FUELSNews 360 - Q3 2013

M A R K E T N E W S & I N F O R M A T I O N

Q2

Q3Q4

Q1

3rd QUARTER

JULY–SEPTEMBER

2 0 1 3

The third quarter of 2013 reflected a slowly improving global economy, with the U.S. and China making sluggish progress while

Europe’s economic struggles continued. Despite projections for a quicker economic recovery, the global economy remains hampered

by high unemployment and relatively weak demand, which affected overall consumer spending and economic confidence.

The U.S. unemployment rate reached 7.3% in August, while the Eurozone’s unemployment rate remained at 12.1%, with Italy,

France and Spain’s unemployment rates above 10% this quarter (Spain’s hit 26.2% in August). Despite numerous attempts to fix

their ongoing economic struggles, Europe remains the biggest point of concern as the global economy struggles to turn the corner.

From a geopolitical standpoint, Middle East issues returned to center stage and made their mark on oil prices. Conflict in Libya

represented almost 1 million barrels per day in disruptions, while Syria’s violence caused a surge in oil prices not seen since May of

2011. As in previous quarters, the market reacted by adding a risk premium to oil prices, especially after some Western countries

announced the possibility of military involvement. Diplomats in Syria and the West reached an agreement after many days of

worldwide tension.

Domestically, the U.S. markets continued to speculate about a possible tapering of the Fed’s Quantitative Easing (QE) program due

to the improving economic conditions seen over the last few months, with the housing sector, the labor sector, and the

manufacturing sector all showing progress. However, the Fed surprisingly left the QE program untouched, with bond purchases

remaining at $40 billion in mortgage-backed securities monthly and $45 billion in long-term treasuries, and with policy rates at

0 to 0.25%. Under the QE programs, the Fed prints a total of $85 billion per month to ensure liquidity in long term bond markets

which keeps interest rates “artificially” low. The Fed restated that the monetary policy will remain active until unemployment falls

under 6.5% or inflation falls under 2%.

Overall, the third quarter reflected a volatile and reactive market once again, with oil prices feeling external influence from the

U.S. dollar, U.S. equities, geopolitics, and supply disruptions. For Q4, experts are forecasting economic improvements in the U.S.

and China, while forecasts for Europe remain fairly mixed.

Q3 2013 Executive Summary

Q2

Q3Q4

Q1

FUELSNews 360° Quarterly Report Q3 2013

Index

FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity

in the oil, natural gas, and refined products industries. The purpose of this report is to provide industry market data, trends and

reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain.

4 Overview

4 July through September, 2013

5 Third Quarter Summary

7 Economic Outlook

7 Global Economic Outlook

9 U.S. Economic Outlook, PPI, CPI

10 Macroeconomic Headlines

12 Fundamentals

12 OPEC

14 Non-OPEC Supply

16 U.S. Crude Production

19 Domestic Crude Oil Inventories & Days of Supply

20 Refinery Inputs

21 Crack Spread by Crude Slate

22 Domestic Production vs. Imports

24 U.S. Fuels Dependance & Consumption

25 U.S. Exports & Retail Diesel

26 U.S. Retail Gasoline Prices & Diesel Forecast

27 Diesel Spreads per PADD

30 FUELSNews 360° Commentaries

30 Commentaries; Andy, Sara and Dan

31 Commentaries; Hannah and Jorge

32 Commentaries; Scott, Chris and Evan

34 Regional View

34 PADD 1, 1A, New England

37 PADD 1B & 1C, Central & Lower Atlantic

39 PADD 2, Midwest

39 PADD 3, Gulf Coast

41 PADD 4, Rocky Mountains

43 PADD 5, West Coast, AK and HI

44 Canada

47 Alternative Products

47 Natural Gas50 Renewable Fuels

52 FUELSNews 360˚ Supply Team

As seen in the first semester of 2013, oil prices remained volatile during the third quarter. Prices for WTI crude oil ranged from alow of $97.99 in early July to a high of $110.53 in early September before settling at $102.33. The main price drivers behindthese moves were geopolitical concerns, economic reports, and external pressure from the U.S. dollar and equities.

Overview

July 2013 through September 2013

4 © 2013 Mansfield Energy Corp.

Source: Bloomberg Finance L.P.

WTI trades higher than Brent, first time in 3 years

WTI stocks decline 9.4 million barrels

Concern on Fed Stimulus reduction

U.S. says it will hold Syria accountable

U.S. unemployment falls to 7.3%

102.83

Third Quarter 2013

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Hi: 320.83

Hi: 110.53

Hi: 15676.94

Hi: 313.43

Low: 262.30

Low: 14776.13

Low: 97.99

Overview

Third Quarter Summary


266.85

Summary, Third Quarter 2013

Oil prices finished the third quarter of 2013 higher, while RBOB gasoline dropped and heating oil finished in positive territory.Crude oil futures (green) increased and settled at $102.33, while RBOB gasoline (yellow) dropped to $2.6347, and heating oil(white) increased to $2.9710. The Dow Jones, the main indicator for stock market price movement, rose in comparison to Q2 andsettled at 15,129.67.

102.83

298.89

15258.24

Source: Bloomberg Finance L.P.

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“Simply put, the global economic recovery has underperformed so far in the year 2013. Despite the fact that some countries have introduced stimulus packages and lowered interest rates, the economic crisis persists.”


The global economy performed marginally better in the third quarterof 2013 compared to Q2, as the latest macroeconomic reportsreflect economic improvements in several countries around theworld, including the U.S., China, and Europe. With 10.4% growthin August, Chinese industrial production has grown at the fastestrate in over 18 months, averaging 0.7% month-to-month growthduring Q3. Despite a disappointing first half of the year, the Chineseeconomy remains hopeful for improvements in GDP growth duringQ3 and Q4, hoping to get back on track in order to meet theforecasted 7.5% yearly growth target.

The European economy remains the primary point of concern forthe global economy. High unemployment and timid industrialproduction suggests there are still many unresolved issues thecountries must address in order for the European economy to beginmaking forward progress. As of the end of August, the E.U.’sunemployment remained at 12.1%, with Spain’s unemployment at

26.3%, Portugal’s at 16.5%, Italy’s at 12%, and France’s at 11%.Manufacturing and industrial output struggled this quarter, with July’sindustrial production levels dropping 1.5%, the steepest decline sinceSeptember 2012. On a yearly comparison, E.U. industrial productionis down 2.1%.

Simply put, the global economic recovery has underperformed so farin the year 2013. Despite the fact that some countries haveintroduced stimulus packages and lowered interest rates, theeconomic crisis persists. Some of the biggest factors that continue toaffect global economic growth include geopolitical instability, as wellas timid consumer spending and extremely high unemployment insome regions. However, the improvements in Q3 have translatedinto mild optimism in some regions (particularly in the U.S.), asconsumers are beginning to see improvements in the labor andhousing sectors, while econometrics for the remainder of 2013 and2014 reflect projected growth.

“Manufacturing and industrial output struggled this quarter, with July’s industrial production levels dropping 1.5%, the steepest decline since September 2012.”

Global Economic Outlook

“With the U.S. economy making some progress in its main economic sectors, many believed it was only a matter of time until the Fed’s QE program would begin to see a reduction.”


The U.S. economic recovery seems to have picked up a bit during the third quarter of 2013. Though some remain skeptical about theeconomic data (some could argue that the jobless claims improvements do not factor in the discouraged workers, for example), the latesteconomic reports suggest the U.S. labor, manufacturing, and housing sectors have all shown improvements during Q3. Furthermore, the latestrevision for Q2 GDP reflected a real GDP growth of 2.5% (previously 1.7%), exceeding expectations of a possible 2.2% increase. The upwardrevision to GDP growth was mainly due to a strong upward revision to net exports, as well as improvements to inventories and nonresidentialstructures investments. With the U.S. economy making some progress in its main economic sectors, many believed it was only a matter oftime until the Fed’s QE program would begin to see a reduction. Some experts went as far as saying the Fed would begin to taper theirmassive printing program by $10 billion per month.

Producer Price Index (PPI) Month-to-Month ChangeJuly August September0.0% 0.3% 0.2%

C

PPI Following a flat month of July, producer prices acceleratedin August, mainly due to higher food and energy prices. The Augustproducer price index rose 0.3%, while the core rate, which excludesboth food and energy, was flat after a 0.1% increase in July. Forthe month of September, experts were anticipating a 0.2%increase in prices ahead of the October 11th official report.

CPI Similar to producer prices, consumer prices increased 0.2%and 0.1% in July and August, respectively. The core CPI, whichexcludes food and energy prices, edged up 0.2% in July and 0.1%in August. For the month of September, experts were expecting a0.2% increase in prices ahead of the October 16th official report.

