OPIS National Supply Summit

October 8 , 2008

NE Sees no Demand for CBOB in Fall, Winter; Buckeye May Ship Next Summer

The boutique fuel, CBOB, has again failed to gain any popularity vote in the Northeast spot market, and it may only see more demand next summer, traders told OPIS on Wednesday.

Since its debut in April-May, CBOB failed to generate a lot of spot trading interest in both the Gulf Coast and New York Harbor
cash markets last summer because of a weaker-than-expected summer gasoline demand and slow conversion of terminals
to blend ethanol.

In the recent weeks, as the market made its transition to the winter grades from summer fuel, brokers pointed out that price negotiations for CBOB had slowed to a halt.

This is because of a lack of CBOB demand, similar winter specs between RBOB and CBOB, and cheaper RBOB.

CBOB is a gasoline blendstock that does not have to meet the very strict standards of reformulated gasoline, but it can meet the conventional regular gasoline specs after blending with ethanol.

Unlike RBOB and conventional gasoline, CBOB is not traded regularly or on a daily basis in the New York Harbor spot market.

Winter RBOB is now priced at a significant discount of at least 5-6cts per gal to CBOB in the cash market, and yet, both grades have similar RVP and octane ratings.

"Marketers will use cheaper RBOB to blend with ethanol, and regular conventional regular will be sold to the conventional markets," a trader said.

"There is a need for CBOB in summer (because of the lower RVP requirements), but not in winter," he said.

Buckeye Pipeline has been deliberating whether to accommodate the shipping of CBOB in its system for delivery to upstate New York since late last year.

So far, no decision has been made yet.

Buckeye has sent out a second round of surveys to shippers and refiners to gauge their interest in shipping CBOB as well as to find out more about the different specs and quantities.

It launched its first market survey late last year on CBOB shipping in 2008, with an eye on shipping last summer. However, Buckeye failed to receive much definitive response.

Buckeye is expected to make a final proposal to refiners and shippers in the next few months after gathering all recent
survey results.

It is clear that Buckeye is unlikely to start shipping CBOB this fall or winter because of a general lack of demand, traders said.

Besides comparatively weak conventional regular prices in summer, CBOB also faced logistics issues and availability of ethanol for blending.

In the first half of this year, Buckeye Pipeline, which caters to the Northeast including New Jersey, New York and Pennsylvania, was slow to convert its terminals to allow ethanol blending.

However, that is changing. The pipeline operator is now making preparations to convert more terminals in upstate New York such as Brewerton, Buffalo, Rochester South, Marcy and Vestal by the end of 2008.

In August, it bought the second-largest ethanol terminal in the U.S., the 1.8-million bbl Albany terminal, formerly owned by Cibro.

This would allow more accessibility to ethanol blending at its terminals.

A Buckeye Pipeline spokesman told OPIS in summer that the company is continuing to assess the market situation, and continues to talk with its customers on CBOB shipping. It has not yet finalized any plans.

He declined to give any possible dates on when Buckeye could start shipping CBOB.

Before Buckeye could go ahead with its CBOB shipping plans, it would need to nail down if it wants to ship only one fungible grade of CBOB or all different grades, which would need delivery segregations in batches.

Buckeye is expected to ship an 84-octane sub-grade, which basically meets all conventional regular specs except for octane.

For Albany and upstate New York, the subgrade would be 84 octane and 1 PSI lower RVP than conventional regular to account for the extra 1 PSI from ethanol blending.

October 6 , 2008

Refinery Project Shelved; Rockies Will Get Less Diesel

A Canadian oil firm has shelved a major expansion at a Rocky Mountain oil refinery that is its only U.S. asset.

Calling the decision both economic and strategic, Connacher Oil and Gas Limited, based in Calgary, Alberta, said that it will put off expanding the Great Falls, Mont., refinery from current levels of 9,500 b/d to 35,000 b/d.

The project, which was in the design phase prior to the announcement, would have increased diesel supplies in the Northern Rockies and in some Western provinces that at times have been chronically short of diesel.

It would have been in full operation by 2011, according to plans.

Connacher cited weak overall economic conditions and the volatile and uncertain state of both capital and credit markets.

Moreover, increased demand for Canadian heavy crude oil and bitumen has reduced heavy oil discounts and created strong netbacks for oil sand producers. "This has made it less important to add new capacity to protect against wide heavy oil differentials," Cameron Todd, VP of Refining and Marketing, told OPIS.

Connacher expects narrower heavy oil differentials to continue for some time, due to delays of many oil sands and heavy oil projects, the company said. It will reconsider the expansion if capital markets improve and a prolonged period of wider heavy crude oil differentials emerge, it said.

