Branded Products - Oklahoma City/Western Oklahoma

Over the last few weeks in Oklahoma City, we have noticed a change in how our Branded suppliers have decided to price their product and divvy allocations.  We are seeing one supplier post 300% daily allocations when they are normally at a consistent 125%.  Normally our customers will pay a premium for the brand name, which in essence nullifies the increase in supply availability, but not this time.  We are actually seeing a .08 differential from our Branded to Unbranded suppliers, giving our customers a competitive advantage to hold the brand.  Given previous market conditions, it has always been difficult to sell retailers on Branding their site as their pricing is less competitive than others in the market (such as On Cue or 7-11).  We are now seeing our Branded customers hold an advantage against these retail giants to finally give a true value to branding their facilities.  This is also beneficial from a marketing perspective as we are able to help the smaller unbranded retailer due to our significant increase in allocations.  Normally if there is ever a beneficial price spread, we are limited at the amount of fuel we can sell because our allocations are at the previously stated number of 125%.  With having a 300% allocation we can take this cheaper product and any rebate incentives we have to show our customers we have the best supply available at the cheapest possible price.  We have noticed higher loyalty offering these prices to our unbranded retailers as their contracts all state they will receive the cheapest available Unbranded supplier.  By us offering them a Branded supplier they realize we are giving them a price they are contractually not obligated to receive.  It is showing superior customer care as well financial understanding.  Along with Oklahoma City, we are seeing an arbitrage of approximately .21 on Shell Branded product out of McKee, TX vs. Scott City, KS.  Between the two, you are looking at about a 205 mile difference in rack locations, but given the difference in cost, our customers are happy to pay the extra in freight.  By offering these prices to customers in Western Oklahoma & Southern Kansas we are showing a quality of using our organization.  We are maximizing our supply for our customers by keeping a watchful eye on price differentials and passing the significant savings on to them to maximize their returns.  Saving a customer money is keeping a customer for life.  We have noticed transparency is the most lucrative option for most customers as their main concern is knowing their wholesaler is doing everything they can to alleviate price costs.  Customer satisfaction is always key.

Biodiesel

So far this year we have noticed a a few hurdles as it pertains to the plausibility of biodiesel for everyday use.  "RIN Gate" has been a terrible setback for us so far this year as the EPA has mandated all the majors to guarantee the viability of every blended gallon they sell.  This shouldn't be that big of an issue, but what we are seeing in the market place is all the majors only doing business with major biodiesel producers such as ADM or Cargill....this is killing the little guy.  We have a great company we use out of High Hill, MO who has had to shut down production because we can not sell their RINs forward to lock in a price to sell to our customer.  We could take the chance of purchasing the product and hoping someone buys our RINs off us once they are transferred from a K1 to a K2, but then we are running the risk of the value dropping significantly or even worse - not being able to sell them at all.  We are having our producer complete their RIN Attest right now in hopes this solves the problem and I will be sure to revert back one to process is completed to let you all know how it has changed the situation.  The main concern with all this is the fact that biodiesel has, again, become a lucrative blending option for those customers using biodiesel.  On closing Friday we saw the market finish with RINs trading on the high side at 1.45.  This brings a blended value up to 2.175.  We saw the NYMEX settle HO out at 3.1889 and Group 3 Platts Avg. end at 3.1152.  Assuming you have a Platts contract with a supplier at Platts previous day Avg. + 2.75 you would see your diesel price at 3.1427.  Assuming basis stays on this consistent level (or goes higher) and RIN values do not drop below the 1.45 (or you can sell them forward) you can purchase biodiesel and generate a blended competitive advantage at HO + 2.10/gallon.  This is incredible because right now, we are seeing offers at HO + 1.75 delivered.  At HO + 1.75 your economics would play out as listed:

Biodiesel cost - 3.1889 + 1.75 = 4.9389
RIN value = 1.45*1.5 = 2.175
Blended biodiesel cost = 2.7639
Diesel cost = 3.1152
B5 Blend = 3.0977 (.0176 savings)
B10 Blend = 3.0801 (.0351 savings)

These savings are not only savings on the side of wholesale, but also a competitive advantage for the jobbers in this area.  I'm excited to get back to moving the volume we had last year, but until RIN Gate gets settled we are at the mercy of the market.  The indication we received at HO + 1.75 isn't something that gets thrown around very often as the majors are sending teams of people into different biodiesel facilities to Vett their operations and make sure the RINs are valid and their reporting structure is concise.  Luckily we have made good friends in this industry and the opportunities present themselves when we need them most.  Afterall....it's not what you know it's who you know.

Basis/Marketing Opportunities

As I'm sure you have all noticed, this year is proving to be one not forgotten in the energy industry.  We  are showing crack spreads at very high levels and demand at a 117 month low.  Our basic economics of supply and demand are being questioned by the refiners' ability to produce product at maximum capacity and flood the pipelines with product while speculators take advantage of arbitrage opportunities and offer overseas political issues as a source of price spikes.  Basis is the game I would be playing right now.....Right now Chicago is showing subgrade gasoline basis at (0.6525).  Compare that with Group 3 economics showing a conventional 87 basis at (0.1400).  You're showing an arbitrage of 0.5125; assume you can transport the product from the Chicago market into the Group at a transportation cost of approximately 0.3000 (FSC included) and your netback comes to 0.2125/gallon (this is without even using pipeline transportation!).  Rather than taking a physical position on this product I think traders need to entertain the idea of using this 0.2125 as a liquidation opportunity and focus the majority of their time on buying CBOB basis in Chicago.  Knowing the time of the year, we can all expect prices to continue to rise, and we can expect the basis gap to close as April quickly approaches and RVP season comes rushing in.  You all may remember last year at this time Chicago basis was at (0.2000) right around February/March; after the RVP change Chicago quickly skyrocketed up to .1500, giving traders who were long basis a VERY happy payday.  Rather than merely trading basis, I would suggest to the wholesale jobbers in the Dayton/Columbus Ohio markets to start heading east towards the unbranded customers being supplied by the NY Harbor.  Right now Chicago's discount to the Harbor is approximately 0.6265 poising jobbers and wholesalers with supply rights out of these terminals a tremendous advantage to customers in western/eastern Pennsylvania.  With the branded suppliers in this market continuing to be aggressive, the price and rebate incentives offered could create chaos for jobbers in the Pennsylvania market with limited Chicago economics.  My preference would be for all my Econ classes I took during my undergrad and Corporate Finance classes taken during my Masters to ring true so I can justify my $1 trillion in student loans, but it seems the Wall Street and all its traders still holds the crystal ball....I just hope to get a peek.