Consumer Price Index (CPI) Month-to-Month ChangeJuly August September0.2% 0.1% 0.2%

U.S. Economic Outlook


Macroeconomic Headlines

Brazilian Imports Continue Despite the Weakening of the Brazilian RealBrazilian imports of gasoline and diesel fuel continued during the third quarter of 2013despite the weakening of the Brazilian Real in comparison to the U.S. Dollar. Since the endof Q1, the Brazilian Real has weakened nearly 26%. However, Brazilian imports of diesel fueland gasoline have remained steady as the country’s refinery infrastructure has not been ableto keep up with demand. To put things in perspective, Brazilian state-owned companyPetrobras imports approximately 8 diesel cargoes (approximately 32.8 million barrels) permonth from the U.S., as well as gasoline from the E.U. and U.S. when the economics arefavorable (depending on ethanol prices and demand). Despite the weakening currency,Petrobras has continued U.S. product imports (mainly diesel) even though the substantiallyhigher product price will not pass down to consumers (due to the fact Brazilian domestic fuelprices are regulated by the government). Despite having to pay hefty prices, Petrobras expectsto continue importing the amount of fuel it needs, as domestic demand has outstrippedBrazilian refinery outputs. According to OPIS, Brazil's reported gasoline imports in July totaled569,914 barrels, which represents a drop of 8.3% from the 621,319 barrels imported inJune. Furthermore, Brazil's diesel imports totaled 4.842 million barrels in July, showing anincrease of 79.7% from the 2.695 million barrels imported in June.

“Despite the weakening currency, Petrobras has continued U.S. product imports (mainly diesel) even though the substantially higher product price will not pass down to consumers (due to the fact Brazilian domestic fuel prices are regulated by the government).”


Middle East Chaos Threatens Production

Volatility in the Middle East played a key role in oil prices during the third quarter of 2013, with Egypt, Syria and Libya taking the spotlight.According to Reuters, Libya's crude oil production is expected to slowly recover to pre-war levels following production issues throughout thequarter. Output had collapsed to below 150,000 bbl/d following protests between the government and armed rebel groups. By mid-September, Libyan production reached 620,000 bbl/d (still substantially lower than its pre-war capacity of 1.6 million bbl/d) as major westernfields ramped up output after protesters agreed to reopen them. By September 19th, 5 out of the 9 Libyan export terminals were operating.

Egypt and Syria’s situation also caused some turmoil inthe market, as the Egyptian president was overthrownand locked down by the military, while Syria’s use ofchemical weapons prompted a reaction from theinternational community that almost resulted in militaryaction. The latest of these events caused spiriteddebates within European and American communities,with most polls opposing the military involvement in theMiddle Eastern country. After several weeks ofnegotiations, Syria agreed to turn over their chemicalweapons arsenal in an attempt to pursue a diplomaticagreement with Western countries.


Fundamentals

OPEC Supply to Decrease in 2013 and 2014 Total OPEC liquid fuels production is expected to decline by 0.8 million barrels per day (bbl/d) in 2013, and 0.2 million bbl/d in 2014.According to the EIA, these declines reflect unplanned outages of crude oil production among some OPEC producers, as well as decreases inSaudi Arabia's production in response to the increase in non-OPEC supply. The chart below reflects estimated unplanned OPEC productionoutages per country between January, 2011 and July, 2013. Note the disruptions in Iran and Libya, which have been a hot topic over thelast two years, as they caused disruptions to global supply which translated into higher oil prices.

Source: EIA

Estimated Unplanned OPEC Crude Oil Production Outages (Thousand Barrels per Day)

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“Total OPEC liquid fuels production is expected to decline by 0.8 million barrels per day (bbl/d) in 2013, and 0.2 million bbl/d in 2014. ”

Fundamentals


OPEC Basket PriceDue to disruptions in Libya and Iran’s sanctions discussed above, the OPEC basket price has seen incrementally higher prices during the thirdquarter of 2013. As seen on the chart below, the OPEC Basket Price, which is a weighted average of oil prices collected from various oilproducing countries, has traded between the $104 – $109 range during Q3 after trading relatively flat, between $100 and $102 during Q2.

OPEC Basket PriceA weighted average of oilprices collected fromvarious oil producingcountries. This average isdetermined according tothe production and exportsof each country and is usedas a reference point byOPEC to monitor worldwideoil market conditions.

s

Furthermore, total OPEC surplus crude oil production capacity in the second quarter of 2013 averaged 2.2 million bbl/d, which isapproximately 0.2 million bbl/d above last year’s level, but nearly 1.0 million bbl/d lower than the historical three-year average. Lookingahead, the EIA projects OPEC surplus capacity to increase by 2.5 million bbl/d in the fourth quarter of 2013, and by 4.6 million bbl/d in thefourth quarter of 2014. Note that these estimates do not include additional capacity that may be available in Iran, but is currently offline dueto the sanctions from the U.S. and E.U.

Source: EIA

OPEC Surplus Crude Oil Production Capacity (Million Barrels per Day)

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Source: OPEC

OPEC Basket Price (dollars per barrel)

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FundamentalsNon-OPEC Supply to Increase Through 2014 Non-OPEC crude oil and liquid fuels production is expected to increase by 1.6 million barrels per day (bbl/d) in 2013 and by 1.4 millionbbl/d in 2014. As seen on the chart below, the main contributing area to non-OPEC production growth is North America, where productionis forecasted to increase by 1.4 million bbl/d and 1.1 million bbl/d in 2013 and 2014, respectively. According to the EIA, North Americanproduction has surged over the last few years, mainly due to continued production growth in U.S., onshore tight oil formations andCanadian oil sands.

Source: EIA

Non-OPEC Production Growth (Million Barrels per Day)

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FundamentalsThe chart below reflects Non-OPEC projected production levels for 2014. The EIA expects production growth from a number of other areas,including Central America, South America, Asia, and Oceania. In Central and South America, liquid fuels supply is expected to increase by 0.2million bbl/d in 2014, mainly due to increases in Brazil's offshore, pre-salt output. Furthermore, the EIA expects total liquid fuels supply inAsia and Oceania to increase by 0.2 million bbl/d in 2014. The increase in supply in 2014 in this region comes mostly from productiongrowth in China, Malaysia, and Australia. As for the U.S. and Canada, the EIA expects production levels to reach 13.20 million bbl/d and4.38 million bbl/d in 2014, respectively, which would account for annual production growth of 1.01 million bbl/d in the U.S., and 123,000bbl/d production growth in Canada.

Source: Short-Term Energy Outlook, September 2013

Non-OPEC Projected Production - 2014 (Million Barrels per Day)

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Fundamentals


U.S. Crude Oil Production per StateMost of the growth in U.S. crude oil production has come (and is expected to continue for the next few years) from the drilling in tight oilplays in the onshore Williston, Western Gulf, and Permian Basins. In fact, offshore production from the Gulf of Mexico is expected toaverage 1.3 million bbl/d in 2013 and 1.4 million bbl/d in 2014. Furthermore, on a state contribution analysis, the biggest contributions in2013 came from Texas followed by Alaska, North Dakota, California and Oklahoma. As seen on the graph below, Texas contributed with2,525 thousand bbl/d (35%), followed by Alaska’s 1,213 thousand bbl/d (14%), North Dakota’s 810 thousand bbl/d (11%), California’s531 thousand bbl/d (7%) and Oklahoma’s 321 thousand bbl/d (4%). Behind the top five listed above, states like New Mexico, Louisiana,Wyoming, Colorado and Utah stand out, as they continued to bolster production and contributed with an average of 2.5% per state to thenational production level. The remaining states contributed a combined 6% to the national production level.

810

2,525

1,213

1,030

531 321

0

500

1,000

1,500

2,000

2,500

3,000

North Dakota Texas Federal Gulf of Mexico

Alaska California Oklahoma

Source: EIA

Top U.S. Crude Oil Producing States (Thousand Barrels per Day)

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Source: DTN ProphetX

Oil Price Volatility

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Oil Price VolatilityThe market saw higher oil price volatilityduring the third quarter of 2013, mainlydue to unrest in the Middle East as themarket added a risk premium to oil prices,fearing possible production or supplydisruptions. As fears dwindled, the marketreturned to more comfortable levels withina few days. As seen on the graph below,the rapid swings in prices were a commontrend during Q3. From a price standpoint,the difference to Q1 and Q2 is evident, as crude oil prices went from tradingbetween $80 and $100 during the firstsix months of the year to trading between$100 and $111 in Q3.