Connacher bought the refinery from Holly Corp., in March 2006. It is in the midst of a hydrogen plant upgrade that will enable it to start producing ULSD in January.

October 1 , 2008

EIA July Gasoline Demand Shows Biggest Slump Since 2001

The difference between weekly and monthly data published by the Energy Information Administration was underscored by a report Tuesday that showed much lower gasoline demand for midsummer than what was published during July. The difference is stunning, and if the year-on-year downtrend is maintained, this year could bring the lowest annual gasoline demand since 2003
or even 2002.

The revision, issued in EIA's Petroleum Supply Monthly on the last day of September, shows July 2008 gasoline demand at just 9.072 million b/d. Marketers, traders and analysts who looked at the weekly statistical bulletin on say, July 30, would have viewed
a four-week average figure for July gasoline demand of 9.375 million b/d, which put it at a modest 2.4% deficit to the same period in 2007.

But the 9.072 million b/d number reflects a 5.7% drop, representing approximately 550,000 b/d of demand destruction. It confirms the suspicion of many marketers who have vociferously maintained that DOE has consistently overstated real demand numbers.

It also may help marketers who are falling behind contract minimums, or growth targets, set by major oil companies. Some
small branded jobbers say that some of their summer month sales were off by as much as 10%, as price-wary shoppers
planned their gas purchases around trips to warehouse clubs such as BJ's, Costco, or Sam's Club and eschewed Mom and
Pop service stations.

Not coincidentally, the 550,000-b/d year-on-year drop occurred in a month that had the highest retail prices ever -- $4.062 as tracked by OPIS and AAA, or some $1.089/gal below July 2007 prices. Retail gasoline values have moderated since then to $3.633, but that still represents a year-on-year increase of 84cts/gal, and marketers believe that the financial crisis has prevented any rebound in demand.

Gasoline was just one segment of the drastically revised monthly portrait by EIA. Demand for all oil products was just 19.4 million b/d in July, which represents the lowest monthly figure in 97 months (May 2003). Total products demand was 1.335 million b/d below July 2007, a decline of 6.4%.

The aggregate July numbers follow a 1.17 million b/d slump in June when retail gasoline averaged $4.046/gal and diesel sold for an average $4.78/gal at the pump.

Viewed from a longer-term perspective, the overall petroleum downtrend has actually gained steam. It's the twelfth consecutive month that features a year- on-year drop in monthly demand for all products, and that hasn't happened since the Persian Gulf War.

The streak for gasoline demand destruction stands at ten months, but to find a July gasoline demand figure this low, you have to go back to 2001 when July demand was calculated at 9.023 million b/d. There are tens of millions more drivers now than seven years ago, so the cut represents some drastic lifestyle changes in parts of the country.

The last time the U.S. saw annual gasoline demand of less than 9 million b/d was 2003 when it was measured at 8.935 million b/d for the year. Even if the demand losses temper to about 3%, the U.S. will use less than 9 million b/d when all the results are
in for 2008. If the last third of the year matches the July rate of demand destruction, the 8.848 million b/d level of 2002 could be
in reach.

Gasoline demand in the last four months of 2007 averaged about 9.262 million b/d as follows: August--9.592 million b/d; September--9.244 million b/d; October--9.25 million b/d; November--9.249 million b/d; and December--9.249 million b/d.

July Gasoline Demand                                 Year
---------------------------------------------              ------
          9.072 million b/d                                 2008
          9.622 million b/d                                 2007
          9.583 million b/d                                 2006
          9.451 million b/d                                 2005
          9.357 million b/d                                 2004
          9.192 million b/d                                 2003
          9.143 million b/d                                 2002
          9.023 million b/d                                 2001
          8.642 million b/d                                 2000

September 29 , 2008

Oil Markets More Volatile, Less Liquid After Wall Street Makeover

The last two weeks have produced $29.50/bbl of volatility on crude and as much as $2.00/gal worth of volatility for fuels. Yet fuel experts believe that back-to-back hurricanes in the Gulf Coast and the September "seizing up" of financial markets lead to more, and not less volatility in the remainder of the year.

Speaking as U.S. crude oil futures notched their biggest-ever price decline and stock market indices fell 7%-9%, Guy Caruso, the former head of the Energy Information Administration, oil trading consultant Andy Lipow and OPIS chief oil analyst Tom Kloza discussed the changes seen recently in both petroleum supply fundamentals and financials.

Caruso, soon to join the Center for Strategic and International Studies in Washington, forecast that U.S. crude oil prices would hold to a range between $100 and $120 per barrel as bearish demand fundamentals counter a global oil market where spare production capacity isn't seen significantly increasing.

