for the increase, the change in language suggests a mid-year rise isn’t out of the question, but increases the likelihood of a late-summer bump, beneﬁting industries prone to summer demand. Over the past three months, the U.S. dollar’s value versus key foreign currencies soared as investors found shelter in thriving American companies. By mid-March, the dollar approached parity with the euro for the ﬁrst time since 2002, weakening the value of crude and supporting greater domestic investment. •

US Dollar – Euro Exchange Rate

FN360o Source: Bloomberg

U.S. Economic Outlook

Consumer Sentiment Index

Consumer Sentiment Index January

February

March

98.1

95.4

93.0

The University of Michigan’s monthly Consumer Sentiment Index reflected growing consumer confidence this quarter — recording its highest level since January 2004 — as energy costs fell to multi-year lows and declining unemployment suggests increased demand for goods and services. Additionally, Americans found their paychecks went considerably further following the dollar’s sharp rise against foreign currencies, decreasing the cost of imports while increasing buying power abroad. Since speculation of an interest rate hike appeared frequently in the news this quarter, the FUELSNews editors decided to assume the Federal Reserve’s perspective on inflation rates, foregoing the Consumer Price Index (CPI) in this edition in favor of the Personal Consumption Expenditures (PCE) price index. The FOMC officially adopted the PCE in 2000 for its flexible, yet comprehensive, measure of consumer spending. Notice on the illustration at right, CPI weights shelter at nearly of third of all consumer spending while PCE, basing the value on business survey results, weighs all categories more evenly. Federal Reserve members clearly intend to raise interest rates in 2015, but dovish updates coupled with Chairwoman Yellen’s insistence on a 2-percent inflation rate leave the date and rate of increase a source of speculation. It’s widely believed the Fed’s waiting for zero-percent interest rates to drive unemployment to its lowest possible rate before committing to a hike. Once employment rates reach the desired floor, stimulus rates will begin to impact inflation rates, signaling the Fed it’s time for the program to end.

FN360

Source: University of Michigan

PCE Weights

CPI Weights 3

7 20

Food and beverages Medical care

Recreation

3 Source: Societe Generale

Shelter

Other housing

Apparel

Education and communication

Transportation

Other goods and services

Headline Personal Consumption Expenditures (PCE) MoM Change January

February

March*

3.68

3.34

3.14 *projection

Trimmed Personal Consumption Expenditures (PCE)

Source: Federal Reserve Bank of Dallas

For now, the headline PCE price index rose by a 2.1-percent annualized rate in February, exhibiting considerable gains in food, energy and core goods after declining in January. While core services also rose in the ﬁrst quarter, their momentum slowed in February after gaining in January. Gasoline prices contributed heavily (≈0.5%) to the rise in headline rates as products ended their precipitous declines in the ﬁrst half of the quarter; though rates should return to January levels in the Bureau of Economic Analysis’ April publication as pump prices gave up much of their mid-quarter gains by the end of March. 9

Fundamentals Balancing Domestic Production with Consumption and Exports

Domestic Crude Oil Inventories Swell to Historic Levels

After nine months of deflated crude oil prices, a more than 45percent decline in rig counts, and daily bearish proclamations from the financial sector, domestic production continues to rise along with commercial inventories, which threaten to eclipse records firmly intact since the Great Depression. By the end of the first quarter, the U.S. Energy Information Administration (EIA) reported domestic crude oil production nearing the nation’s all-time high of 9.6 million barrels a day (mmbbl/d) with minimal slowing. As a result, the International Energy Agency (IEA) promptly revised its bullish prediction for oil’s recovery. At the same time, commercial inventories grew more than 23 percent in the first quarter alone, totaling more than 471 million barrels in storage. Inventories haven’t reached these levels since the discovery of Oklahoma’s Seminole field, California’s Signal Hill, and 10 10

Texas’ Yates and Van oil fields in the mid- to late-20s quenched rumors of peak oil and filled commercial inventories to a record 545 million barrels by October 1929. Consequently, oil values deteriorated by more than 65 percent between 1926 and 1931. Similarly, swelling domestic inventories now encourage oil futures across the globe to return what slight gains they’d mustered in the first two months of the year. Down as much as 58 percent since the glut hit headlines last summer, falling crude oil prices are reshaping the post-financial collapse market and saving consumers millions of dollars each day in energy expenses; though, consumers should only expect savings to continue for as long as production remains near record levels. Once cuts to capital expenditures impact output from the nation’s booming oil fields, prices should prove quick to rebound. •

Fundamentals

Did You Know?

In 1931, commercial crude oil inventories weighed in at more than 400 million barrels, which equated to roughly 160 days of production. Today, the same volume represents only 43 days of production.

Plunging Prices Force Upstream Players to get Creative Most industry estimates suggest global crude oil production now exceeds demand by somewhere between one and two million barrels a day, contributing heavily to the energy market’s rout. In response, energy companies slashed their 2015 capital expenditures by what Deutsche Bank suspected to be 25 percent. Now, with crude oil values still at multi-year lows, drillers have shuttered nearly half the industry’s operating oil rigs, but inventories continue to build and storage capacity’s proving short. Given the overabundance of domestic crude oil and growing scarcity of storage space, the CME announced in early March the creation of a crude storage futures contract. Beginning March 29th, traders may buy and sell the right to store crude oil in thousand-barrel increments at the Louisiana Offshore Oil Port’s (LOOP) hub in Clovelly, LA. The largest privately-held crude storage terminal in the U.S., LOOP’s nearly 70-million-barrel capacity offers shippers an alternative to Cushing, OK tanks, which the EIA estimates at 67 percent full. According to CME leaders, monthly auctions of Loop storage contracts should help participants manage their physical crude storage price risk while presenting new, short-term storage options with easy access to many of the nation’s largest reﬁning complexes.

Source: Loopllc.com

Furthermore, Clovelly’s deep-water port could attract international shippers as they seek storage and wait for global prices to rebound. Shippers aren’t the only ones getting creative, however. Rather than selling barrels at bargain prices or simply halting the development of new wells, drillers are instead prepping wells for the fracking process, but stopping short of “turning on the spigot,” so to speak. These pent-up volumes are as close to commerciallyviable inventory as possible without requiring producers to ﬁnd a home for barrels they would have released. The trend’s become so prevalent —with approximately 3,000 unﬁnished wells nationwide — Bloomberg analysts are calling this backlog of un-fracked wells the “fracklog.” • Source: Loopllc.com

11 11

Fundamentals

Retailers Pass Profits back to Refiners as Finished Products Surge Over a 10-week period beginning in early November, wholesale diesel racks across the nation quickly shed $1.19 a gallon, or roughly 35 percent of their overall value. A week later, retail diesel prices answered with their own 12-week slump, but failed to achieve the same savings wholesale racks offered; instead, losing a little more than 87 cents a gallon, or 23 percent of their value. So, where did the nearly 32 cents a gallon in additional savings go? Retailers’ pockets. Consider it saving for a rainy day. Then again, it’s been pouring since shortly after the start of the New Year.

Wholesale vs. DOE Retail Diesel (US Average)

FN360

Source: Energy Information Administration (EIA)

Beginning the second week of January, average wholesale diesel prices increased by nearly 17 percent — more than 37 cents a gallon — to $2.5664 a gallon, according to data compiled by Oil Price Information Service (OPIS). Meanwhile, retailers battled it out over market share, waiting nearly a month before raising street prices a mere 3.4 cents a gallon, or 1.2 percent. Consequently, diesel rack-toretail spreads plummeted 66 percent from their 87-cent peak in less than two months. 12

Fundamentals At the same time, rising wholesale prices translate to greater earnings on every barrel of crude reﬁners pass through their facilities. Crack spreads estimate the value of converting crude oil into reﬁned products and these spreads have been declining steadily since the

market’s peak in late June. Now, with reﬁned products gaining ground due to production disruptions and crude oil prices stagnating, reﬁners’ margins have doubled since the start of the year to more than $29 a barrel.

WTI 3:2:1 Crack Spread

FN360o Source: Oil Price Information Service (OPIS)

But why should end users be concerned? Wider crack spreads encourage producers to maximize refining capacity and remove any operational impediments, such as a strike. While officials reported no significant decline in domestic production due to the United Steelworkers’ strikes, the nation’s operable capacity fell to as low as 86.6 percent in the first quarter — largely due to seasonal maintenance — and several facilities experienced unplanned

disruptions or, worse, catastrophic failures, such as the explosion at ExxonMobil’s Torrance, CA refinery. Needless to say, refiners were ready to get back to business as usual, capitalizing on peak rates and quieting negative press from ongoing negotiations. Furthermore, increased refining could ease the crude oil glut forming in the country’s storage tanks, which threatens to sink crude oil prices lower still and promises even greater fuel savings. •

Source: The Associated Press

Fundamentals

Surging U.S. Dollar Weighs Heavily on Crude Oil Values Towards the end of the quarter, the Federal Reserve published its summary of the March Federal Open Market Committee (FOMC) meeting, removing “patient” language with regards to an interest rate increase, while failing to establish a firm deadline, and downgrading its growth assessments from “solid” to “moderate.” Traders responded with a 7-cent-per-gallon jump in refined product futures and a $2.50-per-barrel jump in WTI crude, ending a 6-day slump and erasing weekly savings. So, why are oil traders so concerned with interest rates? After all, they didn’t bat an eye at a 10-million-barrel build in commercial crude inventories earlier that day, but slight changes to the wording of a one-page document justified a nearly 6-percent jump in futures? First, the foreign currency exchange market generates $5.3 trillion in trades each day while energy markets account for an estimated $250 billion. Consequently, adjustments in the currencies market often produce sizable ripples in dollar-denominated commodities, such as crude oil. News of rising interest rates would have propelled the dollar’s already inflated value higher against foreign currencies, applying even greater downward pressure to ailing crude oil and refined product prices. However, the Fed’s reluctance to boost interest rates in the near term fueled a sharp decline in the dollar’s exchange rates versus foreign currencies while pushing petroleum products higher.