Rail, Truck, and Barge Domestic Refinery Receipts of Crude Oil on the Rise

Fundamentals

The increase in U.S. domestic production has translated into anincrease in refinery receipts. Over the last few years, U.S. refinerieshave received product from a wider array of transportation systems,including rail, trucks, barges and pipelines. According to the EIA,the Gulf Coast (PADD 3) region accounts for most U.S. refineryreceipts by rail, truck, and barge (receipts almost doubled in 2012)as the region has grown increasingly dependent on rail and truck tomove crude production out of the Eagle Ford and Permian basinsto refineries in the area. In the Rocky Mountain region (PADD 4),domestic truck and pipeline imports of Canadian oil continue toincrease as domestic pipeline receipts have stayed flat, while theEast Coast (PADD 1) receipts decreased in 2011 (mainly due torefinery closures) and increased by 18% in 2012 after severalrefiners added rail facilities to receive discounted crude from theBakken and other tight oil formations.

Over the last few years, truck and rail transportation haveestablished themselves as a reliable alternative transportationmethod when pipelines are operating at limited capacity or when aproduction area lacks pipeline infrastructure. Both of thesetransportation methods have offered greater operational flexibilitythan pipelines, as they make use of existing road and railinfrastructure near producing basins to transport crude oil torefineries that may not be accessible by pipelines. Furthermore, theincrease in barge receipts is mainly due to an increase in crude oiltransfers from rail cars to barges for the final leg of some journeys torefineries (particularly on the East Coast and along the MississippiRiver). Over time, crude oil is expected to continue moving by railand truck (even as additional pipeline infrastructure is built) aseconomics demonstrate these transportations methods could bemore economic, flexible, and effective in some instances.


“Over the last few years, U.S. refineries have received product from a wider array of transportation systems, including rail, trucks, barges and pipelines.”

“Crude oil inventories remained historically high in Q3, mainly due to higher domestic production. Crude oil inventories were lower in Q3 than during the same time last year.”


Fundamentals


Domestic Crude Oil InventoriesCrude oil inventories remained historically high in Q3, mainly due to higher domestic production. As seen on the graph below, crude oilinventories were lower in Q3 than during the same time last year. However, despite domestic refineries operating above 90%, crude oilinventories were also affected by infrastructure limitations (such as limited pipeline capacities), which kept inventories land locked and on thehigher side of the 5-year range.

U.S. Commercial Crude Oil Stocks (Excluding SPR)

Days of SupplyThe Days of Supply (DOS) average dropped below the 5-year average during Q3, averaging 22.74 days. The DOS average consists of thenumber of days it would take for crude oil inventories to satisfy demand. As of mid-September, the DOS was .43 days below the 5-yearaverage of 22.93 and 2.15 days below 2012’s average of 24.65. The main reasons for the decrease of DOS in Q3 include decreasingdomestic crude oil inventories as well as higher domestic demand.

Source: EIA

U.S. Days of Supply of Crude Oil (Excluding SPR)

FN360oDays of Supply (DOS)The number of days that crudeinventories would satisfy demand.

Source: EIA

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Fundamentals


Refinery InputsRefiner net inputs increased during the third quarter of 2013, mainly due to a combination of higher demand and an increase in exports. After averaging 14.8 million barrels (mb) during the first half of 2013, refiner inputs averaged 15.9 mb during Q3. As seen on the graphbelow, the Gulf Coast accounted for 52% of refiner inputs, with an average 8.3 mb during Q3, followed by the Midwest’s 3.52 mb (22%),the West Coast’s 2.47 mb (16%), the East Coast’s 1.08 mb (7%), and the Rocky Mountain’s 0.56 mb (4%). During the week of July12th, refiner net inputs reached 16.2 mb which was the highest input since July of 2007.

Source: EIA

U.S. Crude Refiner Net Input by PADD (Demand) (Excluding SPR)

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Fundamentals


Crack Spread3:2:1 Spread A crack spread measuresthe difference between thepurchase price of crude oiland the selling price offinished products, such asgasoline and distillate fuel,that a refinery producesfrom the crude oil.

s

Crack Spread by Crude SlateWhile declining overall in comparison to Q2, oil refineries continue to see strong profits by producing refined products. The crack spread is theprofit margin for oil refineries when they compare the cost of the crude oil (inputs) to refined products’ wholesale prices (outputs). The 3:2:1crack spread illustrates the product margin at a typical U.S. refinery: for every three barrels of crude oil the refinery processes, it makes twobarrels of gasoline and one barrel of distillate fuel. As seen on the graph below, Western Canadian Select crude oil remains the best alternative in terms of product margin, averaging $48 per gallon so far in 2013, followed by WTI’s $26 per gallon and Brent’s $16 per gallon.

Source: DTN ProphetX

Crack Spreads by Crude Slate (May 2012 – September 2013)

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Fundamentals


Domestic Production vs. ImportsU.S. crude oil production exceeded imports for the first time in 16 years during May of this year, when domestic output exceeded imports by32,000 bbl/d. As seen on the graph below, imports have dropped significantly, while domestic production continues its steady rise in stateslike Texas, North Dakota and Oklahoma. According to the EIA, June’s Bakken production (which makes approximately 90% of NorthDakota’s production) was approximately 23.6% higher than in 2012, while the number of oil wells in production rose from 5,891 to 6,097(in comparison to the 4,300 in June of 2012).

Source: EIA

U.S. Domestic Production vs. Imports (Million Barrels per Day)

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“U.S. crude oil production exceeded imports for the first time in 16 years during May of this year, when domestic output exceeded imports by 32,000 bbl/d.”

U.S. Dependence on Foreign Petroleum DeclinesAccording to the EIA, U.S. dependence on foreign petroleum has declined since peaking in 2005. As seen on the graph below, the UnitedStates relied on net imports (imports minus exports) for about 40% of the petroleum (crude oil and petroleum products) consumed in 2012.

The United States consumed a total 18.6 million barrels per day (bbl/d) of petroleum products during 2012, making it the world's largestpetroleum consumer. Furthermore, at 6.5 million bbl/d, the United States was third in crude oil production. With that said, crude oil alone didnot account for all of U.S. petroleum supplies, as significant gains occurred due to the expansion of crude oil in the refining process, thecapturing of liquid fuels in the processing of natural gas and other sources of liquid fuels (including biofuels). These additional supplies totaled4.8 million bbl/d in 2012.

Fundamentals

The United States imported 11.0 million bbl/d of crude oil and refined petroleum products in 2012 and exported 3.2 million bbl/d of crudeoil and petroleum products, leaving net imports at 7.4 million bbl/d in 2012. Furthermore, the U.S. imported 2.1 million bbl/d of petroleumproducts (such as gasoline, diesel fuel and heating oil) and exported 3.1 million bbl/d of products, making the U.S. a net exporter ofpetroleum products. As seen on the graph below, just over half of these imports came from the Western Hemisphere. (continued)

U.S. Production and NetImports of U.S. Petroleumand Other LiquidsDemand, 2012

Sources of Net PetroleumImports, 2012

40% 60%

28% 53%

16% 3%

n U.S. Production n Net Imports

n Other n Western Hemisphere

n Persian Gulf n Africa

Top Sources:

Canada (28%)

Saudi Arabia (13%)

México (10%)

Venezuela (9%)

Russia (5%)

FN360oSource: EIA

Source: EIAFN360o


Fundamentals

U.S. Liquid Fuels Consumption (Demand)Total liquid fuels consumption increased by 70,000 barrels per day (bbl/d) during the first half of 2013. According to the EIA, the increasewas mainly due to increases in liquefied petroleum gas and distillate consumption. Total liquid fuels consumption reached 149.78 millionbbl/d in the first half of 2013, which is a 0.4% increase from last year during the same time period. Furthermore, the EIA projects totalliquids consumption during the second half of 2013 to increase by 180,000 bbl/d from the same period last year, with all of the finishedproducts contributing to that growth. On a side note, the EIA projects gasoline consumption to decrease in 2014 as improving fuel economy ofnew vehicles continues to outstrip growth in highway travel. For 2014, total consumption of liquid fuels is expected to increase by 30,000bbl/d (approximately 0.2%) with further declines in motor gasoline expected to be offset by higher distillate fuel consumption.

Source: EIA

U.S. Liquid Fuels Consumption (Million Barrels per Day)

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U.S. Dependence on Foreign Petroleum DeclinesThough most consumers believe the U.S. relies on the Middle East for oil, the reality is over 50% ofU.S. crude oil and petroleum products actually came from the Western Hemisphere in 2012 (North,South, and Central America, and the Caribbean), while 29% of the imports came from Persian Gulfcountries (Iraq, Saudi Arabia, United Arab Emirates, etc.). In 2012, the largest sources of net crudeoil and petroleum product imports were Canada and Saudi Arabia. So far in 2013, Persian importsaccount for 25%, while Canadian imports increased to 33%, and Mexican imports rose to 11%.

