PETRONOIA 2011! Fuel Management Planning and Strategies in a Volatile Market Denton Cinquegrana Senior Markets Editor OP

1. PETRONOIA 2011! Fuel Management Planning and Strategies in a Volatile Market Denton Cinquegrana Senior Markets Editor OPIS Government Fleet Expo Wednesday, June 8, 2011

2. GOOD MORNING AND THANK YOU

3. A LITTLE BIT ABOUT OPIS OPIS offers price discovery on wholesale refined petroleum products in the U.S. from the minute the product leaves the refinery gate, until it reaches the retail pumps. Virtually EVERY gallon of gasoline, diesel fuel, jet fuel, or biodiesel that is consumed in the United States is – at some point – tied to an OPIS reference number as a cost basis. OPIS is the go-to place to know what is happening in downstream wholesale petroleum markets.

4. Governments are Big OPIS Users Nearly all the fuel in the U.S. that is purchased by government agencies is at some point tied back to an OPIS price as a cost basis. DESC, the government’s fuel buying agency, uses OPIS as a cost basis for nearly all their fuel purchases. Virtually every state government ties all, or most of their fuel purchases to an OPIS price. Many local municipalities and other government offices have begun using OPIS as a cost basis.

5. A Little About Me I have been with OPIS for just over 10 years and have at one point or another covered every market that OPIS offers price discovery for. My title is “Senior Editor, West Coast,” . While I cover a variety of refined product markets my primary focus is the U.S. West Coast. OPIS spot prices on the West Coast are benchmarked by the industry (more on benchmarking later). While I have spoken at other events, this is my first real speaking “gig”. So please bear with me, I know this stuff can be boring if you don’t live it every day, but I will try and keep it entertaining.

6. Yes…I am from New Jersey

7. What Are We Going To Cover? We are going to talk about U.S. fuel markets – what has happened, what is happening now, and what you can expect. We are going to talk about the importance of understanding your local market (where are you buying your fuel from) – how some simple, easy to learn skills can make you a better fuel buyer, and save you $$$$ in fuel costs every year. We are going to talk about the importance of arming yourself – as a fuel buyer – with the right price discovery tools. We are going to talk about the importance of benchmarking your fuel purchases.

8. Unlike Elvis….Volatility has not left the building….In fact it’s moved in. And when the volatility gets ugly…

10. In less than 3 years… The oil market has made a roaring comeback from where it was during the financial meltdown. In July of 2008, WTI crude (the U.S. benchmark grade) peaked at nearly $145 per bbl. By October, 2008 WTI had fallen to $67 – bbl, and everyone thought that was the bottom. The market however kept dropping Now oil prices are back over $100…So oil supplies must be really tight, right?

11. RIGHT??? .

12. What Is Happening Now? Oil has essentially become another asset class…Not unlike a stock or bond. Optimism on the floor of the New York Mercantile Exchange (NYMEX) that the economy is recovering has caused a solid rally in crude oil, and products prices. Money flows….Investment funds, ETF’s, pension funds, etc. Have all helped contribute to the higher price of “paper” oil. Monetary policy, the dollar also play a role. Net length among “funds” is significantly higher than past events that might inspire buying. The end result…Oil back over $100 plus.

13. But….It’s more complicated than that… MENA, MOAMMAR, MONEY, & MOJO

14. SHOW ME THE MONEY!!! The crude oil futures & options market is now many times the size it was when we marched off to the Iraqi War. Speculative and investment interests have increased their bets on a higher price outcome for crude by many billons of dollars. If one adds up all the various contracts, where there is a long bias, there is probably $40-billion to $50-billion more money invested/bet on a higher price outcome. The paper markets for all oil products continue to see a proliferation of new, sometimes exotic contracts, and that trend will continue. Producers and refiners are the normal circuit breakers, but for now, many are foregoing a hedging strategy. These numbers don’t even take into account all of the money in other exotic derivatives that trade on NYMEX or on the InterContinentalExchange. The money flow bias on higher price outcomes is even larger than meets the eye.

15. Petroleum Futures, Options & Open InterestIraqi War Month Versus Current Mena Backdrop Long Bias - - March 2003 ContractNet Length Funds 2003 WTI Crude -32.7-million bbl Gasoline (RBOB) + 9.8-million bbl Open Interest- - March 2003 ContractApproximate Open Interest WTI CRUDE 547-million barrels GASOLINE (RBOB) 114-million barrels HEATING OIL 157-million barrels

16. But the Iraq War was a significant event The war in Iraq was a significant event. There’s more oil that comes from Iraq than Libya. So futures traders should not be as long now as they were in 2003. WRONG!