Exchange rates are inversely correlated to petroleum futures–one goes up, the other falls

Foreign Exchange Rates Impact Crude Oil Values

FN360o Source: Bloomberg

While the Fed no longer “judges that it can be patient in beginning to normalize the stance of monetary policy,” committee members agreed a rate increase would prove unlikely during the next FOMC meeting in April. Furthermore, continued improvement in the labor market and conﬁdence in a 2-percent inﬂation rate must be achieved before the Fed raises rates. An interest rate hike may be unlikely in the coming months, but expect similar movement ahead of the FOMC’s June 16th meeting, which analysts believe will be the interest rate debate’s turning point, producing an early fall rollout date. • 14

Fundamentals

Six-Week Steelworkers Safety Strike Slowly Resolves With the close of January, roughly 30,000 oil and petrochemical workers watched their contracts expire and many took to the picket line in protest of lax safety protocols, excessive overtime, and the frequent use of non-union contractors. Leaders of the United Steelworkers (USW) labor union called for immediate strikes at nine facilities, including seven refineries sharing a combined capacity of 1.8 million barrels a day, or roughly 10 percent of the nation’s output. By the time negotiations bore fruit in the second week of March, 15 plants, representing 20 percent of the nation’s refining capacity, relied on temporary workers and automated processes to meet refined product demand. After eight weeks of tense contract negotiations and six weeks of picketing, union representatives accepted a four-year deal which labor leaders lauded for its inclusive approach to both safety and hiring practices. Not everyone on the picket line agree, however. While USW leaders felt the deal addressed concerns for both safety and compensation, several local chapters held out for additional concessions before signing return-to-work agreements, including workers at facilities operated by Marathon, BP, and LyondellBasell. Most industry analysts agree, while gains in refined product prices coincided with the onset of USW strikes, picketing workers had little to no fundamental impact on the price of fuel, unless you believe union workers could have prevented the explosion in ExxonMobil’s electrostatic precipitator (ESP). The only production lost as a direct result of USW strikes was at Tesoro’s 166,000-bpd refinery in Martinez, CA; though half the facility had already been closed for scheduled maintenance. •

Fundamentals

Crude-by-Rail Confidence Shaken as Increased Shipments Draw Negative Attention

In early March, emergency response teams clearing the smoldering wreckage of seven burnt-out railcars near Gogama, Ontario were called to yet another derailment only 23 miles away where 35 railcars had jumped the tracks, leaving five tankers to leak oil into the Makami River while several others burned on the shore. Separated by only three weeks, the first derailment occurred well outside the city limits, but flames from March’s accident were easily visible from Gogama’s downtown area. Fewer than 3 miles from the city center, residents and officials voiced similar concerns as visions of the 2013 Lac-Mégantic disaster came to mind. While some claimed “unfortunate coincidence,” others cried “unchecked risk,” not only for their close proximity, but because the two derailments weren’t isolated incidents. Between February 14th and March 9th, five trains derailed while hauling volatile crude oil or other flammable liquids. Though only four of those caught fire, Gogama marked the third reported incident in three short days. Furthermore, in each of these instances, the affected railcars reportedly met new federal guidelines designed to prevent such accidents. 16

Scientists with the Center for Biological Diversity suggest a moratorium on crude-by-rail shipments, citing an imminent threat to some 25 million people, 34 wildlife refuges, and critical habitats for 57 endangered species living within the one-mile evacuation zone of oil trains. Meanwhile, crude-by-rail supporters downplay the quarter’s turbulent

Originated Carloads of Crude Oil vs. Terminated Carloads of Crude Oil on US Class 1 Railroads

*Estimate based on preliminary data

Source: Association of American Railroads, Federal Railroad Administration

Fundamentals events, citing data collected by the U.S. Department of Transportation (DOT) which indicates a spill rate of only 2.2 gallons per million tonmile. Of course, more frequent shipments will inevitably result in more spills and, according to the Association for American Railroads (AAR), crude oil shipments by rail increased from less than 10,000 carloads in 2008 to more than 400,000 carloads in 2013 and an estimated 500,000 last year. Illustrated another way, trains hauling crude from North Dakota oil fields between 2008 and 2013 increased their frequency from once every four days to once every 2 ½ hours. The rail industry recorded the greatest improvement in oil spill volume per billion-ton-miles over the last quarter century. However, the Washington Post reports an incident rate 10 to 20 times higher than that of pipelines, which averaged roughly 22 incidents per billion barrels transported. While not quite as scathing, the DOT suggests approximately 15 trains will derail in 2015 before steadily declining to about five a year by 2034. Both the AAR and Railway Supply Institute (RSI) dispute the finding as exaggerated, but theirs is a difficult position to maintain following such a problematic start to the year.

Crude Oil and Petroleum Product Spills During Domestic Production Oil Spill Volume (Barrels) per Billion-Ton-Miles

Sources: Prepared by CRS; oil spill volume data from Dagmar Etkin, Analysis of U.S. Oil Spillage, API Publication 356, August 2009; ton-mile data from Association of Oil Pipelines, Reports on Shifts in Petroleum Transportation 1990-2009, February 2012. Notes: Pipelines include onshore and offshore pipelines. The time periods were chosen based on available annual data for both spill volume and ton-miles. The values for each time period are averages of annual data for each six month period.

Because these tankers’ thick hulls — all compliant with new federal standards — failed so dramatically in the ﬁrst quarter, U.S. and Canadian agencies launched reviews of newly-imposed regulations, determining if legislators should enforce even stricter safety precautions. Meanwhile, ﬁndings by the Congressional Research Service (CRS) suggest regulators are looking in the wrong direction. According to their data, nearly a quarter of all derailments along Class I railroads’ mainlines between 2001 and 2010 were caused by broken rails or welds. Not only that, but the CRS suggests broken rails and welds resulted in more severe accidents, derailing an average of 13 railcars instead of the 8.6-car average for all other reasons. Coming in second and causing just over 10 percent of all derailments was track geometry defects. Considering then, a third of all freight train derailments in the U.S. were caused by track defects and not railcar construction, perhaps regulators are too busy treating the symptoms rather than the problem. • 17

FUELSNews 360˚ Commentaries Dan’s Dissertation

BULL

Heading into the second quarter, crude oil should continue its decline, testing the lows established earlier this year. However, the commodity will ultimately recover, heading higher before quarter’s end as the selloff will be overblown and U.S. demand for crude oil will increase. The initial decline in prices will be precipitated by rising crude oil inventories at the Cushing hub, which have ballooned over the last several months. I believe a selloff purely related to storage capacity will be excessive – even as PADD 2 crude inventories reach capacity, there remains storage space in PADD 3 and other regional markets. Furthermore, crude oil demand in the second quarter will increase as reﬁneries exit maintenance and ramp up rates ahead of summer driving season. Lastly, lower prices will further discourage production, decreasing supply and supporting the petroleum market.

Evan’s Estimation

BEAR

After the market showed bullish tendencies in February (due to the winter weather conditions), we saw the market switch back to a bearish trend to end the first quarter. For the second quarter of 2015, I predict the bearish behavior to continue, mainly due to the domestic oversupply, dropping WTI crude as low as $25 to $30 a barrel this year. The United States is running out of storage tank space and demand has not been at the level needed to support the surplus supply. Finally, oil infrastructure connecting mid-continent crude to refineries has improved, lowering prices even more. Barring a hurricane hitting the East Coast, I expect refined product and crude prices to slide as they did during the fourth quarter of 2014, but reaching even lower values.

Chris’ Concept

BEAR

At ﬁrst glance, it would appear prices have begun to stabilize. However, crude oil inventories remain near all-time highs and storage capacity will approach capacity in the near future. One market watcher boldly predicted crude would hit $35 a barrel on May 15th based on current projections. I won’t go so far as to call the exact date or price, but I agree the market’s primed for another quarter of lower crude and diesel prices. Although, I anticipate gasoline prices to rise due to the seasonal RVP transition in the coming months.

Fernando’s Forecast

BEAR

As we exit the ﬁrst quarter of 2015, year-over-year supply increases drove natural gas prices to levels so low they nearly warrant production shut-ins. In the second quarter, I suspect we’ll hear rumblings of a price ﬂoor to justify keeping gas in the ground. Unfortunately for bulls, prices tend to lag any such event as the market craves evidence and trends. Thus, I can’t help but feel bearish in the short term. Speculation surrounding summer heating load and the hurricane season will create volatility in the market; albeit subdued relative to the last few months. Upward momentum in prompt month futures should remain muted until structural demand increases impact forward markets. Bottom line — I anticipate range-bound natural gas in the second quarter with volatility skewing the risk-reward to the downside.

FUELSNews 360˚ Commentaries Andy’s Answer

BEAR

It looks like OPEC won their game of chicken with domestic shale producers. U.S. rig counts fell to nearly half their October peak, oil producers slashed future projects and all upstream segments reduced workforces while OPEC production has been creeping higher. In addition, when the CME publishes a futures contract based purely on crude storage, you know we have some interesting times ahead. So where do we go from here? The U.S. dollar has been screaming higher relative to some of the top currency benchmarks, domestic crude levels race towards unchartered territory and the pending turnaround season looms, which could cause a greater backlog of crude inventory. This unique balance of market dynamics has analysts predicting all kinds of values for WTI over the next twelve months and the majority seem to be lower for now. Having said that, I’m revising my low for the year. I now expect WTI crude oil values between $35 and $45 a barrel. Of course, under the right circumstances, prices could rise to the low $70’s, but not much further.