U.S. dependence on imported oil has declined since peaking in 2005. There are several reasonsattributed to the decrease in foreign oil dependency, including a decline in consumption and changes insupply patterns. The “Great Recession” (the financial crisis of 2008), improvements in efficiency,changes in consumer behavior, and patterns of economic growth have played an important role andcontributed to the decline in petroleum consumption. At the same time, increased use of domesticbiofuels (ethanol and biodiesel) and strong gains in domestic production of crude oil and natural gasplant liquids have allowed the U.S. to expand domestic supplies and reduce the need for imports.

(continued)


FundamentalsU.S. Exports of Finished Petroleum Products Exports of petroleum products increased during the third quarter of 2013 following a decrease in the first six months of the year. Total finished petroleum products exports averaged 2.90 million bbl/d in the first semester of 2013, a difference of 40,000 bbl/d comparedto the 2.86 million bbl/d in the first half 2012. During Q3, total petroleum products exports averaged 3.02 million bbl/d, an increase of173,000 bbl/d in comparison to last year’s 2.84 million bbl/d Q3 average. With the increase, total petroleum product exports are averaging2.93 million bbl/d in 2013, a difference of 90,000 barrels in comparison to the 2.84 million bbl/d averaged in 2012.

Source: EIA

U.S. Finished Petroleum Products Exports (Million Barrels per Day)

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U.S. Retail On-Road Diesel On-road diesel prices finished the third quarter of 2013 higher than Q2 but below 2012’s Q3 price level. As seen on the graph below, retaildiesel prices have averaged $3.90 per gallon in Q3, a difference of 5 cents to Q2’s $3.95, and 53 points higher than last year’s Q3 averageof $3.91. Furthermore, at a yearly average of $3.94, 2013 retail diesel prices remain on the higher side of the 5-year range and almost 42cents higher than the 5-year average of $3.52.

Source: EIA

Weekly U.S. No. 2 Diesel Retail Prices (Dollars per Gallon)

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Diesel exports increased to an average1.1 million bbl/d in Q3 and exceeded2012 exports by 269,000 bbl/d,while gasoline exports averaged 3.1million bbl/d, which is a decrease of900,000 bbl/d in comparison to Q2’s4.0 million bbl/d.


FundamentalsU.S. Retail Gasoline PricesRetail gasoline prices decreased during the third quarter of 2013, falling below the 2012 price level for the same time period. As seen on thechart below, gasoline retail prices averaged $3.58 during Q3, which is 6 cents less than 2012’s Q3 average of 3.64, as well as 25 centshigher than the 5-year average of $3.33 for the same time period. On a yearly analysis, at $3.58, retail gasoline prices are 7 cents below2012’s $ 3.65 average, but 35 cents above the 5-year average of $3.23. Despite the drop, retail gasoline prices remain on the upper sideof the 5-year range.

Source: EIA

Weekly U.S. Regular Conventional Gasoline Retail Prices (Dollars per Gallon)

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Diesel Price ForecastsAs we approach the beginning of Q4, when most companies go through their fiscal year budgeting process, there are multiple factors toconsider. From market mechanics, to supply availability, to product seasonality, to weather, the reality is that all of these factors could impactfuel prices. Based on the trends seen in the last three years, we have made different assumptions in order to back into the following prices.With that said, before getting into regional pricing, it is important to first understand the pricing pyramid.

Fundamentals

The Pricing PyramidThe illustration to the right shows what we call “The Pricing Pyramid.” The pyramid is composed of 5 different levels, each of which represents an accrued level of cost until the fuel reaches the retail stations (or a bulk tank). Starting with the NYMEX futures contract price and adding the unique specification of each regional product (basis), we reach the cash (origin) spot price. From there we add the bulk transportation costs for pipeline or vessel fees (rack). Of course, every step adds different costs and margins that ultimately affect prices. Taxes are tacked on to the price at the terminal level or at the retail level (2013 average diesel road taxes are 53cents - including federal, state, and local taxes), while retail margins are incorporated in the final price at the street level (retail).

RETAIL

TERMINAL /RACK

CASH (ORIGIN)

BASIS

NYMEX

+taxesDi

esel

Fuel

Rack

Pric

es pe

r PAD

D

Projected DieselFuel Prices per PADDThe tables to the right reflect PADDspecific diesel fuel price forecasts forthe remainder of 2013 and for 2014.The first table illustrates diesel fuel atthe terminal (rack) level, while thesecond one illustrates diesel fuelprices at the retail level. The priceforecasts take into consideration themarket mechanics discussedpreviously, as well as current taxesand product supply.

27 © 2013 Mansfield Energy Corp.Source: EIA

Source: EIA

FNQ3 High Res_Layout 1 10/18/13 1:30 PM Page 27

Dies

el Fu

el Re

tail P

rices

per P

ADD

FundamentalsRack to Retail Diesel Spreads per PADDThe following charts represent the average price spreads between pricesat the rack level and prices at the retail level (rack to retail spreads) thusfar in 2013. Notice how the rack to retail spreads change based on eachmarket’s mechanics over time.

Source: EIA

Northeast (PADD 1A) – 35 Cents

FN360o

Source: EIA

Central Atlantic (PADD 1B) – 36 Cents

FN360o

Source: EIA

Lower Atlantic (PADD 1C) – 25 Cents

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Source: EIA

Midwest (PADD 2) – 26 Cents

Source: EIA

Gulf Coast (PADD 3) – 30 Cents

Source: EIA

Rocky Mountain (PADD 4) – 20 Cents

FN360o

FN360o

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Source: EIA

West Coast (PADD 5) – 25 Cents

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Fundamentals


The forever bull was beat into submission in the second quarter and then along came Syria. WTItook off breaking into new yearly highs not seen since May of 2011. Heating Oil (NYH futures)broke the $3.20 mark in late August but they have declined ever since. RBOB has followed theHeating Oil trend (lower lately) and with both products declining, while Crude has stayed relativelyhigh, the nice crack spreads enjoyed by the refining community have been vaporized.

The question now is will crack spreads stay this low and ultimately start affecting production, whichhas been relatively high lately helping to build product stocks and eat into crude inventories. Myassumption is cracks will continue to stay in the sub $18 mark for the rest of the year. I know, Ican hear you saying “wow, way to go out on a limb there Andy” but let’s put that comment inperspective. We haven’t seen sub $18 cracks since the first few days of January 2012 (untilSeptember 2013). Which means that I’m suggesting Crude will continue to stay relatively high(above $90) but products will continue to linger relatively flat and potentially drift slightly lowergoing into fourth quarter 2013. Don’t fret; I’ll be bullish again next edition once we have depletedinventories a bit on less production.

Andy’s Answer

FUELSNews 360˚ Commentaries


I ended the 2nd quarter firmly a “Bear” and watched the crude oil market reach highs not seen sincethe spring of 2011 - so much for my track record. Since I rarely back away from an opinion, I stillremain a Bear. With Syria no longer influencing prices in the same manner and speculators trimmingtheir net length positions in crude oil, I believe we may see crude oil back in the $90s once more. As for refined products, their performance has been lackluster in relation to crude and little presentsitself in the form of demand or serious refinery issues to change this. Crude oil’s backwardationgenerally reflects the market thinking that higher prices are temporary. We see this samebackwardation for ULSD or Heating Oil long-term and for Gasoline or RBOB until the spring. I struggleto find a reason to anticipate higher prices.

Sara’s Synopsis

BEAR

The Fed’s decision not to taper their asset purchase program is a nearby bullish sign for crude oil.While it’s true the essence of the government’s program is to assist a struggling economy, whichof course is negative for oil, there is other upside to be considered. First, continued QE should helpemerging market demand as their economies have greater access to cheaper money. Second, aweaker dollar means emerging market currencies should appreciate, lowering the record oil costssome experienced this summer. Furthermore, on the supply side, OECD oil inventories have beenbelow seasonal averages, which may also lend support to prices.

Dan’s Dissertation

BEAR

BULL

FUELSNews 360̊ Commentaries

After hitting 28-month highs in early September, I believe oil prices will drop during Q4, thoughnot as much as some have suggested. On one side, the fact that the U.S. opted for thediplomatic approach with Syria should help oil prices return to more comfortable levels.However, that doesn’t mean the unrest in the Middle East is over ... it is far from it. So far, wehave seen the Middle East make headlines in every quarter this year, so my gut instinct suggeststhings won’t be too different in Q4. On the other side, the Fed continues to pump money intothe U.S. economy, meaning energy commodity prices will remain artificially inflated as the Fedcontinues their aggressive money printing program. Also, keep in mind energy returns have beensubstantially higher than non-energy returns during Q2 (last time I checked the difference was8% vs. 1.5%), meaning energy investments are an even more popular type of investment thesedays. By mid-August, the CFTC Non-Commercial Traders Report for 2013 WTI crude oil was 35%bullish. That personally scares me, as it makes me wonder if it is just a matter of time untilprices plummet. With all this said, I am setting my floor at $95 for Q4, while my ceiling willremain at $111.