17. Petroleum Futures, Options & Open Interest against MENA Backdrop Long Bias - - May 2011 ContractNet Length Funds 2011 WTI Crude +254.3-million bbl Gasoline (RBOB) +49.3-million bbl Open Interest- - May 2011 ContractApproximate Open Interest WTI CRUDE 2.716 - Billion bbl GASOLINE (RBOB) 308.85 – Million bbl HEATING OIL 387.25 – Million bbl Comment: Is fund net length at >250 million bbl a new norm?

19. Situational Awareness There’s more now to know than ever before. Not that long ago, you could look at fundamentals (DOE data, API data, etc.) and that would direct the market for a while. Macroeconomic factors rule the day Direction of the dollar, equities markets What’s happening in the developing economies? China and India much larger factors than a few years ago. More competition for a barrel of oil around the globe.

20. Sovereign Debt Default Chinese Woes Equities Slump Technological Breakthroughs Dollar Rally Consumer Confidence Additional Fuel Tax Alternative Fuel Mandates Position Limits

21. The Yin & Yang Of Crude

22. THE BRIC’s • Brazil • Russia • India • China

23. THE BRINK’s • Brazil • Russia • Iraq • Nigeria • Kazakhstan

24. The Madness of Crowds Jumping on the Bandwagon…The Duke’s know something!

26. The Madness of Crowds "If it has to choose who is to be crucified, the crowd will always save Barabbas" -- Jean Cocteau "Insanity in individuals is something rare, but in groups, parties, nations and epochs, It Is The Rule!" -- Frederick Nietzsche

27. But, There Are “Fundamental” Factors “Fundamental” factors are real, tangible developments are causing markets to rise. Like – a recent spate of production problems at several U.S. refineries. Like – violence in North Africa and the Middle East. Like – the fact that demand for U.S. gasoline and diesel fuel is starting to fall apart due to high prices. Like – reports that OPEC wants to see crude settle in a $70-$75 – bbl trading range, and will adjust production levels to achieve that.

28. Ok – So, What Does This Mean For Me? Remember – markets move everyday ! Although prices fluctuate. It’s like an adjustable rate mortgage the adjusts every day! If you buy fuel regularly, or ratably, the first question you should ask yourself every morning is – what happened in yesterday’s market, and why ? To buy fuel smarter, you need to keep abreast of the basic elements that drive U.S. markets – both internally and externally. This is truly a global village. Understanding the market’s fundamentals is KEY in the development of any fuel buying program.

29. Some Predictions 2011 should be front end-loaded. China cool-down; most of spring gas rally priced in; May traditional low point for global demand. Plenty of refining capacity, but “margin management” overlaps with turnarounds. How will two-headed and three-headed refineries be managed? Demand destruction is in progress. But exports may offset until Asia-Pacific refining impacts U.S. Country can survive $3.75 gal average, but higher? Options for catastrophic insurance worth a look. Financial market “spanking” changes the entire paradigm. But no curbs mean apocalyptic spike this decade.

30. The Seven (7) Steps Let’s Breakdown the Seven (7) Steps You Can Start Employing Immediately to Become a Smarter Fuel Buyer

31. Seven Steps to Fuel Buying Success Understand your local market – where it is, which pipeline it is tied to, who the key suppliers are, and what spot market it is tied to. Do you know the specifics of the fuel specs required in your market? Read your fuel contract and update it / shorten it if necessary. Educate yourself ! Understand the influence Chain – how and why your fuel prices move up, or down. Read industry news – especially refinery news. It will help you time your purchases better. Reassess and Reevaluate your fuel buying program.

32. How Do I Become a Smarter Buyer of Fuel ? Step One – identify your local market ! There are nearly 400 individual terminals, or “racks” where wholesale products are sold. The fuel that you buy comes from one or more of those locations. You need to find out which of those rack locations your product is delivered from – even though some rack locations are separated by only ten, or fifteen miles, there can be 3-5ct gal price variations, or arbitrages between the racks. Is that rack on a pipeline? If so, which pipeline(s) serve that rack? Why would there be such dramatic price differences?

33. Step One – Know Your Local Market After you determine what rack your fuel comes from, get a better understanding of who the suppliers are. Each of those 400 rack markets is dominated by one, or more suppliers. Know which of those has a big market share – they may be the most aggressive pricer, and that’s what causes those big arbitrages between the markets. Is that rack on the water? There may be a trader or two in that market that looks to dump excess cargo bbls especially in markets that feature weak prices. Knowing the specifics of your local market is critical!

34. Step Two – Understand Fuel Specs When I started in this industry, there were not many different specifications of fuel. The clean air act changed that initially. If you were a gasoline buyer, all you had to worry about was regular, unleaded, or premium. If you were a diesel buyer, all you had to worry about was high, or low sulfur. NOT ANY MORE!