Jessica’s Judgment

BULL

April showers bring May ﬂowers and they can also bring healthy crops. The second quarter marks the start of planting season for corn and soybeans… and anxiety. I predict market volatility as a result. The weather is a tricky thing. Mark Twain said it best, “Climate is what we expect; weather is what we get.” If it’s too hot, or too cold, or too wet, or too dry, or planting progress is too fast or too slow, crops will likely rise in price to cover any apprehension. I am not a pessimist, I am a realist and I am betting it will be “too” something. I expect the apprehension to be short-lived for soybeans though, meaning prices should decline in the third quarter. The 2015-2016 soybean marketing year is expected to include increased U.S. planting acreage, increasing stocks and driving prices down. Corn, however, was the champion crop last year, maintaining relatively low prices and proving less proﬁtable. Therefore, farmers intend to plant fewer acres in 2015. Ultimately, when it comes to feed stocks, everyone’s eyes are trained on crude oil as the falling price per barrel impacts the endurance of the renewable fuels industry.

Nate’s Notion

BEAR

I’m bearish on the second quarter, neutral for the third, and bullish by the end of the year. I still maintain the collapse in rig activity will eventually decrease oil production in North America and this, in turn, will help rebalance the global supply and demand situation. Furthermore, crude oil has been pressured by an unusually strong U.S. dollar as the euro, loonie, and several other overseas currencies trade near historical lows versus the greenback. The strengthening dollar will hurt domestic manufacturing, but since the U.S. economy is predominantly made up of consumer spending — roughly 70 percent of GDP — a strong dollar will make overseas goods and services cheaper while pushing oil prices and other dollar-denominated commodities lower. This should spur domestic oil consumption, eventually helping to rebalance the demand side of the equation from an oil fundamentals standpoint. Obviously, companies outside the U.S. beneﬁt from a stronger dollar, because it makes their goods and services cheaper and more competitive when selling to the U.S. and China. It may take until 2016 for all of this to come to fruition, but my guess is we’ll see energy demand rebound in the second half of the year, supporting oil prices for the third and fourth quarters. Plus, the contrarian in me says that when everyone turns bearish, that’s usually when a bottom begins to form.

Regional Views PADD 1 East Coast

PADD 1A Wholesale vs. DOE Retail Diesel

(dollars per gallon)

PADD 1A Northeast

FN360o Source: Energy Information Administration (EIA)

New England Markets Weather Snowiest Year on Record Starting the New Year off with heavy snowfall and prolonged winter temperatures, Northeast residents received their annual reminder loud and clear — “Build more natural gas pipelines!” While Marcellus production along the Ohio/Pennsylvania border propelled the nation’s natural gas inventories to unprecedented heights, legislative hurdles and strong landowner opposition in neighboring northeastern states still prevented cheap, abundant resources from making their way into energy-starved markets. Consequently, New England utility companies found themselves, once again, relying on diesel-powered backups due to strict natural gas allocations. After suffering through last year’s winter season and seeing ﬁrst-hand how quickly electric power generators could drain a market’s distillate inventories, New England suppliers boosted distillate oil inventories by nearly two million barrels — a 36-percent increase — before ﬁrst-quarter winter storms rolled in.

New England (PADD 1A) Distillate Oil Inventories “ After suffering through last year’s winter season and seeing ﬁrst-hand how quickly electric power generators could drain a market’s distillate inventories, New England suppliers boosted distillate oil inventories by nearly two million barrels— a 36-percent increase— before ﬁrst-quarter winter storms rolled in.”

Energy Information Administration (EIA)

Unfortunately, inventories don’t last long when the Northeast’s largest refineries experience complications and barge deliveries slow due to high winds and ice. Fuel prices spiked on February 20th as record-low temperatures created operational disruptions at several East Coast facilities, including Monroe Energy, PBF Energy, Phillips 66, and Philadelphia Energy Solutions (PES). In fact, Monroe Energy ceased operations all together when the Delaware River froze, denying its 166,000-bpd Trainer, PA refinery access to water necessary for cooling units. Consequently, New York Harbor heating oil values demanded a 5-cent premium over NYMEX heating oil futures. Shortly after the basis differential strengthened, help arrived from overseas as European producers capitalized on elevated prices. By the 25th, six vessels carrying 1.8 million barrels of diesel had already embarked on trans-Atlantic journeys, alleviating supply shortages in the Northeast and reducing the New York Harbor’s physical-to-futures spread by 40 percent. Unfortunately, the sudden influx did little to ease the premium March heating oil futures earned over April, which peaked at a record 37 cents a gallon on the last day of trading in February.

NYMEX Heating Oil Futures

Did You Know?

Since refined product contracts sold on the NYMEX deliver into the New York Harbor upon expiration, Northeast supply carries considerable sway over NYMEX futures. When winter weather erodes inventories, physical traders will buy up prompt month futures to secure quick barrels at the center of the disruption. Energy Information Administration (EIA)

Northeast basis values will continue to spike during the winter months so long as natural gas demand surpasses the region’s distribution capacity and distillate suppliers rely on production from distant markets. As shown below, New England suppliers already prove less willing to maintain signiﬁcant diesel inventory, reducing distillate stocks by nearly half since late 2010.

New England (PADD 1A) Distillate Oil Inventories

Source: Energy Information Administration (EIA)

As scheduled pipeline projects complete in the coming years, natural gas from Appalachian shale should sate demand, but limited access to cost-advantaged crude will likely discourage any noteworthy increase to reﬁning capacity. Therefore, Northeast consumers should expect to remain susceptible to winter shortages unless inventories rise or the industry commits to new/expanded reﬁned product pipelines as far north as Maine. • 21

PADD 1 East Coast PADD 1A Northeast

Natural Gas Pipeline Projects Offer Greater Access to Energy-Starved States

Only 6 to 7 percent of all residences (6.2 million homes) in the United States consume home heating oil, yet over 70 percent of this usage takes place in Northeast households. Considering heating oil prices traditionally exceed natural gas, that percentage may start to recede as many consumers contemplate a cleaner, cheaper form of fuel. However, the lack natural gas pipelines prevents some willing Northeast residents from making the switch, forcing them to stick with heating oil. Reacting to growing demand, PennEast Pipeline Company, TransCanada Pipelines Limited, and the Constitution Pipeline Company among others each proposed projects to increase the Northeast’s natural gas supply by as early as this year. In January, TransCanada Pipelines Limited, Portland Natural Gas Transmission System, and Iroquois Gas Transmission System LP held joint open seasons for natural gas deliveries into New England starting as early as November 2017. Offering a ﬁxed price along existing pipelines could sway potential shippers as it reduces risks of construction delays and everincreasing rates. Expected to break ground this summer, the Constitution Pipeline Company plans to build a 124-mile, 30-inch pipeline extending from Northern Pennsylvania into East Central New York. Once it connects to the Iroquois and Tennessee natural gas pipeline networks in Schoharie County, New York, the Constitution pipeline will contribution 650,000 dekatherms of energy to an estimated 3 million Northeast and New England homes by the second half of next year. Kinder Morgan, owner of the Tennessee Gas Pipeline (TGP), announced last summer plans for the Northeast Energy Direct Project (NED), a 500,000-dekatherm-per-day arrangement with local natural gas distribution companies (LDCs) involving the replacement of aging pipeline systems and the addition of several new pipeline segments spanning multiple Northeastern states. Approximately 90 percent of the project’s construction would take place along existing utility corridors or adjacent to TGP’s mainline. Expected to begin service in late 2018, NED would liberate roughly 2.2 billion cubic feet of natural gas from the Marcellus bottleneck each day while providing Northeast consumers greater energy security and considerably lower heating costs in the winter. 22

PADD 1 East Coast

Finally, PennEast Pipeline Company intends to build its own 108-mile, 36-inch natural gas pipeline from Northern Pennsylvania down to West Central New Jersey. Slated to complete near the end of 2017, the proposed $1-billion pipeline would service upwards of 5 million homes and contribute roughly $1.6 billion to households and businesses during its construction.

PADD 1A Northeast

Evidently, the once natural gas-challenged Northeast region could soon possess the infrastructure necessary to boost product availability and lower natural gas prices. As more homeowners trade out old heating oil tanks for the little blue flame, heating oil prices could finally stabilize and winter-driven shortages wouldn’t be the annual fire drill they are now. •

“ Expected to break ground this summer,

the Constitution Pipeline Company plans to build a 124-mile, 30-inch pipeline extending from Northern Pennsylvania into East Central New York.”

Southern Maine Jumps on the RFG Bandwagon At the request of the State of Maine, the U.S. Environmental Protection Agency issued a rule requiring the sale of reformulated gasoline (RFG) across several southern counties beginning June 1st of this year. Similar to Massachusetts, Rhode Island, and Connecticut, which share in the Providence distribution network, seven southern counties — including Androscoggin, Cumberland, Kennebec, Knox, Lincoln, Sagadahoc, and York — will still switch to a low-RVP gasoline between May and September, but will not require the conventional formulation previously consumed. Their transition to RFG blends responds to industry requests for a single, consistent fuel requirement throughout New England, simplifying the region’s gasoline supply and reducing risk of disruption or shortage. Cementing the State’s support for reformulated gasoline, the EPA added a provision requiring a four-year commitment from all areas opting into the RFG program. Reﬁners, importers, and distributors will sell only RFG products after May 1st, followed by retailers and wholesale purchasers-consumers on June 1st. •

PADD 1 East Coast

PADD 1B Wholesale vs. DOE Retail Diesel

PADD 1B & 1C Central & Lower Atlantic

FN360

Source: Energy Information Administration (EIA)

PADD 1C Wholesale vs. DOE Retail Diesel

FN360o Source: Energy Information Administration (EIA)

PADD 1 East Coast

Southeast Shippers Capitalize on Winter Supply Disruptions

PADD 1B & 1C

to push additional distillate products along Line 3 into Philadelphia and Linden, NJ. By the close of February, Gulf Coast diesel gallons traded at roughly 40-cent discounts to New York Harbor Barge as heavy snows, high winds, and thick ice delayed barge deliveries, pressuring prompt NYMEX futures higher.

