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US Jet Fuel: Market signals in a rising price environment Markus Wimmer Editor, Argus Jet Fuel Louise Burke Strategic Business Development September 25, 2013
Presentation overview About Argus US jet fuel: Market signals in a rising price environment The impact of shifting crude oil fundamentals and refinery economics on jet fuel Supply and demand factors in different regional US jet fuel markets Jet fuel market signals to watch in upcoming months Argus methodology and usage
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1. The impact of shifting crude oil fundamentals and refinery economics on jet fuel
$/bl Jet up with crude in 2H2013, but bearish factors remain 140 135 130 Feb-May: Overproduction pressures prices May-Aug: Steady price increases due to seasonal demand and crude oil strength Sep: Price drop as Syria tensions ease, refiners continue to overproduce 125 120 Jan-Feb: Post-Sandy tightness in USAC 115 110 105 100 95 90 WTI USGC Colonial jet 85 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
Main drivers for WTI strength since May 1. Important crude pipeline startups south of Cushing, Oklahoma (Seaway reversal, Permian Express) 2. Reduction in Canadian imports due to unplanned outages in Canada 3. Strong midcontinent refinery run rates since the end of the turnaround season in June 4. Increased geopolitical risk due to political and military unrest in Egypt and Syria 5. Crude oil supply disruptions in Libya, Iraq, and other countries
$/bl Jet fuel cracks down from last year and vs. ULSD 45 40 Gasoline crack ULSD crack Jet fuel crack 35 30 25 20 15 10 5 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013
Thousand b/d US refiners produce above 5-year highs in the Spring and Fall 2013 why? US jet fuel production 1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5-year spread 5-year average 2013
b/d US refinery expansions 10,000,000 9,000,000 Crude distillation Catalytic cracking Coking Hydrocracking 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
'000 bl Expansions driven by product exports, now 16pc of total production, up from 5pc in 2003 1,200,000 1,000,000 US products exports US domestic products demand 7,000,000 6,800,000 800,000 6,600,000 6,400,000 600,000 6,200,000 400,000 6,000,000 200,000 5,800,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 5,600,000
US shale boom impacts crude slate
Shale boom lightens US crude diet 31.2 US refinery crude feed API Gravity (Degrees) 31 30.8 30.6 30.4 30.2 30 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bakken yields more jet fuel than WTI and LLS Refinery Yield, Volume % LLS (35.6 ) WTI (39.6 ) Bakken (41 ) Eagle Ford (47 ) Gasoline/ Naphtha 24.2 32.1 36.3 37.1 Jet/ Kerosene 12.4 13.8 14.7 11.9 Diesel 26.4 14.1 14.3 21.1 VGO 27.3 27.1 26.1 24.2 Residual Fuel Oil 7.2 9.4 5.2 4.5
Bakken reaches all three coasts Bakken now even with imports on east coast Competing flat with LLS / Eagle Ford at Gulf coast West coast prefers Bakken s improved margin over ANS
Will EPA & Congress fix RFS-2?
