1. WHITE PAPER Intra-DayPrice VolatilityThis document requires Adobe Reader version 6.0.1 orA Look at the Facts andlater. To view this document, please download AdobeReader from: http://www.adobe.com/ Potential Implications By Laurence Cohen, Telvent DTN Product Managementwww.dtn.com/refinedfuels | 1.800.391.1175

2. INTRA-DAY PRICE VOLATILITY Intra-Day Price Volatility A Look at the Facts and Potential Implications Introduction The term volatility is one of the most frequently used words in the petroleum industry today. How can it be measured, and what are the implications for decision makers in pricing and supply? In this industry on how suppliers are coping with volatility via changes in price effective times. This information will help buyers and suppliers understand key market trends, and ultimately lead to more informed purchasing and selling decisions. Measuring volatility how much has it increased? Volatility increased dramatically in 2008Figure 1 depicts a measure of volatility based on the average daily This document requires Adobe Reader version 6.0.1 or change in the RBOB NYMEX contract. Price changes are shown on an later. To view this document, please download Adobe absolute value basis. In 2008, there was a dramatichttp://www.adobe.com/ Reader from: increase in market volatility, to an average daily price change of 5.8 cents per gallon. By comparison, the average daily price change in 2007 was 3.5 cents per gallon. Thus far in 2009, the average daily price change exceeds 4 cents per gallon, slightly below the same time period in 2008. Figure 1 Volatility increased substantially in 2008A measure of volatility based on the average daily change in the RBOB NYMEX contract 2009 Telvent DTN. All rights reserved. www.dtn.com/refinedfuels | 1.800.391.11751 3. Prices can change rapidly over the course ofINTRA-DAY PRICE VOLATILITY a couple of hoursGiven the large daily changes in prices, one of they key questions for buyers and sellers is when and how often to make an intra-day price or purchase decision. This challenge is significant, as the markets can change quickly during the course of the day. Consider the daily decision making process in the morning. For buyers, do I load early in the morning, or do I wait to see what happens? For sellers, do I keep my price where I set it yesterday, or should I make one or more intra-day changes? FIgure 2 captures the changes in the spot market during a narrow two hour window between 10 a.m. and noon.Figure 2Market prices change drastically, even in a two hour window in the morning This document requires Adobe Reader version 6.0.1 or later. To view this document, please download Adobe Reader from: http://www.adobe.com/Change in spot prices, noon vs. 10 a.m. Central time(absolute value) 2008 averagesNearly 45 percent of the time, spot prices moved less than +/-1 cpg between 10 a.m. and noon. However, it is clear that there was often significantly higher volatility with the markets moving greater than 2 cpg about 35 percent of the time. From the inset pie chart, 72 percent of the time the market continues in the same direction up or down comparing 10 a.m. and noon prices. However, there are still a significant number of days 28 percent when the market at noon has moved in an opposite direction to where it was headed at 10 a.m.2 2009 Telvent DTN. All rights reserved. www.dtn.com/refinedfuels | 1.800.391.1175 4. How have suppliers coped with increased volatility?INTRA-DAY PRICE VOLATILITY Intra-day price changes nearly doubled in 2008 vs. 2007In reaction to the jump in volatility in 2005, suppliers began to sharply increase the frequency of 6 p.m. (or end of business day) effective times, moving away from midnight effective times. With the further jump in volatility in 2008, suppliers began to increase the frequency of intra-day moves as well. Figure 3 tracks the increases in intra-day price changes:Figure 3 Intra-day price changes are increasing assuppliers cope with higher volatility This document requires Adobe Reader version 6.0.1 or later. To view this document, please download Adobe Reader from: http://www.adobe.com/ In 2004, 6 p.m. prices (end of business day) represented only about 10 percent of all price moves, but by 2009 this increased to about 80 percent of all price moves. In 2004, only about 4 percent of all price changes were made on an intra-day basis. By 2008, the frequency of intra-day moves nearly tripled, to 11 percent of all moves. Compared to 2007, intra-day moves nearly doubled in 2008. 