Central & Lower Atlantic

Reminiscent of last winter, cold weather demand in the Northeast encouraged Colonial pipeline shippers

Basis Creates Shipping Opportunity

“ As Southeast barrels ﬂowed

north into energy-starved markets, falling temperatures resulting in natural gas allocations, prompting power plants in the Carolinas to rely on their diesel-powered backup generators.”

FN360

Source: Oil Price Information Service (OPIS)

As Southeast barrels ﬂowed north into energy-starved markets, falling temperatures resulting in natural gas allocations, prompting power plants in the Carolinas to rely on their diesel-powered backup generators. These generators consume up to 50,000 gallons of diesel each hour when winter’s in full swing and mid-Atlantic fuel markets found themselves pinched between two struggling markets. By mid-March, warmer temperatures and steady deliveries returned distillate prices to their previous ranges. •

Falling Gulf Coast Basis Demands Line Space Premiums Since last May, the hot topic among Southeast shippers, suppliers and end users of reﬁned products has been Colonial Pipeline Line Space values. Argus was the ﬁrst to start tracking and publishing the value last year; however, Platts and OPIS have both since begun publishing their own.

Gulf Coast Diesel Line Space vs. Basis

In the ﬁrst quarter of the year, Colonial line space proved both volatile and valuable as shippers fought for every barrel in the Northeast. Illustrated below, line space bears an inverse correlation to basis, suggesting line space carries more value when Gulf Coast product prices decline, incentivizing shippers to take products as far north along the line as possible. •

Source: Oil Price Information Service (OPIS)

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

Florida Supply Constricts Under Weak Houston Supply and Strong Northeast Demand

Despite falling diesel values across the country, Florida rack and retail prices pressed higher as a result of ongoing supply challenge and the New York Harbor arbitrage discussed earlier. First, numerous shipments of diesel, previously destined for Florida markets, bypassed the state entirely on their way to short Northeast ports. Supplies tightened, but prices didn’t gain signiﬁcantly versus the national average until heavy fog along the Houston shipping channel delayed shipments bound for barge-dependent Florida markets. The subsequent collision of two vessels and closure of the shipping channel worsened Florida’s supply situation. Damaged hull of a chemical tanker, March 15, in the Houston Ship Channel. Source: Associated Press

Florida vs. National Diesel Values

Source: Source: Oil Price Information Service (OPIS)

As Florida continues to face challenges heading into the second quarter, opportunities exist for customers to truck product from pipeline terminals in southern Georgia and Alabama; though, in some cases, it’s “necessity,” not “opportunity.” Of course, this further strains pipeline terminals which were already stressed from shippers moving product north. With fog clearing and the Northeast disruption resolved, vessels can ﬁnally replenish coastal markets, easing product prices ahead of summer driving demand and, eventually, hurricane season. • 26

“ Since last May, the hot topic among

Southeast shippers, suppliers and end users of reﬁned products has been Colonial Pipeline Line Space values.”

PADD 2 Midwest

PADD 2 Wholesale vs. DOE Retail Diesel

FN360

Source: Energy Information Administration (EIA)

Midwest Refinery Hiccups Led to Tight Rack Supply The New Year kicked off with a host of refinery issues across Illinois and Ohio, resulting in tight refined product supplies in Ohio River Valley markets. First, a crude oil fire at PBF’s 175,000-bpd Toledo, OH refinery disrupted output and, while cleanup went quickly, extreme winter temperatures delayed the affected crude distillation unit’s restart until mid-January. At the same time, a small fire in Marathon’s 225,000-bpd Robinson, IL refinery reportedly slowed gasoline and diesel production. About a week later, an isocracker at Husky Energy’s 155,000-bpd Lima, OH refinery exploded and, finally, Phillips 66’s Wood River, IL refinery reported flaring — a red flag for operational disruptions — throughout the month as workers struggled to complete scheduled maintenance.

Products values in the Chicago pricing region were the cheapest in the country to start the year, but rose considerably given the aforementioned issues. For instance, Detroit’s overabundant diesel supplies at the end 2014 actually caused rack prices to dip well below regional cash values, producing negative netbacks across the eastern portion of the state and encouraging shippers to redirect incoming barrels. Unfortunately, reﬁnery issues quickly erased any consumer savings as the spread between rack prices and cash values (“netback”) increased more than 15 cents per gallon. Key Ohio markets also suffered rapidly rising prices as highlighted by the graph below. •

Ohio Valley Netbacks (Rack minus Spot)

Courtesy Marathon

Source: Oil Price Information Service (OPIS)

PADD 2 Midwest “ Chicago CBOB opened March just shy of $1.70 per gallon before promptly spiraling lower in the ﬁrst week of trade to settle around $1.40 per gallon. This represented a discount of nearly 50 cents a gallon to NYMEX RBOB futures.”

Chicago Gas’ Wild Ride Seasonal RVP changes and refiner buying led to a wild end-of-quarter ride for Chicago origin gas. Chicago CBOB opened March just shy of $1.70 per gallon before promptly spiraling lower in the first week of trade to settle around $1.40 per gallon. This represented a discount of nearly 50 cents a gallon to NYMEX RBOB futures. Various sources attributed the decline to traders liquidating transitional 13.5-lb gasoline inventories ahead of the mid-month switch to low-RVP, summer-grade gasoline. Only a few days later, rumors of an operational disruption at a large regional refinery, and resulting bid interest from that large gasoline producer, sent Chicago 13.5-lb CBOB surging. Compounding the issue, supply of that RVP gasoline was extremely tight, given many refineries had turned their production efforts toward the summer grade gas ahead of the required transition. In three trading days, regional gas increased 20 cents per gallon to roughly $1.57 per gallon, only a 25-cent discount to NYMEX RBOB. •

PADD 3 Wholesale vs. DOE Retail Diesel

PADD 3 Gulf Coast

FN360

Source: Energy Information Administration (EIA)

Houston Shipping Channel Closures Choke Movement through the Nation’s Refining Hub According to data collected by the U.S. Energy Information Administration (EIA), nearly 20 percent of the nation’s refineries, possessing a third of the industry’s refining capacity, proudly call Texas their home. A significant number of these facilities rely on the Houston ship channel for both crude oil imports and refined product exports, whether directly or indirectly. So, after suffering several unexpected closures over the month of March, a backlog of crude and refined product vessels quickly formed outside of Houston, denying one of the country’s most important refining hubs its very lifeblood. Early in the month, foggy weather caused intermittent closures of the waterway as the Coast Guard halted traffic on safety concerns. Ships began building up in both directions leading to heavy traffic. Then on Monday, March 9th, Coast Guard officials blamed poor visibility for the collision of two ships, spilling MTBE – a gasoline blendstock now banned in the U.S. for its carcinogenic properties – into the busy waterway. The ship channel closed immediately and, at its peak, nearly 100 vessels sat idly while crews worked to clear the spill, barring direct crude deliveries to five refineries with a combined capacity of 1.3 million crude oil barrels a day, or 7 percent of the nation’s daily capacity. According to Oil Price Information Service (OPIS), delayed shipments even drove ExxonMobil to reduce production rates at their 600,000-bpd Baytown refinery on concerns of an inbound crude shortage.

Coastal Diesel Spread to Gulf Coast Pipe

Ultimately the channel re-opened to twoway trafﬁc on Friday, March 13th, but not before costing coastal markets along the Gulf of Mexico and Atlantic (PADD 1) dearly. After four days without reﬁned product shipments, several markets, including the state of Florida, cringed as local fuel prices surged ahead of comparable regional cash values. •

Source: Oil Price Information Service (OPIS)

“ According to data collected by the U.S.

Energy Information Administration (EIA), nearly 20 percent of the nation’s refineries, possessing a third of the industry’s refining capacity, proudly call Texas their home. A significant number of these facilities rely on the Houston ship channel for both crude oil imports and refined product exports, whether directly or indirectly.”

PADD 4 Wholesale vs. DOE Retail Diesel

PADD 4 Rocky Mountain

FN360o Source: Energy Information Administration (EIA)

Salt Lake City Diesel Soars following Tesoro’s Prolonged Maintenance Relatively isolated from its neighboring PADDs, the Rocky Mountain region (PADD 4) offers a uniquely complicated supply structure. According to the U.S. Energy Information Administration (EIA), PADD 4 distillate production roughly matches its consumption, leaving only a small volume available for export to PADDs 2 and 5; though total exports nearly equal imports from other areas of PADD 2, resulting in balanced net receipts between PADD 4 and surrounding markets. Consequently, supply disruptions in other regions rarely impact PADD 4 markets. Conversely, disruptions in PADD 4 often lead to extremely tight

refined product allocations, uncontrolled price increases, and longer recovery times as arbitrage opportunities prove few and far between. Along those lines, Salt Lake City (SLC) — a key refining market, centrally-located and inaccessible to outside supply — began the year as one of the cheapest pull points in the region, but refinery issues in early March quickly increased refined product prices to more than $2.20 a gallon, making it one of the most expensive places to pull diesel in the nation.