For products I am bearish gasoline and bullish diesel for Q4. Gasoline demand should remain flator decrease following the summer driving season, while diesel fuel demand should increase aswe approach the winter months due to cold temperatures. I expect diesel demand to continue toincrease as crude oil and product transports continue to increase, as the U.S. has beenincrementally producing more crude oil year over year, putting our current infrastructure underpressure. As refineries continue to operate at high rates and products continues to flow, I expectdemand from the transportation sector to continue its uptrend, which may have an impact ondiesel fuel prices. With that said, keep in mind that the U.S. is a net exporter of diesel, so ifneeded, we could meet our own demand (as long as the economics make sense).


Despite the fact that crude will continue to set the floor for gas and diesel flat prices, I amrelatively bullish crude and bearish products for Q4’13. While WTI crude prices continue totake cues from geopolitical events, such as the threat of ongoing conflict in the Mideast andcurrency fluctuations, products stay grounded in US fundamentals. I also don’t believe we’veseen the bottom for the 3-2-1 crack spread quite yet, as US refineries continue upgrades toprocess heavier crudes with prompt discounts as low as $30 to WTI (such as WCS and Bakkencrude) – meaning that the traditional 3-2-1 crack spread no longer accurately reflects USrefinery runs and that a “new normal” will be set for WTI versus NYMEX HO and RB.

Hannah’s Hypothesis

Jorge’s JudgmentBEAR

BULL

FUELSNews 360̊ Commentaries


Chris’s ConceptBEAR

I was bearish for the third quarter of this year but will flip to a bullish prediction through the fourthquarter of 2013. This market continues to remain inflated due to the ongoing conflicts in theMiddle East. We saw the market drop off in mid-September after some positive news wasreleased regarding the Syria crisis; however, I believe we are far from over with all of the MiddleEast instability. This uncertainty will add an upward push to this market. In addition, while therehave been recent signs of slow economic repair in the United States, many believe the USeconomy is still not stable enough to survive without the Fed’s stimulus program. With the QEprogram continuing (at least for now), this could increase financial demand and oil prices in thefourth quarter. For these two reasons – Mid East violence and the Fed’s stimulus programcontinuing – I am predicting a bullish market for the fourth quarter of 2013.

Evan’s EstimationBULL

For the fourth quarter of 2013, I’m leaning towards a bearish market. US crude oil productionincreased to an average of 7.6 million barrels per day in August. This marks the highest monthlyproduction of crude since 1989. The forecast for the remainder of 2013 is 7.5 million barrelsper day and projected to increase in 2014 to 8.4 million barrels per day. Along with overalldemand still declining, major oil companies still struggling to meet RFS standards and Libya’s oilproduction coming back on line, I project the market will continue trending downward. Of coursethis projection doesn’t include a storm during the remaining two months of hurricane season.

Scott’s Sixth Sense I remain confident in my predictions of the last quarter, based on where Canada is in the third quarterof 2013. The challenge continues to be that Canada, like many of our friends economies around theworld, has taken longer to reach a position of “natural growth” or a level of economic stability wheregovernment intervention and global banking policy is no longer steering the ship. We are seeing theright indicators to reach natural growth. There continues to be a tremendous requirement for capitalinvestment to develop Canada’s energy resources. The interest of foreign investors remains strong andthis will continue to drive major projects, acquisitions and joint venture activity through 2013 and2014. Growing global demand for resources and hydrocarbons combined with Canada’s political andeconomic stability, technological advances, and highly skilled workforce are attracting theseinvestment opportunities. This coupled with Canada’s moderate inflation level, consistent employmentposition, a healthy housing market, and improving U.S. export markets, all point to solid growth.Expect to see a continued strengthening Canadian economy in the last quarter of the year.

Canadian crude prices have been very healthy throughout the year, whereby Western Canadian heavyoil followed higher world prices in late Q2 and into Q3. I predict with higher prices being supported byincreased rail exports to US markets, and improving economies, crude prices will edge up in Q4.

BULL

“Though most consumers believe the U.S. relies on the Middle East for oil, the reality is over 50% of U.S. crude oil and petroleum products actually came from the Western Hemisphere in 2012.”

Project Mariner East – Sunoco LogisticsSunoco Logistics (SXL) has plans drawn up to reversetheir East to West pipeline in a project known as ProjectMariner East. This pipeline is currently transporting

refined products from the Philadelphia area out to the Pittsburgh area, but will soon deliver propaneand ethane from the Marcellus and Utica Shale region in Western Pennsylvania back to their facility inMarcus Hook. The undertaking of this project is going to cause some challenges on the refined productsside, shutting down terminals and potentially creating some product shortages.

PADD 1 East CoastPADD 1A New England


PADD stands forPetroleum Administration for Defense Districts

During World War II, the United States was divided into five different PADDs in order to help organize the allocation of fuels derived from petroleum products, includinggasoline and diesel fuel. This virtually meant that if the U.S. was attacked, the country’soil supply would be strategically spread out among five different regions, making itmore difficult to destroy the country’s oil infrastructure and resources.

PADD 5:West Coast,

AK, HI

PADD 4:Rocky

Mountain

PADD 3: Gulf Coast

PADD 2: Midwest

PADD 1:East Coast

Regional View?

Did You Know?

The Buckeye Laurel Pipeline and the Sunoco Logistics Pipeline are the two main pipelines that travel through southern Pennsylvaniacarrying refined products from the refinery rich east side to the western edge of the state. All of the terminals throughout Pennsylvania are fedby one or both of these pipelines. With the reversal of a large portion of the Sunoco Logistics Pipeline, this may put a strain on refinedproducts in multiple cities. The Sunoco Mechanicsburg terminal is the first terminal to experience the effects of this project and is currentlyidle. This terminal had to shut down well before the project began due to the largest shipper pulling out of that market in preparation of thereversal. In Mechanicsburg, the terminals that remain open are the PPC and Gulf terminals (both supplied by the Buckeye Laurel pipeline).The other terminals that are expected to be affected are the Sunoco Blawnox and Sunoco Pittsburgh terminals. These terminals are expectedto go idle in the upcoming months and remain idle until July 2014. The Sunoco Delmont and Sunoco Altoona terminals are expected toremain operational since they are also fed by the Buckeye Laurel pipeline.

Along with those terminal closures come the unknown of how the Buckeye Laurel pipeline will fare during this time. The demand to ship onthis pipeline will be increased dramatically to make up for the Sunoco Logistics pipeline no longer being a viable option to ship refinedproducts. Pittsburgh currently receives some product from the Chicago market on a West to East pipeline and these barrels will help supportthe supply in the second largest city in Pennsylvania. Altoona, PA and Harrisburg, PA are the two markets with the most supplyuncertainty; they will only be fed by one pipeline (Buckeye Laurel pipeline) instead of two.

“Sunoco Logistics (SXL) has plans drawn up to reverse their East to West pipeline in a project known as Project Mariner East.”

The supply situation throughout Pennsylvania will be interesting to watch over the next few months with thisproject kicking off. Already, many of the suppliers who had a throughput at Sun-Mechanicsburg have movedon to throughput at other Mechanicsburg terminals. Will supply be largely impacted throughout the state?Will supply be impacted in only select cities? Will we see no impact in supply due to this pipeline reversal?Those are the important supply questions we will face in the upcoming months.



Sources: Sunoco Logistics

The third quarter of 2013 proved to be a tough one for most of the refineriesin the Northeast region. The first refinery issue that arose involved the IrvingSt. John refinery, in which their smaller fluid catalytic cracker (FCC) was shutdown. Just days after the first FCC was taken out of service, the larger FCC wasshut down due to operational issues. In addition to the FCC units being takendown, Irving additionally shut down their crude distillation unit (CDU) and adesulfurization unit. All units were repaired and restarted in just under a monthafter being shut down; however, the larger FCC unit had to be taken out ofservice again two weeks after the restart. Irving has pushed their turnaroundback (which was planned for the fall of 2013) until the first quarter of 2014.

Philadelphia Energy Solutions (PES) also had to take down some unitsunexpectedly at their Philadelphia refinery. PES was forced to shut down analkylate unit and hydrotreater right around the same time that Irving washaving issues with their refinery in St. John. The shutdown of these units lastedapproximately 2 ½ weeks, they finally restarted on July 30th.