2009 Telvent DTN. All rights reserved. www.dtn.com/refinedfuels | 1.800.391.11753 5. Figure 4 provides more detail on where the intra-day moves are INTRA-DAY PRICE VOLATILITY currently taking place.Figure 4Intra-day moves are more common in unbranded sales and in PADD 2 Intra-day moves are most prevalent in the PADD 2 (Midwest), while intra-day moves are less common in the PADD 4 (Rocky Mountain) area. This document requires Adobe Reader version 6.0.1 or As expected, intra-day moves represent a much greater portion of the later. To view this document, please download Adobe unbranded business (20 percent) compared to the branded business (2 Reader from: http://www.adobe.com/ percent). The unbranded intra-day changes at 20 percent is large and significant. For perspective, if everyone made one intra-day change for every end of day change, the percentage of intra-day moves would be 50 percent. It is apparent that intra-day price moves have become a standard practice in the unbranded sales channel. Conclusions Where are volatility and pricing practices headed?We have quantified the substantial increase in market volatility, and presented some facts on the corresponding changes in pricing effective times and increase in intra-day prices. Forecasting volatility for 2009 is of course difficult. However, looking at the month-to-month variance in 2008, it is apparent that any supply disruption or geopolitical event is likely to keep volatility high during 2009. However, if the absolute price levels remain relatively low, this may help to somewhat stabilize daily volatility. 2009 Telvent DTN. All rights reserved.www.dtn.com/refinedfuels | 1.800.391.11754 6. We think it is safe to predict that there will continue to be increases inINTRA-DAY PRICE VOLATILITY intra-day price changes, in both branded and unbranded business. The shift to 6 p.m. pricing (from midnight) took time to fully transition, as this required changes in the downstream supply chain processes and systems. Similarly, the shift towards intra-day price changes requires buyers and sellers to have much better information and systems in order to react and execute decisions effectively. This transition appears to be taking place and will continue to gain momentum. We are also seeing innovative buyers and suppliers stepping away from the pack and seeking new ways to buy and sell fuel. For example, there has been explosive growth in transactions on the DTN Exchange, which provides an online transactional platform where prices and volumes are agreed to on the basis of real time market conditions. What are some of the implications for my business?Volatility and intra-day pricing are here to stay. Failure to recognize these trends and adapt to the new market realities can have unintended This document requires Adobe Reader version 6.0.1 or consequences, including: later. To view this document, please download Adobe Reader from: http://www.adobe.com/ Loss in profitability: As a buyer, there may be better deals out in the market that may not be apparent by only looking at rack prices once a day. As a seller, there may be opportunities to capture additional margin and sales by increasing frequency of intra-day moves to reflect market conditions. Increased risk and hedging exposure: The dynamic nature of spot and rack prices creates additional challenges for risk management practices. Short term forecasts of sales and prices become a huge challenge and the costs associated with hedging are not always transparent in many organizations. Use of misleading rack benchmarks for decision making: Static views of rack averages and other benchmarks may not always reflect what is going on in the market. When doing historical analysis to study price relationships, it is important to consider all rack and spot prices that were in effect throughout a given day, not necessarily prices at the opening bell. 2009 Telvent DTN. All rights reserved. www.dtn.com/refinedfuels | 1.800.391.1175 5 7. In order to stay on top of the market and make good decisions, real INTRA-DAY PRICE VOLATILITY time business intelligence is needed, including: Accurate discovery of spot market prices: As prices change throughout the day, it is critical to have up-to-date prices that reflect trading activity in the major markets. Accurate and timely discovery of intra-day supplier rack prices: With increased price changes throughout the day, yesterdays end-of-day prices often expire and cannot be used for decision making purposes. It is essential to have up-to-date supplier intra-day price changes as they occur. Calculation of key performance indicators: It is vital to have access to current levels of performance against the backdrop of market conditions. This includes real time terminal liftings/sales, inventories, and margins.In addition to having the solid business intelligence described above, it is important for decision makers and analysts to view this informationThis document requires Adobe in an organized and consolidated way. Buyers and sellers also need toReader version 6.0.1 or later. To view this document, please download Adobe have robust processes and systems for leveraging this information into Reader from: http://www.adobe.com/ decisions about purchasing, supply, and pricing. Interested in more information? Telvent DTN continues to assist petroleum suppliers and buyers in managing volatility. Our products and services are helping thousands of companies in the downstream supply chain make better decisions on pricing, purchasing, and supply. Contact your Telvent DTN sales professional for more detailed information about new Telvent DTN tools to optimize buying and selling petroleum products. 2009 Telvent DTN. 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