Salt Lake City Wholesale Diesel

FN360

Source: Oil Price Information Service (OPIS)

PADD 4 Rocky Mountain

While some amount of the market’s nearly 60-percent gain fell in line with the national average, which rose more than 33 percent during a six-week period, Salt Lake City’s unique supply situation compounded premiums brought on by seasonal maintenance at Tesoro’s 58,000-bpd refinery. Normally, the winter chill prompts greater distillate demand across the region, but Salt Lake City experienced its warmest winter on record this year, making the market’s dramatic rise that much more surprising. Consumers typically enjoy their lowest refined product prices during the fall and early winter months, but warmer temperatures generally bring refinery maintenance and, consequently, higher prices. Though rack prices eased near the quarter’s close, the majority of refinery maintenance in the Greater Salt Lake City area — home to all six Utah refineries — will still occur in the spring and summer months due to the favorable weather conditions. Expect further disruptions in coming months and generally tight supply across the region. •

“While some amount of the market’s nearly 60-percent gain fell in line with the national average, which rose more than 33 percent during a six-week period, Salt Lake City’s unique supply situation compounded premiums brought on by seasonal maintenance at Tesoro’s 58,000-bpd reﬁnery.”

31 33

PADD 5 West Coast, AK, HI

PADD 5 Wholesale vs. DOE Retail Diesel

FN360o Source: Energy Information Administration (EIA)

Torrance Refinery Explosion Shocks Los Angeles Gas Market As most Los Angeles locals were finishing their first cup of coffee the morning of February 18th, an uncontrolled explosion tore through the gasoline processing unit of ExxonMobil’s 155,000-bpd Torrance refinery, injuring four contract workers and blanketing the area with smoke and ash. Residents reported shockwaves as far as two miles away and a health advisory urged locals to remain indoors until the dust settled. Reports from emergency response officials and others with knowledge of the facility’s operations suggested contractors attempted to fix the fluid catalytic cracker’s (FCC) expanders when an injection of ammonia created a pressure buildup, leading to the electrostatic precipitator’s (ESP) explosion. Union leaders for the United Steelworkers (USW) pointed to the incident as proof for their concerns regarding safety in the nation’s refineries and chemical plants. The State of California is not known for its light touch with refiners, either. In the past, state prosecutors levied significant fines against refiners for lesser infractions and the fallout from February’s blast may discourage interest from potential investors. Consumers immediately felt the pinch, even at the retail pump, since ExxonMobil’s Torrance refinery 34

PADD 5 West Coast, AK, HI “ Consumers immediately felt the pinch, even at the retail pump, since ExxonMobil’s Torrance reﬁnery covers a large percentage of southern California’s gasoline demand.”

covers a large percentage of southern California’s gasoline demand. Immediately following the news, Los Angeles cash prices surged as much as 11 cents a gallon, exceeding NYMEX futures by 44 cents a gallon and driving CARB gasoline basis values to 17-month highs. The graph at left shows basis values rising steadily since spring reﬁnery maintenance and the United Steelworkers’ (USW) strikes ﬁrst impacted gasoline production in mid-January. According to the California Energy Commission (CEC), inventories of California-grade gasoline and diesel both fell sharply as production disruptions ate into available resources. •

Los Angeles CARB Gasoline Basis

FN360

Source: Oil Price Information Service (OPIS)

Oregon Legislation Adopts California Clean Air Look-Alike Program On March 12th, Oregon Governor Kate Brown signed SB 324, removing the December 31st sunset clause of the state’s Clean Fuels Program and paving the way towards fully implementing its Carbon Intensity (CI) program. Structured much like California’s current Low Carbon Fuel Standard (LCFS) program, Oregon’s Clean Fuels Program will set increasingly stringent CI thresholds, requiring importers and in-state producers alike to offset carbon emissions from fossil fuels with compliance certiﬁcates on an annual basis. For the purposes of the Clean Fuel Program, importers will be deﬁned as the party claiming “ownership title to transportation fuel from locations outside Oregon at the time it is brought into the state…” Oregon will also adopt a similar method for calculating carbon intensities as used by the California Air 35

Resources Board (CARB). The Oregon Department of Environmental Quality (DEQ) will contact regulated parties and credit generators to ensure their timely registration. Any companies unsure of their regulatory obligations should reach out to Oregon DEQ. Compliance obligations based on CI will not begin until 2016. However, regulated parties are required to participate in the program for the 2015 “reporting only” baseline session. In addition to removing the sunset clause, SB 324 also provided program exemption language for importers bringing in less than 500,000 gallons of combined gasoline or diesel fuel in any calendar year. • © 2015 Mansfield Energy Corp.

Canada Canadian Rig Counts Decline on Oil Market Rout While domestic crude oil producers shuttered nearly half of all rigs during the first quarter, Canadian rigs declined at an even more alarming rate, losing nearly three-quarters (73%) of all operating rigs over a 10-week period. Falling from its January 16th peak of 440 rigs, the nation’s total rig count fell to only 120 during the week ending March 27th. Of course, Canadian producers manage wells unlike U.S. drillers. As illustrated below, first quarter rig counts always swell before the mid-spring culling. Therefore, while rig counts started the year with seemingly devastating declines, history shows Canadian rig counts typically retreat more than 60 percent between its early-February peak and the quarter’s end. When compared to the industry’s 5-year average count, the first quarter ended with half its usual rigs, mirroring declines seen in the States.

Canadian Rig Counts

FN360o Source: Baker Hughes

Despite the nation’s rapidly-declining rig counts, Western Canada Select (WCS) — the benchmark for Alberta’s heavy, sour crude — fell below $30 a barrel in mid-March for the first time in six years, narrowing its cost advantage to WTI to less than $14 a barrel. Traded as a discount to WTI crude oil futures, WCS once offered refiners a roughly $20-a-barrel savings over lighter domestic products due to its heavier gravity and increased refining demands, but discounts proved unsustainable as WTI futures slid to multi-year lows. Already a favorite of Midwest refiners, but requiring significant upfront capital to adopt, Canada’s heavy, sour crude may be a hard sell to newcomers if analyst predictions of even 36

Canada

WCS Discount to WTI Crude

“ With nearly 80 percent of the nation’s

crude oil output exported to the States, producers can’t afford to lose this customer base and new demand is highly unlikely, limiting the industry’s 2015-16 potential. ”

FN360o Source: Bloomberg

lower domestic crude values prove true. With nearly 80 percent of the nation’s crude oil output exported to the States, producers can’t afford to lose this customer base and new demand is highly unlikely, limiting the industry’s 2015-16 potential. Forecasts depict a 30-percent drop in revenues from oil exploration, reﬁning, and peripheral services this year. Analysts expect the market’s continued rout to discourage Canadian oil ﬁeld capital spending, slashing estimates by a third from $69 billion last year to

$46 billion by the end of 2015. At the same time, reduced oil field activity leads to declining refined product demand as generators, pumps, vehicles, excavators, trains, and more slow consumption of distillates without demand for crude oil. Finally, look for tax revenues to decline significantly in the next year. Alberta alone collected over 23 percent of its $338 billion 2013 GDP from the energy sector — by far its largest contributor. Until the international supply imbalance resolves, consumers may save at the pump, but they’ll pay for it in government services. •

Weather and Power Outages Contribute to Tightness in Greater Toronto Area Extreme weather conditions and a disruptive power outage in the Greater Toronto Area (GTA) contributed to severe supply allocations in the ﬁrst quarter. Blamed on freezing rain and road salt on the city’s hydro poles, Toronto’s March 3rd power outage impacted over 250,000 residents. Several fueling stations in the area ran dry on gasoline in the days following the outage, producing a snowball effect as distribution companies long-hauled product into the GTA from nearby supply points, such as Ottawa and Sudbury. While snow and a single power outage may not seem concerning to most consumers — how could even a severe power outage really impact supply, after all? — the Toronto market operates on a strict 37

just-in-time system, requiring lengthy periods of recovery following any supply disruption. Shell Canada station owners originally attributed the tightness to an incident at the company’s Sarnia reﬁnery, but a Shell spokesman later conﬁrmed issues stemmed from weather-related disruptions. Short on regular gasoline, station owners found themselves discounting premium products to satisfy demand while remaining competitive. •

Renewable Fuels

Feedstock Frenzy As with any manufacturing process, producers calculate profit margin as sales price minus all expenses. Biodiesel producers and refiners both rely on the same calculation, yet their inputs differ significantly. While refiners enjoy an almost-perfect correlation between their raw material costs and product price — 0.956 last year when comparing WTI crude futures and NYMEX heating oil contracts — biodiesel producers vying for the same market share as petroleum refiners suffer a considerably weaker — almost-inverse — correlation of -0.566.

Soybean Oil vs. WTI Crude Oil

FN360o Source: Bloomberg

Since more than 90 percent of soybean oil, the primary component of biodiesel, goes to edible products — cooking oil, margarine, mayonnaise, and shortening, for instance — and accounts for a relatively small portion of the nation’s energy portfolio, soybean oil exudes little pressure on the heating oil market. Conversely, heating oil prices along with federal compliance certificate (RIN) values demonstrate a growing influence on soybean prices. Already this year, the soybean-heating oil spread (BOHO) hit both a five-year low (January 29th, $0.5587/gal.) and a twenty-month high ($0.8081/gal.). Lower BOHO values generally translate to reduced production costs for biodiesel producers, which in turn makes biodiesel more economical for diesel blending. Early in the first quarter, soybean oil futures declined more than 11 percent over the course of eight trading days not in response to crude oil’s collapse, but as a result of record soybean harvests in Brazil and Argentina. As the graph on the next page illustrates, values recovered much of their losses over the next month before anticipation of increased biodiesel imports and an encouraging domestic planting season deflated prices once more. 38

Soybean Oil Futures

Renewables

“ Early in the ﬁrst quarter, soybean oil futures

declined more than 11 percent over the course of eight trading days not in response to crude oil’s collapse, but as a result of record soybean harvests in Brazil and Argentina.”