Blendwall fears push up cost for RINs in 2013, encourage production of jet fuel 6 5.5 RVO $/bl 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
USGC jet fuel production 000 b/d RIN costs and jet fuel production levels show a 25% correlation 1000 900 800 700 600 500 400 300 200 100 0 USGC jet fuel production (Thousand b/d) Linear (USGC jet fuel production (Thousand b/d)) 0 1 2 3 4 5 6 RVO $/bl R 2 = 25%
'000 b/d US budget cuts reduce military demand by 20% in 2013, total US demand by 2.4% 170 US military jet fuel production (4-week average) 160 150 140 130 120 110 100 90 80 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 US military jet fuel production (4-week average)
Jet fuel at 4-year lows versus ULSD 8 USGC jet fuel minus ULSD c/usg 6 4 2 0-2 -4-6 -8-10 -12-14 -16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 4-year spread 4-year average 2013
2. Supply and demand factors in different regional US jet fuel markets
USAC breaks out post-sandy, but remains below transportation costs for most of 2013 18 16 NYH minus USGC c/usg Transportation Houston-Linden, NJ 14 12 10 8 6 4 2 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
Refinery closures reduce Atlantic coast capacity 38% in 4 years Owner City State Capacity b/d % of Region Status Philadelphia Energy Solutions Philadelphia PA 335,000 17% operating after ownership change Phillips 66 Linden NJ 238,000 12% operating Monroe/ Delta Trainer PA 185,000 10% operating after ownership change PBF Delaware City DE 182,200 9% operating PBF Paulsboro NJ 160,000 8% operating United Refining Co. Warren PA 65,000 3% operating American Refining Bradford PA 10,000 1% operating Ergon Newell/Congo WV 20,000 1% operating Hovensa St. Croix US Virgin Islands 350,000 18% shut 2/2012 Sunoco Marcus Hook PA 178,000 9% shut 12/2011 Sunoco Eagle Pt/Westville NJ 145,000 7% shut 2/2010 Western Refining Yorktown VA 66,300 3% shut 9/2010 Hess Port Reading NJ 0* 0% shut 2/2013 Capacity 2009 1,934,500 100% Capacity 2013 1,195,200 62% Capacity Lost 739,300 38%
'000 bl East coast production now only accounts for 10% of supply, imports for 4% - 86% are shipped from the Gulf 250,000 200,000 150,000 100,000 50,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 USAC receipts from other PADDs USAC production USAC imports
Colonial pipeline at capacity
Colonial pipeline at capacity Demand in New York has filled the pipeline Almost continuously allocated for 2 years Plans to expand to 2.4 mn b/d in 2013 with expansions aimed at easing bottlenecks into NYH Colonial and Buckeye Pipeline also completed a NYH pipeline tie-in to ease shipping transfers Jones Shipping Act discourages spot cargo movements between USGC and USAC
C/USG Chicago market realigns with Gulf after refinery after a heavy maintenance schedule in 1H2013 350 340 330 320 310 300 290 280 270 260 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 USGC Colonial jet Chicago jet
Chicago Chicago prices were the highest in the country between February and July Three area refineries have (BP, Citgo, ExxonMobil) have most of their production under contract Very little storage available Spot arbitrage on the Explorer pipeline is risky and not being worked
'000 b/d Gulf coast supply goes into export market rather than to the East coast or Chicago 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US Imports US Exports
$/bl West coast margins supported by diesel, jet 40 35 30 25 20 15 10 5 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 LA Carbob crack LA Carb diesel crack LA jet fuel crack
US West coast: Shutdowns, soft Asian market opens arbitrage from South Korea 160 140 120 100 80 60 40 20 0 Sep, 13 Aug, 13 Jul, 13 Jun, 13 May, 13 Apr, 13 Mar, 13 Mar, 13 Feb, 13 Jan, 13 Dec, 12 Nov, 12 Oct, 12 Sep, 12 Aug, 12 Jul, 12 Jun, 12 May, 12 Apr, 12 Mar, 12 Mar, 12 Feb, 12 Jan, 12 West coast jet fuel imports '000 b/d
US West coast Tesoro now the largest PADD 5 refiner with 716,500 b/d nameplate capacity (ahead of Chevron 485,000 b/d, Phillips 66 355,000 b/d). Tesoro has sold its Hawaii downstream business, including the shuttered 95,000 b/d Kapolei refinery, to a subsidiary of Par Petroleum Corp. in June 2013; Par is currently restarting the refinery.