Northeast Refinery Issues Plague Third Quarter of 2013

ShaleMarcus HookTerminalRefineryMarkwest FractionatorRefined Products PipelineProposed PipelineMariner East Pipeline



Source: EIA

Top 5 Northeast Refineries

FN360o

Phillips 66 performed planned maintenance on their Bayway, NJ refinery during the time when the PESand Irving refineries were shutting down units for unplanned maintenance. The maintenance at thisrefinery involved a reformer that produced xylene, toluene, benzene and reformate. Even though thismaintenance was planned, the impact was still felt in the NYH RBOB gasoline futures market.

The Come-By-Chance refinery in Newfoundland also completed unplanned repairs. North AtlanticRefining, who currently owns this refinery, shut down a sulfur recovery unit and isomax unit for repairswhen the PES, Irving and Phillips 66 refineries were already running at reduced rates. These unitsremained out of service for close to two weeks.

The last refinery that saw issues during the third quarter of 2013 was Monroe Energy’s Trainer refinery.Monroe Energy, a subsidiary of Delta, was forced to shut down its only FCC unit back in late August.This shutdown came after Phillips 66 and North Atlantic Refining restarted their units; however, the largerFCC at the Irving refinery still remained down.

These events caused a reduction of gasoline production in the Northeast and, in turn, created upwardpressure on the RBOB futures due to a surge in spot gasoline purchases by these companies.

Refinery Outages

Source: OPIS



Expansion of Bio in the NortheastRhode Island has signed a bill that will require all heating oil within the state to contain biodieselstarting July 2014. Currently, New York City is the only area that mandates all heating oil to contain acertain percentage of biodiesel. The bill states that all heating oil within the state of Rhode Island isrequired to contain 2% biodiesel by July 2014, 3% biodiesel by July 2015, 4% biodiesel by July 2016and 5% biodiesel by July 2017. The governor does have the ability, however, to suspend this mandateif biodiesel is not available at reasonable prices. This enactment of a bio-heat requirement does notcome as a surprise as the Northeast consumes over 75% of the country’s heating oil and continuouslystrives to clean up the pollution caused by the burning of fuel.

New York City has also enacted a new bio mandate. There is currently a requirement that all heating oilconsumed within the city limits of New York City must contain at least 2% biodiesel. In September,New York City Mayor Michael Bloomberg signed a bill requiring all city vehicles to contain biodiesel by2014. This bill requires all city vehicles to use 5% biodiesel by 2014 and 20% biodiesel by 2016between April and November (bio gels more easily in cold weather than diesel).

Marathon East Coast ExpansionMarathon is working on increasing its export capacity and continuing to access untapped productmarkets on the east coast. Marathon plans on utilizing their Catlettsburg refinery in Kentucky thatproduces 233,000 barrels per day. In conjunction with Catlettsburg, it could also deliver products fromtheir refinery in Robinson, Illinois. Marathon is currently building additional storage tanks in theirGaryville refinery that produces 490,000 barrels per day in Louisiana. Adding this additional tankagewill allow products to be exported out of Galveston Bay.

Marathon has scheduled maintenance for the Catlettsburg refinery through October 30th. A crude unit,vacuum unit, CCR unit and vacuum gas oil unit are all scheduled to have maintenance during this time.This pause in production will add additional stress to the Kentucky and Tennessee markets that arealready experiencing tightness of supply.

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

MemphisMemphis suffered product outages at the end of September for ULSD and tight allocations for gasoline following a power blip at Valero’srefinery that caused damage to the sulfur recovery unit. The repairs took over a week to complete. Up until this time, Memphis had beenhandling the additional demand that normally sourced out of North Little Rock, AR; however, with Teppco pipeline making changes thearbitrage opportunity opened between the two terminal cities. Valero and Exxon had to schedule additional barges up the Mississippi River tohelp support their terminals during the refinery’s down time. Lion Oil also experienced product outages during this time. With Memphis contractand rack allocations cut to below 50%, long hauls had to be arranged from multiple terminal cities including markets in Mississippi, Alabama,Kentucky, Missouri, Arkansas and additional terminals in Tennessee. Nashville terminals felt the impact immediately with scarce ULSD andgasoline. In addition to issues in Memphis, terminals in the southeast were transitioning out of low RVP season. Several terminal cities werealready experiencing tightness of product during this time for gasoline and were unable to provide the support needed in the Memphis market.

“ In September, New York City Mayor Michael Bloomberg signed a bill requiring all city vehicles to contain biodiesel by 2014.”

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


Southeast GasolineSeveral terminal markets in the Southeast began feeling the impact of increasing RIN values andtheir values being passed down at the rack posted price level. 2013 ethanol RINS traded as high as1.455; as a result, rack suppliers began calculating a portion or all of the RIN values into their prices.Several markets saw over 100% of the RIN values being passed along at the rack. Customers whohad contracts based upon shipping cost quickly watched their contracts slip higher compared to rackprices. Since then, suppliers and customers have worked together as a portion of the RIN values arebeing passed along in contracts.

During the third quarter of 2013, shipping gas products from the Gulf Coast into New York Harborwas very profitable for shippers on the Colonial Pipeline. During the first 45 days the spread was.08-.09 cpg for both CBOB and RBOB. By the end of August, the spread continued to increase to over.20 cpg. The impact was felt the most in RFG markets during the transition to High RVP gas, withmarkets such as Baltimore, Fairfax, Richmond and Norfolk experiencing tight allocations duringSeptember. Even with the arbitrage opportunity available on the pipeline, Philadelphia rack pricesduring the end of September were discounted to what was available in Baltimore for RFG gasoline.

Colonial Pipeline Open SeasonOn September 12th, Colonial Pipeline announced an opportunity for current shippers and newshippers to enter a transportation services agreement. The agreement included rate discountsdepending on the shipper’s commitment on Lines 1 and 2 and developments to the allocationcalculation. The length of this agreement is up to 10 years and is expected to begin 2014.

Magellan Solicits Shipper Interest in Potential New Pipeline into Little RockFollowing the halting of interstate diesel shipments on Enterprise pipeline as of July 1, 2013, Little Rock, AR has experienced continuedshortness of supply for ULSD as the market relies solely on the El Dorado refinery for product. Diesel deliveries to the Little Rock area nowlean heavily on hauling diesel in from surrounding markets, such as Memphis and Fort Smith which leads to additional logistics challenges aswell as up to 10 cents in freight.


PADD 2 Midwest

Husky Lima Refinery Contemplates UpgradeThe Husky Lima refinery in Ohio is considering a $300 million upgrade that would allow them to refine heavy,sour crudes along with the current slate of light crude oils. If approved, the upgrade would be completed in2017, allowing the refinery to run as much as 25% of the 160,000 barrels-per-day as heavy crude.

The driver for investing in heavier crude processing arises from theextreme discounts in price. West Canadian Select crude, for example,has run at a discount of almost $24 year-to-date versus West TexasIntermediate crude oil, or almost $0.60 per gallon. Assuming runs of40,000 barrels-per-day of the discounted crude, this makes a paybackperiod of less than a year for the refinery while allowing them moreflexibility in sourcing.

PADD 3 Gulf Coast

In response to the above issues, Magellan MidstreamPartners has announced a plan to potentially tie the MagellanNorth pipeline system into Little Rock, which would allowdiesel shipments from a multitude of major pipelines andrefineries. Magellan is currently assessing shipper interest byconducting an open-season that will end mid-October of thisyear. If enough shippers commit to shipping on the proposedpipeline, Magellan will begin construction this year for dieselshipments to start sometime next year, hopefully easing thesupply concerns that plague the region now.

Coffeyville

Ponca City

Tulsa

Little Rock

Ft SmithAllen

Ardmore

From Houston

DuncanWynnewood

Oklahoma City

PADD 3 Gulf Coast

Construction of Gas-to-Liquids Facilities Boom in Louisiana

Over the past few months, more and more players have announced plans to construct gas-to-liquids(GTL) facilities in the southern half of Louisiana. Gas-to-liquids refers to technology that utilizes naturalgas, a commodity that is currently in abundant supply in the US, to make petroleum products such asgasoline and diesel. The projects have a wide range of operators and outputs with niche operators toglobal GTL giants offering a variety of products.


Source: OPIS

One of the companies, G2X Energy, announced plans for a Lake Charles facility earlier this year that will produce approximately 12,000barrels-per-day of 87 octane gasoline once operational. Construction is currently slated to begin in 2014 for operations to start 2017. This is G2X’s second recent project in PADD III, as they broke ground on construction earlier this year for a methanol facility in Pampa, TX.