FN360

Source: Bloomberg

Surging petroleum inventories and restrictive geopolitical sanctions limit crude oil’s upward potential, leaving renewable fuel producers to anxiously await the Renewable Fuel Standard’s (RFS2) ﬁnal approval and the reinstatement of the $1 biodiesel blender’s tax incentive to reenergize popularity amongst consumers. •

Shuck Corn out of the RFS? In late February, Senators Pat Toomey (R-Pa) and Dianne Feinstein (D-Ca) introduced the Corn Ethanol Mandate Elimination Act of 2015, calling for the removal of corn ethanol from the Renewable Fuel Standard. Considering the industry is still waiting for a 2014 Renewable Fuel Standard update, it almost seems a moot point, but ethanol producers and lobbyists intend to fight the legislation nonetheless. The bill’s supporters argue ethanol blending requirements increase fuel prices and vehicle maintenance expenses while driving food prices higher, sowing toxic levels of nitrogen-rich fertilizer along critical waterways, and burning high-carbon fossil fuels — mostly coal — to produce renewable, lowercarbon blending components, resulting in a net increase to greenhouse gas (GHG) emissions and undermining the goals of the program. Opponents of the bill claim analysts consistently misjudge ethanol’s influence over food prices. While it’s true corn values nearly tripled between 2005 and 2008 — a fact the World Bank attributed to the federal government’s 10-percent ethanol blending requirement — the Organization for Economic Cooperation and Development (OECD) contradicted the group’s findings a month later, warning “the impact of current biofuel policies… should not be overestimated,” and spotting ethanol’s influence at only 7 percent of the overall price. This year, record crop yields contributed to the commodity’s lowest values in recent history; yet food prices remained elevated, challenging supporters’ arguments. Furthermore, increasingly efficient 39

farming methods now result in surplus corn stocks, so long as weather conditions remain favorable. Consequently, ethanol retains its discount to gasoline prices, despite the petroleum market’s sharp decline. Without federal support for existing corn-based technologies, renewable industry advocates worry the void created would only give way to increased petroleum usage, dependency on foreign oil, and pollution while discouraging new biofuel technologies. Supplementing the nation’s gasoline inventories for over ten years now, corn-based ethanol relieved pricing pressure prior to the energy boom and cemented the United States’ role as the world’s largest ethanol producer by 2005. Last year, producers published record proﬁts, netting $54.4 million and more than doubling the previous record $25 million (2007). For these reasons, it’s unlikely the government will abandon its blending mandates just as the industry hits its stride. So, don’t expect those “contains up to 10% ethanol” stickers to disappear anytime soon. •

Renewables

RINterference

Biodiesel producers have grown accustomed to D4 RINs running interference against more competitively priced petroleum-based distillates, creating leverage for a product inherently dependent upon federal mandates for demand and tax rebates for proﬁts. Consequently, a thriving market has sprung up around biodiesel RINs, compensating for the product’s disadvantaged price at the rack. At the start of the year, 2015 biodiesel RINs surged to $1.03 per RIN amid regulatory angst while maintaining a premium of roughly 10 cents over previous year RINs. As such, 2014 RINs peaked at only 90 cents per RIN before quickly shedding nearly a quarter of their value between the second and third weeks of January. Spreads have since corrected as both vintages calmly drifted lower through February and March to 20 cents below their peak and an 8-cent spread to one another.

D4 Biodiesel RINs

FN360o Source: Oil Price Information Service (OPIS)

Similar to biodiesel RINs, ethanol (D6) RINs enjoyed a sudden, albeit brief, surge shortly after the start of the New Year before losing roughly a quarter of their value in the coming weeks. Unlike D4 RINs, however, ethanol vintages maintained close spreads throughout the quarter; though it’s important to note which vintage held the lead for much of the quarter. Market watchers commonly — and often incorrectly — assume recent pricing anomalies stem from the EPA’s failure to produce a ﬁnalized 2014 Renewable Fuels Standard (RFS). Well, this is one time watchers have it right. Common sense would suggest current year RINs hold greater value because they may be retired against this year’s Renewable Volume Obligation (RVO) without limits, while only a small percentage of 2014 RINs may be carried forward to meet 2015 obligations. Of course, buyers typically know their obligated volumes for the previous year by now, as well. This could mean obligated parties are preparing for an unexpected increase to their 2014 RVOs, generating increased demand for 2014 ethanol RINs. •

D6 Biodiesel RINs

FN360o Source: Oil Price Information Service (OPIS)

Natural Gas

Domestic Natural Gas Prices Prompt NYMEX futures ended 2014 below the $3/mmBtu barrier for the first time since 2012. Typically, prices would rebound in the first quarter on increasing winter demand, but even a wintery one-two punch Ali could be proud of didn’t boost prices above the mark for long. By the close of the quarter, futures had quietly fallen into the $2.60/mmBtu range. Heavy snowfall and persistently-cold temperatures along the East Coast supported Northeast basis markets in cash trading. Meanwhile, New England residents experienced one of their toughest winters on record and, if not for significant YoY increases to liquefied natural gas (LNG) shipments to the region, demand would have far outstripped supply. The interior of the country suffered brief winter extremes, but resulting price action was muted relative to eastern markets. In California, winter came and went with little effect and even less snow, exacerbating the state’s ongoing drought and raising concerns for hydroelectric power generators, but hardly impacting natural gas values. As evidenced by the chart below, challenges still remain in meeting winter peak gas demand in several major market areas. At the same time, the impact of the region’s underdeveloped pipeline network becomes clear as buyers near the Marcellus shale hub (Dominion South Point) enjoyed consistently lower prices than consumers only a short distance to the northeast. While natural gas supplies in Ohio and western Pennsylvania easily outpace local demand, pipeline operators struggle to connect those abundant resources to markets in need.

Seasonal Natural Gas Prices Pre-Winter Rates Peak Demand Rates

Natural Gas It could be said that winter weather “rescued” natural gas from further declines — and this may well be true —but some traders still bid downside volatility even as the industry prepared for its injection season. As illustrated below, natural gas volatility remained near historical highs, topping the list when compared to other commodities and demonstrating traders’ uncertainty in the future price of natural gas.

Swing Set

Natural ga volatility has surged, vaulting the market to the top of Wall Street as measured by the size of the average daily price move. Percentage show realized volatility over the course of the year

*Through Feb. 3

Source BNP Paribas

The Wall Street Journal

Forward pricing remained depressed as overwhelming long-term supply cast its shadow over demand. At the quarter’s close, a $4 natural gas contract didn’t appear at any point within the next ﬁve years, presenting natural gas consumers an opportunity to lock in lower long-term hedges before the eventual supply/demand picture unfolds. Mexico, South America, Europe

and the rest of the developed world will likely vie for domestically-produced natural gas in the coming years as pipeline expansions and new LNG export terminals allow shippers to sell cheap, American gas overseas. Pair increased exports with a ﬂoor in marginal production costs and, suddenly, today’s sub-$3 prices constitute bargain rates. •

Natural Gas

Domestic Natural Gas Supply “Go West, Young Methane” Since widespread development of the Northeast’s Marcellus and Utica shale formations began, producers, pipeline operators, state representatives and residents debated the best solutions to alleviating the distribution bottleneck, allowing game-changing supplies to flow throughout energy-hungry markets. Well, an outlet to the west is finally taking shape. The Rockies Express Pipeline (REX) delivered its first westbound shipments of natural gas last year, relieving pressure on Appalachian Basin producers eager for demand. Through a series of phases, REX began shipping in 2009 with the intention of transporting Rockies supply east. However, as shale economics shifted, the production landscape in these markets changed dramatically.

REX pipeline interconnects in Zone 3

Source: Energy Information Administration (EIA)

Offering improved economics over the Rockies’ deep well plays, the Marcellus and Utica shale formations will soon provide several eastern production hubs (shown below) another channel for trapped natural gas supplies, relieving downward pricing pressure caused by the region’s supply imbalance. Capacity is being booked on the Zone 3 East-to-West project which REX plans to bring into service sometime in mid-2015. • 43

Natural Gas

Natural Gas Rig Count Declines, yet Production Presses On While the nation’s natural gas production rates finally show signs of slowing, producers are not out of the woods yet. Largely due to improved drilling efficiency, analysts expect natural gas production to surpass 4 Bcf per day in the upcoming quarter, despite falling rig counts across the nation. As evidenced below, producers achieved greater production efficiency across today’s three main growth plays— Utica, Marcellus and Eagle Ford.

US Major Shale Natural Gas Production Per Rig FN360o

“ Largely due to improved

drilling efﬁciency, analysts expect natural gas production to surpass 4 Bcf per day in the upcoming quarter, despite falling rig counts across the nation.”