35. Step Two – Understand Fuel Specs Now, we have a very complicated, “boutique” fuel slate – many different kinds of gasoline and diesel fuels that vary by the rack. Like, low RVP or RFG, or Low Sulfur or CARB gasoline. Like, Texas LED, or ULS, or NRLM, or CARB diesel fuel. In short, the fuel slate today is non-fungible, which means that it has the least interchangability. IT IS CRITICAL FOR EVERY FUEL BUYER TO UNDERSTAND WHAT FUEL IS REQUIRED AT WHICH TERMINAL ! THIS CAN VARY BY COUNTY!

36. Step Three – Read Your Fuel Contract! Many buyers are still working off contracts that are ten or more years old, and have incorrect language regarding fuel specificity and price / cost basis. Contracts should be updated, and the length of the contract should be reconsidered! If you are a gasoline buyer in an RVP or RFG area, your contract probably may not specify the correct fuel to be delivered. If you are a diesel fuel buyer in areas that have specific fuel requirements, your contract may not specify the correct fuel to be delivered. If you are “ratable,” consider shortening the length of your contracts and revisit them every 2/3 years.

37. Step Three – Read Your Contract Does your contract spell out what “benchmark,” or cost basis is being used? What is a “benchmark?” Is it a rack, or a “spot” market benchmark? With the advent of volatility in the last five years, there are more benchmarks to choose from especially if you are using OPIS. Is it a weekly benchmark? If so, what does “weekly” mean? Is it a daily benchmark? If so, which of the three daily benchmarks is the cost basis – morning, closing, or midnight? If it is a spot benchmark, do you understand the very major differences between OPIS, Argus and Platt’s?

38. Step Three – Read Your Contract Is the cost basis a “gross,” or a “net” price? A “gross” price refers to payment terms – NOT temperature correction. Gross billing means that the customer gets a 1% discount if they pay within 10-days. A “net” payment terms means that there is no discount. The price is the price. If you are buying on a “gross” basis, have you asked your supplier to pass that 1% along to you? Is that a reasonable request? Do you verify that the prices being charged to you on the invoice / bill of lading are correct?

39. Step Four – Educate Yourself! The fastest road to success is simple – CONTINUITY IS KING! If you buy fuel everyday, or several times a week, or if you are in charge of the group that purchases fuel, you should have a basic understanding of market direction. Take five minutes everyday and ask yourself – what happened in the markets yesterday? Check out financial websites, Bloomberg, Marketwatch, Yahoo Financial, etc. These can hold the keys to explain why the market is doing what it is doing,

40. Step Five – The “Influence” Chain Step Five is key to being a better fuel buyer. The “Influence Chain” is the chain of events that occur that cause your fuel buying prices to rise, or to fall. As you become a smarter, more educated fuel buyer, understanding this chain of events will help you time your purchases better. Remember – energy markets move up and down in large amounts!

41. NYMEX – paper market, influenced by regional and international factors. Cash “Spot” Markets – actual wet, in tank bbls in New York, Gulf Coast, Group 3, Chicago, and the West Coast almost instantaneously. Rack Prices – at 6:00 p.m. that same day. Retail (pump) Prices – probably two / three days later. The Influence Chain IMPACTS IMPACTS IMPACTS

42. Pieces of the Influence Chain – The NYMEX If you want to buy smarter, you must understand the NYMEX, and it’s influence on day-to-day petroleum markets. NYMEX stands for New York Mercantile Exchange. The NYMEX is a futures, or paper market. It is NOT a physical market. Fuel buyers use the NYMEX to purchase future quantities of fuel. Most often, these purchases are done to hedge the exposure of physical positions. The NYMEX is the single most influential part of the influence chain.

43. Pieces of the Influence Chain – Spot Markets Spot markets are areas that are considered refining hubs. These are areas where huge volumes of fuel are traded in bulk pipeline, or waterborne quantities. Spot markets have a direct relationship to the NYMEX. This relationship is called basis. Of the 400 or so terminal / rack locations in the U.S., more than 300 are tied directly to one of the spot markets. As a smarter fuel buyer, you should identify not only which rack(s) your product comes from, but which spot market supplies that rack.

44. US Spot Markets Pacific Northwest Group 3 Chicago NY Harbor San Francisco Los Angeles Gulf Coast

45. Pieces of the Influence Chain - Racks Racks are the third piece of the influence chain. Movement in the NYMEX affects daily trading in the spot markets because of basis. The upward or downward movement in those spot markets is the information that refiners / suppliers use to determine whether to raise, or lower rack prices. Oil essentially trades 24 hours a day now.

46. Pieces of the Influence Chain – Retail While rack prices react almost immediately to changes in the NYMEX, and to Spot Markets, retail lags behind. Retail markets are much more complex entities, and have their own dynamics. Retail prices may, or may not react to movement in the NYMEX, Spot, and Rack markets. Typically, though, retail prices will react, but much more slowly.

