FUEL SUPPLY DYNAMICS

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FUEL SUPPLY DYNAMICS -What You Dont Know CAN
Hurt You-
Presented by Tom Kloza, Chief Oil Analyst,
OPIS Invent The Future NAFAs Fleet Management
Institute May 4-7, 2002 Philadelphia, PA
Pennsylvania Convention Center
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The World The U.S.
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Beware Of The Experts
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The Lever Of Global Volatility
40 BBL
5 BBL
Actual Cost
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U.S. Motor Fuels Volatility
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The Oprah Market
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Its All About Relationships
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There Are Stable Relationships
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There Are Turbulent Relationships
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Manifestations Of The Oprah Market
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Elliptical Orbits
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Danger Shallow Water
NO DIVING SHALLOW WATER
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BEWARE OF THE BAY OF FUNDY
This is going to sound weird, but stay with me.
If you want to understand why U.S. gasoline
prices gyrate like a whirling dervish, look north
to the Bay of Fundy in Nova Scotia. Tidal
swings in the upper Bay have been measured at
more than 53 feet, higher than a five-story
building. The key reason for the wild tidal
swings is that the Bay is shallow and
funnel-shaped. The water has nowhere else to go
when there's a bulge in supply at high tide, and
wave after wave is amplified by the unique
resonance of the Fundy tides. When the tide
retreats, it leaves nooks, crannies, and
estuaries exposed to the ravages of nature.
It's not nature, but Man that has created a
parallel world in the U.S. gasoline distribution
system. Year-on-year, the changes haven't been
that dramatic--it's tough to get too excited
about gasoline inventories that are about 14
million barrels above last year's total of just
over 200 million barrels. Its not til you look
back 20 years that you start to understand the
shallow delivery system that plagues the U.S.
Twenty years ago, before the notion of "just in
time" inventories became the latest fad, spring
typically saw about 285 million bbls of gasoline
in primary storage. That was the requirement even
though there were about six grades of gasoline in
use nationally, compared with nearly 160
different blends in 2002. Over 300 refineries
fulfilled the need, and about one third of those
plants sat on U.S. coasts. Flash forward to
2002. Gasoline traders this winter called the
14-million bbl supply surplus to 2001 "massive"
and wondered whether refiners might survive the
peril that such huge inventories might present.
Hyperbole doesn't take the winter off, it
appears. Days Supply Now Versus Then More
proof of the shallow nature of the rivers,
estuaries, and pools that hold gasoline these
days can be garnered from the striking demand
differences between 2001 and 1981.
Notwithstanding the rose colored glasses through
which we view the Reagan years, U.S. gasoline
demand was a miserable 6-million b/d in the first
year of that presidency. So the 285-million bbl
of inventory represented nearly 48 days of
supply, a comfortable level.
Contrast that with mid-February inventories.
Sure, a 14-million bbl year-on-year surplus
provides some comfort, but with early Winter
gasoline demand of about 8.2-million b/d, it's a
small measure. The 217-million bbl of press-time
inventory reflects only about 26.5 days of
supply. If you believe that the economy is on
the upswing, you might even predict that gasoline
demand will flirt with 9-million b/d once the
driving season is under way. Any way you look at
it, the U.S. is likely to only have some 22-28
days of gasoline supply in its system when the
summer pinch begins. Now versus then is
further complicated by the new challenges of
Clean Air. Virtually every barrel of inventory
that was counted in the press-time survey is
unsuitable for consumption in May because of high
Reid Vapor Pressure. Suppliers must flush
217-million bbl from a system, all the while
balancing the need to keep enough inventory on
hand to satisfy spring demand of about 8-million
bbl. No such challenges existed in 1981. Watch
out east of the Rockies There have been
massive movements of population in the last
twenty years, but everyone didn't leave the
Midwest. Yet, one wouldn't know this if he or she
looked at gasoline inventories. In 1981, there
was about 90-million bbl of gasoline in storage
in the Midcontinent. This year, there's about
54-million bbl, a difference of about 40 percent.
There are far fewer refineries in the Midwest and
the region depends mostly on the smooth flow of
products from the Gulf Coast. East Coast
gasoline stocks are about 23 percent below where
they were 20 years ago. The Gulf Coast is shy
about 20 percent from 1981. Combined, we find
Petroleum Allocation Districts 1, 2, and 3
representing about 70-million bbl of the storage
deficit between the Bush and Reagan
Administrations. No one has yet figured out a
way to determine days' supply of gasoline by
district, but there's no margin for error in
these locations. In short, they represent the
dangers of shallow inventory. Starkly lower
storage in 2002 can bring volatile swings that
rival the tidal flow of the Bay of Fundy. If
only, they were as predictable . . .
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Bipolar Influences Themes
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THE CURRENT STATE OF INVENTORIES
NOW 5/1/02 5/1/01
5/1/00 5/1/99 Dist. Production 3,787
3,671 3,697 3,544 3,348 Dist.
Inventories 96,480 120,757 104,676
98,955 127,426 Gasoline Stocks 206,747
214,412 200,880 200,711 223,025 Gasoline
Production 8,474 8,384 8,650 8,461
8,124 Crude Stocks 288,553 321,093
320,500 304,142 331,147 COMBO NUMBER
591,780 656,262 626,056 603,808 681,598
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Gasoline Factors

• Petronoia, Enemas Brown Bananas
• Refineries On The Block
• Cheap Gas Now, But What About Later?

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Seasonal Affective Disorder Gasoline
5312 (11/25/2002) Atlanta
8136 (3/10/03) Atlanta
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DIESEL
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How Sweet It Is
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A Mess For The Rest Of The Decade
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THE ULTIMATE LSD
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WHO SHOULD YOU BELIEVE?

• EIA says cost of producing ULSD in 2006 will be
  5.4-6.8cts gal
• Modeling system says 4.7-7.3cts
  from 2007-2010 6.5-9.2cts in 2011
• EIA also says that the widest price differential
  of 10.7cts gal in 2010 is based on assumptions
  consistent with industry views.

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Charles River Associates Baker OBrien Study

• Estimated increase in the marginal price needed
  to balance supply and demand is 14.7-48.9cts gal,
  depending on imports.
• 10 of ULSD will be downgraded (vs. 2.2 in EPA
  EIA estimates)
• EIA document does admit that the extent to which
  product contamination will occur in the
  distribution system (and how much product will be
  downgraded as a result) is very uncertain.
  (Estimates range from 4.4 to 17.5)

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Why Natural Gas Matters
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Seasonal Affective Disorder Diesel
5512 (11/25/2002) Harrisburg
9937 (3/10/03) Harrisburg
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2003-2004 Outlook

• Crude
• 2001 2002 were the "last normal years
• Refinery pit stops are twice as long
• Offshore alternatives tail off going forward
• Summer gasoline winter diesel hits hyperbolic
  numbers
• Extremities internal organs
• Prices disconnect with futures values

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What Can You Do To Prepare?

• Relate your local market
• Know Futures facts fallacies - dont be
  hoodwinked
• Understand new ways of buying
• Play the dispatch delay game
• Drive a hard bargain
• Buy oil like you buy airline tickets

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WHY WE'LL SURVIVE GOOD HONEST, AMERICAN KNOW-HOW