The impact of production constraints has been exacerbated by the depletion of gasoline inventories in the U.S. and diesel stocks in Europe, a situation recently made worse because of the credit crunch, Caruso said.

Lipow, president of Lipow Oil Associates, also linked tightening credit terms for physical crude traders with the decline in inventories. Higher interest rates for trade finance have combined with banks' reluctance to lend money in a backwardated market, and removed any incentive to store inventory. Lipow cited a big drain in U.S. inventories as well as a need for international
trading companies to squirrel away excess output in floating storage as a means of coping with a backlog.

"Traders are wary of buying cargoes to flip at a later time," Lipow said. "Liquidity is falling off in the physical market and even on Colonial pipeline. You just can't afford to buy and sell at a 25-point spread; you need a penny just to break even."

The situation speaks to a major disconnect between wet and paper markets that has consequences and no short-term end in sight, OPIS' Kloza said.

"With the exception of the big oil companies, smaller suppliers can't justify buying spot fuel in the Gulf Coast and sending it out on the pipeline," he said. The chasm between values in the physical market and those on NYMEX seriously jeopardizes the competitiveness of those barrels downstream, he added.

The double whammy of Hurricanes Gustav and Ike on U.S. fuel inventories has also distorted the overall petroleum market. Hurricane Ike shut about 20% of U.S. refining capacity just as the 15% shut by the earlier Hurricane Gustav was coming back and probably cost the system as much as 60 million barrels of crude -- far more than the accumulated loss of offshore U.S. oil production, Lipow said. The result of refiners turning back term purchases of oil because they can't process it has added to the weak consumer demand for fuel and resulted in a precipitous drop in crude oil futures.

At the same time, fuel supply in regions of the country that haven't seen the growth in fuel storage that others have but where population growth is strongest have been the most compromised and will take the longest to return to normal, according to Kloza.

While legislation setting the terms for a bailout of the U.S. financial sector failed to pass in the House of Representatives on Monday, speakers on the call gave their views of how oil markets might behave after the meltdown that has changed the face of Wall Street.

"Less liquidity and more volatility," said Lipow. Banks, which had stepped in to conduct increasingly large numbers of oil transactions, are now likely to pull back in their more regulated, de-leveraged states.

Bid-ask ranges are likely to widen and buyers will have further to go to get done, Lipow said. "It will make it harder to hedge (risk)," he added. Those players who lost in hedging over the last few years "will go back to being rateable players," Lipow said.

Kloza pointed out that financial participation in benchmark WTI futures is as much as ten times higher than it is in refined products, and suggested that could keep odd relationships between products and crude. The difference between physical or "wet barrel" cracks and the paper numbers for NYMEX futures was wide and likely to remain wide through October, he added.

Crude will be the primary beneficiary of more optimistic macroeconomic news, but will also be a more prominent victim when financial markets take a turn for the worse. Accordingly, some traditional hedging mechanisms may fall prey to distortion and not offset risk in the actual physical markets.

"Tried and true methods of hedging need to be put aside," Kloza said.

September 24 , 2008

Oil Markets to See Outages into October

U.S. gasoline inventories dropped to their lowest levels ever, setting the stage for gasoline product outages to linger into October.

Southeastern gasoline marketers tell OPIS they continue to battle product outages and they expect to experience loading delays for "at least another two weeks," according to one large chain retailer who worries that he may have to close some stations due to a lack of product.

A number of gasoline stations have run out of product following Hurricane Ike. Many other stations where product is available continue to see long lines.

Gasoline outages are common at supply points fed by the Gulf Coast - along the Colonial Pipeline and even along the TEPPCO, Explorer, and Magellan systems.

One marketer who buys product through several states says he can't get gasoline at a number of terminals. He is diverting trucks to alternate supply points, sometimes fifty to a hundred miles out of the way to get "a few precious loads of gasoline."

Making matters worse, major oil companies are cutting off unbranded accounts so they can keep branded marketers supplied. Even unbranded marketers with contracts are being shut off.

"When I am able to find barrels I am paying a premium price," one marketer told OPIS. He paid one supplier $3.25 for a gallon of unleaded in a city where more common prices were $2.80.

Gasoline supplies have been drawn down to critical levels because so much capacity was disabled by Hurricane Gustav and Hurricane Ike. The supply situation appears to be a bit worse than during Katrina, because inventories prior to the storm were much lower. Declining prices, uncertain demand, and the high cost and enormous price risk of carrying barrels forced many marketers to reduce normal supply levels. Along comes the refinery shutdowns, and a supply crunch develops.

Marketers say that some terminals and stations are so low on fuel that when supplies are replenished they will be rapidly exhausted. "Everyone will run to fill up, further exacerbating the supply situation."

This is why some marketers are predicting that supply challengers will stretch into October.