Source: Energy Information Administration (EIA)

So long as market prices exceed marginal cost of production, producers will ﬂow gas to cover a portion of their ﬁxed costs. Only when demand increases will a new pricing paradigm for the marginal mmBtu appear. • 44

Natural Gas

Natural Gas Demand As the industry exits the winter 2014-15 withdrawal season, the market will look for any non-weather related demand to surface and offset the continued increase in production. In the search for new demand, the power sector is an obvious place to start. With the summer cooling season’s approach, coal generation retirements will be the center of attention. In total, approximately 13GW of coal-ﬁred generation is set to retire over the course of 2015; though gas-ﬁred generation helps offset some of this loss. As illustrated below, new renewables projects, primarily wind and solar, should also contribute to the mix. •

Scheduled electricity generation capacity additions and retirements in 2015 megawatts

10,000 Annual Net Change: Wind (9,811 MW) Natural Gas (4,318 MW)

8,000 6,000

Solar (2,235 MW)

4,000

Nuclear (1,122 MW)

2,000

Other Renewables (471 MW) Petroleum and Other (-800 MW) Coal (12,922 MW)

0 -2,000 -4,000 -6,000 -8,000

JAN FEB MAR APR MAY JUNE AUG SEP OCT NOV DEC Source: Energy Information Administration (EIA)

Natural Gas

US Natural Gas Exports

Cheniere’s Sabine Pass LNG facility

Over the last decade, rampant development of natural gas wells increased the nation’s output by approximately 50 percent, improving access to cheaper, cleaner fossil fuels while the rest of the world struggles to kick the oil habit through costlier alternatives. However, the industry is preparing to enter a new economic era as it begins exportation of natural gas in earnest. Cheniere’s Sabine Pass, located in Louisiana, will ramp up operations later this year with Trains 1 and 2 coming on line before the four remaining Trains. When fully operational, the facility will prepare 3.5 Bcf of natural gas for export each day. Several other LNG export facilities are under construction including Freeport (TX), Corpus Christi (TX) and Cove Point (MD). In total, FERC approved approximately 8.6 Bcf of daily export capacity to date; though, not all hurdles have been cleared. The DOE now reviews each new proposed facility to determine the project’s impact on U.S. consumers. This clearance is required for all natural gas exports outside the nation’s free trade agreements (FTA). •

Demand South of the Border Although not as proliﬁc as the Marcellus shale of Appalachia, Eagle Ford production continues to increase, as does take away into Mexico — discussed in the previous FUELSNews 360 edition. Eagle Ford’s proximity to the Mexican border, as seen in the map below, makes it ideal for quenching Mexican natural gas demand. Currently, Mexico buys incremental natural gas off the spot LNG market to fuel power generation at a rate of roughly $10/mmBtu. Consequently, shippers hope to replace costlier imports through cross-border pipelines already under construction, expecting to contribute anywhere from 3.8 to over 5 Bcf of domestic natural gas each day by 2018. • Texas

Excerpted NGI’s Map of Nat Gas Pipelines and Shale Plays

Natural Gas

Natural Gas Inventory Winter weather volatility played games with projected end of winter season inventory. A cold November and warmer December warned of a 2011-12 winter repeat in which strong production and mild temperatures led to the lowest spot prices in nearly a decade. However, Mother Nature did not disappoint as temperatures fell below normal in January and February, blanketing northern markets with record snowfall and boosting heating demand.

First quarter storage fell below the 5-year average, as indicated in the graph below, while easily exceeding last year’s rates. By the end of March, over 2,200 Bcf of natural gas had been pulled from inventory over the course of this withdrawal season — not an easy feat considering the approximate 6 Bcf/day gain in production Y/Y. Clearly, weather-induced demand steers the market, leaving less than 40 percent of peak natural gas in the ground as we enter the injection season. •

Working Gas in Underground Storage Compared with the 5-Year Maximum and Minimum

“ A cold November and warmer

5-year maximum - minimum range

Lower 48

5-year average Source: Energy Information Administration (EIA)

December warned of a 2011-12 winter repeat in which strong production and mild temperatures led to the lowest spot prices in nearly a decade.”

Electrical Power

Pricing Power If you had asked 7+ years ago what drove the marginal price of power, the answer would have been coal for much of the country, regulated or deregulated. However, the proliferation of shale natural gas overwhelmed the market in recent years, driving natural gas prices below virtually any regional coal product. The one exception may be coal from the Powder River Basin (PRB) in Montana and Wyoming.

The table below compares the cost of coal from various regions to that of the Henry Hub in Louisiana, the delivery point for NYMEX natural gas contracts. PRB pricing is dramatically less than both Henry Hub and other coal-producing regions; though, transportation often proves costly and complicated. Further, emission limitations and rising costs drove many utilities and merchant generators away from coal altogether.

NYMEX Henry Hub & Coal Commodity Spot Price ($/mmBtu)

Note: Prices do not include transportation which can double the delivered price as is typically the case with PRB

Source: Energy Information Administration (EIA)

Consequently, traders and electric power generators today generally consider markets with natural gas prices in mind, especially on a forward basis, as coal-ﬁred plant retirements are expected to accelerate signiﬁcantly in the coming years. Coal’s replacement also improves transparency to the marketplace as natural gas proves more liquid than most traded commodities. The correlation between natural gas and power allows equating the two commodities via the heat rate in which the fuel is converted to electricity. The chart below provides samples of pool power forward pricing followed by their respective heat rates versus NYMEX natural gas futures.

Forward NYMEX Gas ($/mmBtu) & Power Prices for selected Pools ($/MWh) Pricing as of March 17, 2015

Note: Winter NYISO zone J is driven by natural gas basis as delivered gas into NYC is approximately $9.64/mmBtu

Source: Energy Information Administration (EIA)

Effective Heat Rates (vs. Henry Hub gas-NYMEX futures)

Notice the consistently higher summer heat rates. Typically, the strongest peak power demand occurs during these months, translating to higher heat rates. Summer gas prices tend to remain lower and more stable than winter rates as the power market no longer competes with home heat as temperatures warm. However, summer months also generate greater peak hour demand, requiring natural gas or residual oil units to compensate and driving heat rates signiﬁcantly higher.

Note: If we delivered gas into NYC the effective Heat Rate for NYISO would drop from 30.00 to 10.26

Source: Energy Information Administration (EIA)

In the current state of the market, natural gas is priced to absorb as much power demand as possible. As suggested in the Natural Gas section of this edition, increased supply constantly seeks new demand and power generation appears the most attractive as federal regulations force more coal-ﬁred power plants ofﬂine, leaving a void in the industry’s energy portfolio. •

Power Generation – Supply Stack Evolution Above, we discussed the connection between

CAISO load, net load, and wind and solar output on example weekdays during 2014

natural gas and power along with the heat rates linking the two in forward markets. However, this connection is rarely static, requiring mindful consideration of external forces’ impact on this relationship. External forces, such as solar and wind generation, trickle into forward pricing as evidence and understanding evolves in the cash markets. As the graph below suggests, increased solar and wind generation can impact the electrical grid. The three days selected highlight the volatility of renewable capacity output and the residual impact on net loading of the power grid.

Source: California Independent System Operator (CAISO), Daily Renewables Watch

In 2011, California Governor Jerry Brown signed legislation requiring one-third of the state’s electricity to stem from renewable energy by the end of 2020. In conjunction with this mandate, California regulatory agencies incentivized individuals and corporations to install solar and wind generation through grants and credits, lowering units’ installed cost considerably. There are many environmental and economic benefits to such legislation; though, unintended consequences also followed, still requiring monitoring and management. As evidenced in the data above, tapering solar and nearly non-existent wind generation on October 22nd left two significant ramps in load, which other sources inevitably covered. Not all generation is created equal and each ramp would likely require quick-start units in the base load portion of the stack. Quick-start units are essentially peaking units, costing more to build per MW and — depending on the region — may consume more expensive fuels, such as heating oil. Thus, renewable energy’s overall cost and/or benefit to the grid is not always clear. • 49

Transportation & Logistics Macroeconomics Favor the Transportation Industry, Despite Short-Term Slump Truck tonnage made its strongest gains in over a year this quarter while posting its fourth consecutive monthly gain, adding 6.6 percent since January of last year and 1.2 percent since December. Factory output seems to be driving the increase with demand for steel used in the auto industry leading the way. The Freight Transportation Services Index (TSI) was off 0.2 percent in January, declining for the second straight month and illustrating a decline in freight carried by for-hire transporters. While rates declined at the start of the year, January’s index fell only 0.6 percent below the all-time high of 123.6, posted last November. The ATA requested the Federal Motor Carrier Safety Administration (FMCSA) make alterations to its Compliance, Safety, and Accountability system (CSA) following the Government Accountability Ofﬁce’s (GAO) recent criticism. During a hearing in front of the Senate Commerce Subcommittee on Surface Transportation and Merchant Marine Infrastructure, Safety, and Security, the GAO chastised the FMCSA for ignoring its concerns regarding the quantity and quality of data used in determining CSA scores, claiming the FMCSA’s methods fail to effectively identify high-risk carriers.

Transportation Services Index

Source: Bureau of Transportation Statistics

The TSI illustrates month-to-month changes in freight shipments by transportation mode in both tons and ton-miles. Rail and pipelines both grew in January while air, truck, and waterborne transportation all declined. Class Eight truck sales continue to rise, jumping 38 percent in December to ﬁnish the second-best year on record, according to ACT Research. December sales marked the fourth-highest month on record and the third straight month reporting 40,000 or more units sold. OEM’s attributed the growth to strong demand for new technology and improved fuel economy of the latest models. Meanwhile, ACT Research reported trailer orders declining slightly; though they remain signiﬁcantly higher than orders taken last year. 50

Fueled by ﬂeets’ increasingly-limited capacity, rising economic expectations, and robust cash reserves, the trucking and logistics industry will likely report strong acquisition rates this year, piggybacking on an extremely active 2014. Analysts initially expected acquisitions to slow in 2015, but the combination of an aging workforce and restrictive federal regulations forced ﬂeets “to look outside organic growth,” according to Andy Ahern, CEO of Ahern & Associates. While the cost of acquisitions are on the rise, they provide companies quick, easy access to drivers. •

Transportation & Logistics

Bill Aims to Block Public Display of CSA Pennsylvania Representative Lou Barletta introduced a new bill arguing an old point this quarter. Backed by legislators from South Dakota and Tennessee, Barletta aims to halt the public display of trucking company safety scores, claiming the program uses data with “no causal connection” to collisions. The bill would not hide scores from law enforcement agencies, however. The bill would simply prevent erroneous or misleading data collected under the CSA program from unfairly inﬂuencing carrier selection. Known as the Safer Trucks and Buses Act of 2015 (H.R. 1371), Barletta’ proposal would remove CSA scores from public view while improving its value to law enforcement personnel. To accomplish these goals, the CSA would instead utilize only safety data determined to be predictive of motor carrier crashes while emphasizing accuracy. The bill would require controls for variations

between state- and self-reported data in addition to appropriate accounting for geographical differences with respect to enforcement and crash fault. Supporters also expect the CSA to adequately address differences between bus and truck companies effectively, considering their vehicle operation, routes, and cargo vary so widely. Finally, Barletta insists current assessment methodologies unjustiﬁably hinder small motor carriers as a result of limited safety data. While Barletta had no trouble convincing fellow congressmen the CSA ranking system has its ﬂaws, not everyone agrees public access to data should be restricted. Without publicly-accessible rankings, consumers would lose potentially vital insight during the carrier recruitment process. While critics and supporters agree the program owes users an accurate interpretation of carrier safety, revisions will likely be needed before carriers are held fully accountable for the safety of their drivers, their fellow motorists, and their cargo. •

“ While critics and supporters agree the program owes

users an accurate interpretation of carrier safety, revisions will likely be needed before carriers are held fully accountable for the safety of their drivers, their fellow motorists, and their cargo.”