US West coast crude sourcing to continue to shift Bakken now 17% of Washington State crude slate Washington refineries Capacity b/d Coking b/d Rail Crude b/d BP Cherry Point 225,000 58,000 20,000 P66 Ferndale 101,000 0 5,000 Shell Anacortes 145,000 25,300 0 Tesoro Anacortes 120,000 0 50,000 US Oil Tacoma 40,700 0 30,000 California has room for margin improvement: 1% Bakken, but 342,000 b/d of rail expansion planned until 2015 631,700 83,300 105,000 Proposed crude-by-rail facilities Capacity (b/d) Timeframe PAAP - Bakersfield, California 70,000 2014 Valero - Wilmington, California 60,000 2015 Valero - Benicia, California 70,000 2015 Tesoro - Vancouver, Washington 120,000 2014 Alon USA - Portland, Oregon 10,000 Sep-13 P66 - Rodeo, California 12,000 end 2013 342,000
3. Jet fuel market signals to watch in upcoming weeks and months
$/bl 3/2/1 crack spread run cuts? 40 35 30 25 20 15 10 5 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 WTI 3/2/1 LLS 3/2/1 WTI 3/2/1 minus RINs LLS 3/2/1 minus RINs
Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 US products exports stall in 2H 2013 30,000 U.S. Exports of Petroleum Products (y/y change in Thousand Barrels) 25,000 20,000 15,000 10,000 5,000 0-5,000-10,000
04-Jan 11-Jan 18-Jan 25-Jan 01-Feb 08-Feb 15-Feb 22-Feb 01-Mar 08-Mar 15-Mar 22-Mar 29-Mar 05-Apr 12-Apr 19-Apr 26-Apr 03-May 10-May 17-May 24-May 31-May 07-Jun 14-Jun 21-Jun 28-Jun 05-Jul 12-Jul 19-Jul 26-Jul 02-Aug 09-Aug 16-Aug 23-Aug 30-Aug 06-Sep 13-Sep Jet fuel production surplus keeps jet cracks down? 1,800 US jet fuel production & demand '000 b/d 1,500 1,200 900 600 300 0-300 Production surplus Production Demand
RINs high enough to incentivize jet fuel production on the expense of gasoline and diesel? 150.00 135.00 120.00 105.00 90.00 75.00 60.00 Biodiesel RIN Advanced RIN Ethanol RIN Cellulosic RIN 45.00 30.00 15.00 0.00 02-Jan-2013 02-Feb-2013 02-Mar-2013 02-Apr-2013 02-May-2013 02-Jun-2013 02-Jul-2013 02-Aug-2013
$/bl Narrow Brent-WTI spread shifting crude scale in favor of imported crudes? 24.00 Brent-WTI spread 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Brent-WTI spread
% Jet yields fall after Brent/ WTI spread narrows 10.20 10.00 US refinery product yield 31 30.5 9.80 9.60 9.40 9.20 9.00 8.80 8.60 8.40 30 29.5 29 28.5 28 27.5 27 8.20 Nov-2012 Dec-2012 Jan-2013 Feb-2013 Mar-2013 Apr-2013 May-2013 26.5 Kero/ Jet Distillates
Summary A rise in crude oil pushed jet fuel prices up since May, before pressures softened in September Overproduction depressed jet fuel crack spread US refinery expansions US shale boom impacts crude slate Blendwall encourages production of jet fuel US budget cuts reduce military demand by 20 Signals to watch 3/2/1 crack spread run cuts? US products export growth stalling? Jet fuel production surplus keeps jet cracks down? RINs high enough to incentivize jet fuel production? Narrow Brent-WTI spread shifting crude scale in favor of imported crudes?
4. Argus methodology and usage
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Argus Methodology Argus methodology reflects transactions all day long Alternative methodology reflects deals done at 3:15, with prices indexed to an assessment of futures 45 minutes after the settlement Argus adopted the International securities regulators organization(iosco) Principles for Oil Price Reporting Agencies (the PRA principles) Ensure transparency of information in a timely and usable manner Ensure transparency of process through compliance Train and supervise staff Compliance Procedures - Collect, collate and clarify market information Define the methodology of published prices and ensure it is transparent Define the basis, location, size, time period, specification of the contract being assessed or reported Verify and validate all market information received Explain and justify decisions
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Markus Wimmer Editor, Argus Jet Fuel Email: markus.wimmer@argusmedia.com Phone: +1 713 429 6303 Louise Burke Strategic Business Development Email: louise.burke@argusmedia.com Phone: + 1 646 376 6142 www.argusmedia.com Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, FMB, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Ltd. Visit www.argusmedia.com/trademarks for more information. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.