PADD 4 RockyMountain


The Rockies saw little news of note during most of the third quarter. At the close of the quarter, however, things began to change. Salt LakeCity felt a supply squeeze, with Tesoro’s Salt Lake City refinery experiencing issues which caused a noticeable impact to supply as well asprices in the region. This impact led to an arbitrage or price advantage between PADD 5’s Las Vegas and PADD 4’s Salt Lake City. LasVegas’ price advantage of $.40 cents per gallon compared to Salt Lake made long hauls advantageous depending on the fuel drop site.

“Colorado remained uneventful until a 100 year flood wreaked havoc on terminal assets in the Denver market place.”

Source: EIA

Las Vegas vs. Salt Lake City ULSD Prices

FN360o

In addition, the former Chevron Pipeline now owned by Tesoro wentdown for testing between Salt Lake City and Boise. Ten days of testingstrained the overall supply of gasoline in both market places. Coloradoremained uneventful until a 100 year flood wreaked havoc on terminalassets in the Denver market place. Rocky Mountain Pipeline’s Dupontterminal, Suncor’s East and West Denver terminals and Magellan’sAurora terminal all experienced shutdowns due to rising flood waters.Rising waters and obstructed highways made fuel deliveries impossible.The Denver Channel 7 News reported that 17 counties were impacted bythe flood, with 30 state bridges destroyed and 20 damaged and 200miles of road damaged. In addition, approximately 1,200 oil and gas wellswere shut down by energy companies and the Colorado Oil and GasConservation Commission reported “notable” releases.

Source: The Denver Post


“During the third quarter, Los Angeles and San Francisco CARBOB basis traded at a five-year record low. This happened as total gasoline inventories along PADD 5 remained nearly 3 million barrels higher than the same week last year.”

During the third quarter, Los Angeles and San Francisco CARBOB basis traded at a five-year record low. This happened as total gasoline inventoriesalong PADD 5 remained nearly 3 million barrels higher than the same week last year. However, the outlook changed as the West Coastexperienced a slew of refinery issues. Shell Martinez, Valero Benecia, Tesoro Golden Eagle, Phillips 66 Wilmington, and Exxon Torrance allexperienced refinery outages and traders were concerned about their impact on the supply chain and, of course, wholesalers began to experiencethe rise of wholesale prices at numerous rack locations. However, the health of refineries on the west coast proved not to be an issue for long, asgasoline inventories were building and refinery rates were strong. By mid-September spot prices began to move downwards once more.

After it’s shutdown in April, Tesoro announced the sale of its 94,000 barrel per day refinery in Hawaii to Par Petroleum in the third quarterof 2013. Once the sale is closed and the refinery restarted, Par Petroleum will begin marketing gasoline and diesel supply to local retailstations on Oahu, Maui, and the islandof Hawaii. They are also expected tosupply the Hawaii Electric Company aswell as the Honolulu InternationalAirport and military installations. Sincethe refinery’s shutdown, Tesoro hasbeen delivering product to the Hawaiianmarket by tanker from the U.S. WestCoast. Par Petroleum estimated therestart of the refinery would cost anestimated $27 million in their companyfiling to the Securities and ExchangeCommission.


PADD 5 West Coast, AK, HI

A West Coast Refinery Overview

Source: OPISFN360o

The Los Angeles area produces approx. 1 million barrels of refined products daily.

The San Francisco area produces approx.850,000 barrels of refined products daily.

The Seattle area produces approx.650,000 barrels of refined products daily.

Los Angeles vs. San Francisco CARBOB Basis

Exxon MobilTorrance155,000 b/d

ChevronEl Segundo260,000 b/d

BP (west)Carson266,000 b/d

Conoco PhillipsWilmington139,000 b/d Valero (Ultramar)

Wilmington78,000 b/d

TesoroWilmington97,000 b/d

ValeroBenicia132,000 b/d

Conoco PhillipsRodeo128,000 b/d

TesoroGolden Eagle166,000 b/d

ShellMartinez158,000 b/d

ChevronRichmond257,000 b/d

Conoco PhillipsFerdale107,000 b/d

BP WestCherry Point230,000 b/d

ShellPuget Sound145,000 b/d

TesoroAnacortes120,000 b/d

Source: Energy Supply Logistics

Canada


Consumer Price IndexThe Canadian price index rose 0.1 % from June to July 2013,following a twelve month 1.2% increase in June. This improvingtrend in the CPI, from the first half of 2013, was seen across six ofthe eight sectors measured monthly. Canada is expected to continuein a relatively moderate inflationary environment throughout theremainder of 2013.

EconomyThe Bank of Canada declared in September that the Canadianeconomy is showing encouraging signs of recovery. While theeconomy has not yet returned to normal levels, it is showing showssigns of returning to a state that wouldn’t require extraordinarily lowinterest rates and other stimulus measures. Although encouraged, theBank of Canada is forecasting growth of 1.8% this year and 2.8% in2014, downgraded slightly from their original forecast of 1.9%, and2.9%, respectively. The Bank cited improving demand for Canadianexports, higher long-term interest rates, and rising business sentimentas evidence the economy is getting back on track. The expectation isCanadian interest rates will remain at the trendsetting rate of 1%until the end of 2014.

Gross Domestic ProductCanada’s Gross Domestic Product was down 0.5% in June,which was close to expectation, given the loss of momentumthe economy suffered in the second quarter. This decline was notall due to the devastating floods in Alberta and the generalconstruction strike in the Province of Quebec. Retail salesdropped across the country and will likely continue a flatter trendfor consumption into the fourth quarter of 2013. For theremainder of the year, analysts predict that improvement in theU.S. housing market, rising motor vehicle sales, and increasingU.S. business investment in Canadian products continues thegrowth trend of rising demand for exports. Into 2014, as theeconomy continues to move forward, the Canadian dollar islikely to rebound against the American dollar.


Canadian Crude Oil Markets Today, Canadian refineries have a total refining capacity ofalmost 2.0 million b/d of crude oil. In 2012, Canadian refineriesprocessed just over 1.7 million b/d. Of that total, only about60% of all the crude oil refined is being sourced from domesticsupply. The on-going restriction for Eastern Canadian refineriesto obtain domestic supply is the limited access of crude through apipeline system that supplies the eight refineries in the west.Currently Eastern Canadian refineries have no choice but to makeup the remainder of their production capacity by importing722,000 b/d of foreign crude supply. The encouraging news isthat through to 2020, Western crude oil will continue to supply100% of the Western Canada refining demand which willincrease by over 80,000 b/d. This future increase in demand isdriven from a number of capacity increasing projects including theMoose Jaw Asphalt Refinery and the Coop Refinery, bothlocated in the Province of Saskatchewan, as well as the start-upof the Sturgeon (North West Partnership) Refinery located atRed Water, Alberta, near the City of Edmonton.

As Canada and the United States are natural trading partnersgiven the geography, Canada continues to be the number onesupplier of crude oil into the U.S. Although Canada has longerterm plans to develop alternative foreign markets for their crudesupply, the U.S. is almost Canada’s only market. A growing U.S.domestic production in lighter crude from shale and more recentlyTexas and North Dakota opportunities has displaced foreign

Quebec General Construction Industry Strike For two weeks, starting in late June, Quebec’s constructionindustry came to a complete halt, as unions representing 175,000residential, industrial and commercial construction workers called aprovince wide strike in a dispute over wages. All constructionprojects were idle, until the Quebec government passed legislationordering striking workers to return to the job site. The strike didslow the provincial economy and affected Canadian materialsimports into Quebec, as the construction industry is over a $50million dollar a day business for the province.

Alberta Floods The devastating floods of 2013 across Alberta have led to aspending spree following storms that caused $5 billion dollars indamage. It is reported the post flood spending will more thancompensate for the drop in economic activity related to the naturaldisaster as the province is revising it’s GDP growth rate to 3.2 %in 2013, up from 3.0% previously projected due to the anticipatedeconomic boost.

Canada

imports. Even with the newer U.S. supply Canadian exports ofcrude oil into the U.S. grew by 200,000 b/d or a 9% increasein 2012 over 2011.


Alternative Products

Natural GasU.S. natural gas inventory was monitored closely during the third quarter’s “refill” seasonafter a colder than normal winter depleted historically high stockpile levels. Early in July,injections lagged the five-year average as warmer weather fueled demand for electricitygeneration. On July 18th, the EIA reported natural gas inventory increased only 58 Bcf theweek prior, roughly 10% below analysts’ expectations of a 65 Bcf increase and less thanthe five-year weekly average of 70 Bcf. Given the surprise, NYMEX natural gas for Augustdelivery surged 5% on the day, a $.183 increase, to settle at $3.8120 per MMBtu.