Transportation & Logistics

Driver Shortage—Sad Fact or Consequence? According to the U.S. Bureau of Labor Statistics, demand for commercial truck drivers should increase by roughly 11 percent — nearly 200,000 new jobs — before the close of 2022. At the same time, the Bureau reports the average commercial truck drivers’ age as 55 years old, earning $38,000 a year, and still driving as much as 60 hours a week. No wonder the industry’s attracting younger drivers at abysmal rates. A fundamental issue exists regarding the shortage of young over-the-road truck drivers in today’s transportation sector. Currently, drivers must be at least 21 years old before pursuing a commercial driver’s license (CDL) and, even then, some carriers won’t hire drivers before the age of 25 due to hirer insurance premiums. Therefore, recent high school graduates seeking work can’t pursue a career in transportation for several years, often leading them to skilled labor where age barriers don’t exist. If carriers won’t target recent high school grads, how can they improve recruitment and compensate for retiring baby boomers in the midst of a driver shortage? Traditionally targeting former military, career changers, early retirees and others who “happen into” the transportation sector, the financial collapse created a new opportunity for carriers: unemployed college graduates. Typically meeting the legal requirements for a CDL, yet failing to find gainful employment with their newly-minted degree, college students often find themselves with limited prospects and a hefty helping of debt. According to a recent study by the Federal Reserve Bank of New York, “roughly 44 percent of recent graduates—meaning those ages 22 to 27 with a B.A. or higher—were in a job that did not technically demand a bachelor’s degree.” Why not trucking?

Underemployment and underemployment rates of young college graduates, 1994-2014*

Source: Source: Economic Policy Institute

* Data for 2014 represent 12-month average from April 2013-March 2014. Note: Underemployment data are only available beginning in 1994, data are for college graduates age 21-24 who do not have an advanced degree and are not enrolled in further schooling. Shaded area denotes recessions. Source: Authors’ analysis of current population Survey microdata

Transportation & Logistics With a growing shortage of drivers — predicted to reach 300,000 by 2020 — and an estimated 16.8-percent of young college graduates finding themselves under- or unemployed, the labor market should be conducive to attract younger drivers. Also favoring carriers, the Bureau’s $38,000 annual salary estimate appears relatively competitive for most recent grads. Federal data suggests more than half of students graduating in the early ‘90s to work in fields not requiring a degree found themselves in jobs paying at least $45,000 when adjusted for inflation. By 2012, fewer than 40 percent could consider themselves so lucky. Worse still, 20 percent instead found themselves in low-wage jobs, earning less than $25,000 a year.

“ Between competitive wages and tuition

reimbursement programs, more 22 to 27-yearold college grads may ﬁnd themselves behind the wheel in a growing industry and carriers may ﬁnally feel some relief from the industry’s 92-percent turnover rate.”

Since the average truck driver earns more than a large percentage of recent college graduates, why aren’t we seeing a wave of graduates pursuing truck driving? It’s possible these new grads, carrying their college debt like a load of bricks, aren’t willing or able to muster the up to $7,000 needed for mandatory CDL driving courses. To combat this issue, many tucking companies now offer tuition reimbursement programs to ease the financial burden while securing a valuable asset. Between competitive wages and tuition reimbursement programs, more 22 to 27-year-old college grads may find themselves behind the wheel in a growing industry and carriers may finally feel some relief from the industry’s 92-percent turnover rate. •

Diesel Exhaust Fluid (DEF) The forward NOLA granular urea curve indicates NOLA-indexed granular urea prices dropping from the $315-per-short-ton range to between $280 and $290 per short ton (st) over the next six months as we move through spring and summer. North American prilled urea, the basis of DEF NOLA-indexed pricing and the key component in DEF’s production, fell to its lowest ﬁrstquarter level in four years. NOLA prilled urea prices have been in the low $300’s/st and even dipping into the high $290 range in March. We expect prices to settle in the mid-to-high $290/st range as we head past the planting season into the summer months.

US Gulf NOLA Urea vs. DEF NOLA

FN360

Source: Green Markets

“ North American prilled urea, the

basis of DEF NOLA-indexed pricing and the key component in DEF’s production, fell to its lowest ﬁrstquarter level in four years.”

Diesel Exhaust Fluid (DEF)

In this issue we want to explain the distinction between agriculturegrade urea — basis for the NOLA index — and automotive-grade urea — a key ingredient in DEF — to understand North American supply/demand and future DEF pricing. It is an important distinction and helps explain the divergence between the DEF supply shortage in North America and dropping NOLA-indexed DEF prices. First, agriculture-grade (or “ag-grade”) urea contains impurities, including metals and alloys, while automotive-grade urea does not. These metals and alloys can damage or disable a diesel power unit’s Selective Catalytic Reduction (SCR) system. In addition, agriculturegrade urea is coated with formaldehyde to prevent clumping. When formaldehyde coating is dissolved in water and run through an SCR unit, a ﬁlm develops on the catalytic converter. The impurities and dissolved formaldehyde (or aldehydes) will degrade an SCR unit over time, leading to replacement costs of between $6,000 and $10,000 per unit. Secondly, automotive-grade urea simply costs more to produce than its ag-grade counterparts. Nitrogen producers are accustomed to manufacturing ag-grade fertilizers, which represent most of their production volume. The manufacturing demands for ag-grade urea are very different from automotive-grade urea. To start, ag-grade fertilizers are consumed two times per year – during the spring and fall planting seasons. On the other hand, North American ﬂeets consume automotive-grade urea on a daily basis. Since nitrogen plants possess limited storage capacity, automotive-grade urea 55

Unloading a barge of agricultural-grade urea

demands a just-in-time production schedule, requiring producers to keep plants running 24 hours a day, 7 days a week, and 365 days a year, similar to refineries. They cannot idle plants for long maintenance seasons or reduce expenses during the off-season, as with ag-grade fertilizer production. Finally, since automotive-grade urea must be ultra-purified, it is more costly to manufacture. It also requires nitrogen plant upgrades and long-term capital investment projects. As a result, the industry’s current automotive-grade urea production capacity falls roughly 50 percent short of demand while ag-grade fertilizer production capacity in North America easily fulfills orders. The supply short is being filled instead by higher-cost imports — dry prilled urea from Asia and liquid concentrate from Europe. As a result of these automotive-grade urea supply/demand imbalances, a growing disconnect exists between the cost of aggrade urea and the implied cost of automotive-grade urea. The NOLA index, which indexes ag-grade urea, is softening during a period when automotive-grade urea prices should be rising. In fact, NOLA-indexed February prices for ag-grade urea were the lowest they’ve been in four Februaries, while most North American nitrogen plants have placed customers on allocation for automotivegrade urea. We believe this discontinuity will put greater pressure on the urea producers and importers to distance themselves from NOLA-indexed pricing in the future. •

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

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

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

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

Mansfield’s National Supply Team Jessica Phillips Renewable Supply & Distribution Supervisor Jessica is based out of Houston, TX and is responsible for nationwide purchasing, hedging, and the distribution of renewable fuels. Joining the Mansfield team in 2009, she has held multiple titles over the years: Contracts Coordinator, Regional Supply Analyst, Senior Strategic Supply Analyst, and as of late, Renewables Supply Supervisor. Jessica has a strong background in refined products scheduling, contracts, optimization and market analysis and is driven to continue to expand her knowledge in renewable and alternative fuels.

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

Nate Kovacevich Senior Supply Manager Before joining the company, Nate worked for Yocum Oil Company as a Senior Trader where his responsibilities included managing the company's reﬁned product and renewable fuels procurement, handling all hedging related activities, and providing risk management tools and strategies to help customers mitigate volatility and price risk. Nate previously worked for FCStone, where he performed commodity research and analysis for customers with agricultural and petroleum related risk, devised and implemented risk management programs and strategies, and executed futures and option orders on all the major exchanges as well as any OTC related transactions. Nate earned his BA in Entrepreneurship and Economics from the University of St. Thomas

Fernando de Agüero President, Mansfield Power & Gas Fernando possesses a broad energy industry experience ranging from regulated utilities to deregulated merchant and retail business. He has launched five privately held energy ventures. Holding positions as CEO of a wholesale natural gas and electric supplier, Chairman, CEO and President of a deregulated retail natural gas marketer, Manager and CEO of a deregulated retail electric provider, Co-Founder, Chairman and CEO of a leading smart grid-enabled prepaid utility solutions and software development company and held various leadership roles spanning strategic planning, finance, business development, commercial operations and trading at AGL Resources, GenOn (formerly Mirant Corporation) and Southern Company.

1st QUARTER Q44

FUELSNews 360° M A RK ET N E WS & INFOR MATIO N

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