47. Industry News – Why It’s Important Industry news – especially news regarding refineries – is critical to fuel buyers. Once you have determined which rack(s) your fuel comes from, and which spot markets serve those markets, understand which refineries supply those markets. Refinery turnaround issues have a HUGE impact on supply.

48. Refinery News – What To Look For FCC turnarounds affect gasoline production. Hydrocracker turnarounds affect gasoline production. Reformer turnarounds affect gasoline production. Desulfurization unit turnarounds affect distillate production. Coker turnarounds affect distillate production. When these units go down at refineries, it affects production, and that affects your local markets! Having that news in front of you can help you time your purchases better!

49. Basic Price Discovery Once you know your local market, and have determined the correct benchmark, or cost basis for your fuel purchases, you should purchase basic price discovery. You can use the basic price discovery for two primary, and very important reasons: - To Verify the price being charged to you is correct. - To see what other suppliers are charging, and to see if your price is competitive.

50. Sample Atlanta Rack Price Discovery ATLANTA, GA 2009-05-26 11:00:34 EDT **OPIS GROSS NO.2 DISTILLATE PRICES** No.2 No.2 No.2 Terms LS Move HS Move ULS Move Date Time Shell u N-10 -- -- -- -- -- -- -- -- 157.50 + .83 05/22 18:00 Marathon u N-10 -- -- -- -- -- -- -- -- 157.65 + .65 05/22 18:00 TransMont u N-10 155.15 + .85 -- -- -- -- 157.81 + .60 05/22 18:00 Musket u N-10 -- -- -- -- -- -- -- -- 157.85 + .62 05/22 18:00 Valero u N-10 -- -- -- -- -- -- -- -- 157.85 + .60 05/22 18:00 COP u N-10 155.45 + .80 -- -- -- -- 157.90 + .60 05/22 18:00 FlntHlsRs u N-10 155.35 + 1.01 -- -- -- -- 158.02 + .87 05/22 18:00 Colonial u N-12 -- -- -- -- -- -- -- -- 158.10 + .65 05/22 18:00 Murphy u N-12 155.70 + .85 -- -- -- -- 158.20 + .65 05/22 18:00 BP b 1-10 -- -- -- -- -- -- -- -- 158.71 + 1.19 05/22 18:00 Chevron b 1-10 -- -- -- -- -- -- -- -- 158.90 + .50 05/22 18:00 Texaco b 1-10 -- -- -- -- -- -- -- -- 158.90 + .50 05/22 18:00 Shell b 1-10 -- -- -- -- -- -- -- -- 159.09 + .84 05/22 18:00 Coastal b 1-10 -- -- -- -- -- -- -- -- 159.35 + .50 05/23 00:01 Sunoco b 1-10 -- -- -- -- -- -- -- -- 159.35 + .50 05/23 00:01 COP b 1-10 157.15 + .80 -- -- -- -- 159.50 + .40 05/22 18:00 Valero b 1-10 -- -- -- -- -- -- -- -- 159.63 + .60 05/22 18:00 BP u N-10 -- -- -- -- -- -- -- -- 159.94 + .55 05/22 18:00 Marathon b 1-10 -- -- -- -- -- -- -- -- 160.00 + .66 05/22 18:00 Citgo b 1-10 -- -- -- -- -- -- -- -- 160.10 + .40 05/22 18:00 Citgo u 1-10 -- -- -- -- -- -- -- -- 160.10 + .40 05/22 18:00 Mystik b 1-12 -- -- -- -- -- -- -- -- 160.10 + .40 05/22 18:00 XOM b 1-10 -- -- -- -- -- -- -- -- 160.16 + .62 05/22 19:00 LOW RACK 155.15 -- -- 157.50 HIGH RACK 157.15 -- -- 160.16 RACK AVG 155.76 -- -- 158.90 OPIS GULF COAST SPOT MEAN - 05/22 FOB COLONIAL 151.300 -- -- 154.050 OPIS GULF COAST DELIVERED SPOT (SRI) FOB ATLANTA 154.44 -- -- 157.19 BRD LOW RACK 157.15 -- -- 158.71 BRD HIGH RACK 157.15 -- -- 160.16 BRD RACK AVG 157.15 -- -- 159.48 UBD LOW RACK 155.15 -- -- 157.50 UBD HIGH RACK 155.70 -- -- 160.10 UBD RACK AVG 155.41 -- -- 158.27 CONT AVG-05/26 155.76 -- -- 158.90 CONT LOW-05/26 155.15 -- -- 157.50 CONT HIGH-05/26 157.15 -- -- 160.16