Source: EIA

Refill Season Natural Gas Inventory Injections (Billion Cubic Feet)

FN360o

A series of strong inventory gains through late July and early August culminated in a stockpile increase of 96 Bcf as reported in an EIArelease on August 8th. Natural gas for September delivery slipped 2 percent the next day to settle at a five-month low of $3.23 perMMBtu. Injections vacillated through the remainder of the quarter as discretionary demand and weather dictated inputs. Natural gas forNovember delivery settled the quarter at $3.56 per MMBtu.


Natural Gas

Fracking The University of Texas released a comprehensive study onSeptember 16th that found smaller amounts of methane areleaked through hydraulic fracturing than previously estimated by theEPA and industry critics. This is an important contention, becausewhile methane burns cleaner relative to other fuels such as coal andoil, pure methane is an extremely potent greenhouse gas whichtraps heat at a much higher rate than carbon dioxide; critics offracking have claimed that methane lost during natural gas drillingeliminates any potential climate benefits of burning the fuel. Thereport, sponsored by the Environmental Defense Fund and ninepetroleum companies, analyzed over 500 wells and was the first tostudy operations at actual drilling sites.

In particular, the researchers found that new containment measuresduring well completion, a process that prepares the well forproduction, captured 99 percent of methane leaks. The EPA recentlyinstituted a requirement that will go into effect January 2015 thatobligates drillers to control leaks during completions, though many

companies have already begun to comply. However, some skepticsbelieve the wells chosen for the report are not representative offracking nationwide, since the petroleum companies knew ahead oftime they would be closely monitored; the implication being thatmany unmonitored drillers do not make the effort to reduceemissions. Nonetheless, the study does show that with the propercontrols in place, methane leaks on the drilling pad can becontrolled, maintaining the overall climate benefits of natural gasrelative to other fossil fuels at that step in the supply chain.

The report is released after several years of increased hydraulicfracturing of shale gas. Fracking involves the injection of water,sand, and chemicals into wells, a process that releases more gasthan conventional drilling. Shale production, now roughly 30percent of all U.S. natural gas, is expected to reach 50 percent by2040. The below graph highlights the explosion of productionacross various U.S. shale plays:

Source: EIA

Monthly Dry Shale Gas Production (Billion Cubic Feet per Day)

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“In particular, the researchers found that new containment measures during well completion, a process that prepares the well for production, captured 99 percent of methane leaks.”

As is typical for this time of the year, Midwestern weather dictated grain prices during the quarter. After closing at a quarterly high of $5.27per bushel in mid-July on warm weather concerns, CBOT corn for December delivery – the benchmark contract for the new crop – generallyfell through the remainder of the month and into early August on more moderate temperatures and sufficient rain. December corn settled at alow of $4.4725 per bushel on August 13th, the lowest futures value since 2010. The day before, the USDA had forecasted U.S. farmerswould harvest 13.763 billion bushels of corn, 28 percent more than last year’s output, boosting world reserves to the largest since 2002.

Toward the end of August, extremely hot and dry weather threatened most of the Midwestern crop, as temperatures averaged as much as 14degrees above normal. July and August were also the driest since 1936 in Iowa, Illinois, and Indiana. As a result, corn jumped the most inover a year, 6.5% on August 26th, to settle at $5.005 per bushel. Soybeans also followed suit climbing 4.6% on the day to settle at$13.895 a bushel after three prior weeks of increases.

Renewable Fuels


Source: CME

Q3 CBOT Soybean (right) and Corn Prices (left) (Dollars per Bushel)

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Nonetheless, prices eased towardthe end of the quarter as theharvest is still expected to be arecord crop. In fact, both GoldmanSachs and Deutsche Bank claimthe USDA is underestimating theoverall harvest: Goldman claimsoutput will be 14.14 billion bushelswhile Deutsche Bank predicts14.25 billion bushels, thiscompared to the 13.843 projectedby the USDA.


Renewable FuelsRINsIn an early August release finalizing therenewable fuel 2013 standards, the EPAunexpectedly addressed upcoming 2014concerns regarding the E10 blend wall. TheEPA stated “it will propose to use flexibilities inthe RFS statute to reduce both the advancedbiofuel and total renewable volumes in theforthcoming 2014 RFS volume requirementproposal.” The ethanol blend wall refers to thedifficulty incorporating ethanol into the fuelsupply at volumes over the standard E10blend, despite a rising RFS requirement toblend more of the biofuel. Based on concernsover a shortage of ethanol RINs, prices rose toa high of $1.455/RIN in mid-July up over1,700% on the year. The EPA is expected tooffer more details on how it will revise the2014 mandate in early fall when it is due topropose next year’s percentage standards.

Given the EPA announcement, a Septemberstatement by the Commodity FuturesTrading Commission that they may begintracking banks’ RIN trading, and areassessment of blending economics bymarket participants, RIN prices fell steadilytoward the end of the quarter. 2013 EthanolRINs settled the quarter at $0.4375 per RINwhile 2013 Biodiesel RINs closed at $0.625.

2013 RIN Values (Dollars per RIN)

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Source: OPIS

Source: OPIS

Source: OPIS

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Wholesale Gulf Coast CBOB vs. E10 Blend

Wholesale Gulf Cost ULSD vs. Biodiesel Blends

Mansfield’s National Supply Team

Andy Milton VP of Supply & DistributionAndy Milton heads the supply group for Mansfield and during his tenure the company has grown from 1.3billion gallons to over 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuelsupply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Prior toMansfield, Andy worked at RaceTrac Petroleum. Andy’s expertise in purchasing via pipeline, vessel, andthe coordination via futures and options for hedging purchases enables him to successfully lead a team ofexperienced and motivated supply personnel at Mansfield. Andy’s team handles a wide geographic areaof 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 SouthernUniversity where he received a BS in Sports Management.

Sara Hordinksi VP of Western US SupplySara Hordinski’s extensive background in supply and trading, futures hedging and rack marketing, bringsa unique perspective to Mansfield’s supply department. Although new to Mansfield’s supply department,Sara has more than twenty-five years’ experience in the oil & gas refined products industry. She hasmarketed refined products throughout much of the United States by pipeline, truck, and rail. In addition,she worked with numerous suppliers, refiners, jobbers, c-store owners, and distributors nationwide todevelop competitive contract pricing and hedging programs individual to their needs.

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

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



Hannah Hauman Manager of Supply & DistributionHannah Hauman serves as the Midcontinent Manager of Supply & Distribution and is based in Houston, TX.Hannah manages Midcontinent refined products trading and scheduling, contracts, procurementoptimization, and fixed price shorts. Prior to joining Mansfield, Hannah worked for Marathon PetroleumCompany and Atlas Oil Company in a variety of functions within marketing, supply, and trading. Hannahholds a BS from The University of Findlay and an MBA with a focus on Energy Risk Management from theUniversity of Houston.

Jorge Pradilla Supply Risk SupervisorJorge Pradilla started at Mansfield as an intern where he assisted with tracking supplier postings and marketanalytics. Jorge progressed to become a Supply Risk Supervisor focusing on Mansfield’s futures andclearport activities including reconciliation, broker dealings and trade executions. Jorge oversees thecompany’s hedging portfolio as well as tracks liabilities, fixed price contracts and analyzes market trends.Jorge also authors the FUELSNews Daily. Born in Colombia, Jorge holds a BS in Marketing from PiedmontCollege and an MBA in Managerial Leadership.

Scott Van Berkel Director of Canadian OperationsScott recently joined Mansfield after a 32 year career with Shell Canada Ltd. Scott’s broad expertise spansa variety of areas including marketing, sales, logistics and customer service. Scott held numerousmanagement positions with both Shell Canada and their parent company, Royal Dutch Shell. Scott’sextensive knowledge of the Canadian market, coupled with his experience working in the Commercial,Industrial and Retail businesses, makes him an invaluable asset to the supply team. Scott holds a BS inAgricultural Economics from the University of Manitoba.

Chris Carter Southeast Supply ManagerChris Carter serves as the Southeast Supply Manager responsible for refined product purchases includingcontracts, 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 supplycontracts and current bids. Chris manages pipeline shipments of gas and diesel on the Colonial, Plantation andCentral Florida Pipelines. Chris joined Mansfield in 2009 as a Supply Optimization Analyst and earned his BA inBusiness Management from North Georgia College and State University.

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

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Mansfield Energy Corp.

www.mansfieldoil.com

www.fuelsnews.com

678.450.2000

1025 Airport Pkwy SW

Gainesville, GA 30501

United States of America

Disclaimer: The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore,no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein areprovided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contract.

©2013 Mansfield Energy Corp.

FUELSNews 360°MARKET NEWS & INFORMAT ION

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FUELSNews 360 - Q3 2013