CALIFORNIA PETROLEUM CONFERENCE
HILTON, SAN DIEGO, CALIFORNIA, JUNE 27, 2006

There have been a lot of geopolitical events. Look at the situation with North Korea or Venezuela for example. Crude is up $2.00 today but supply, really, has been stable. So don't underestimate the effect of geopolitical events.

The low sulfur diesel scenario is playing out right now. We'll see what happens with volatility as right now that product gets into the marketplace.

Demand is still strong but supply is, I'll call it, shaky. Hurricane season has begun.

Don't underestimate the funds. When more funds are buying crude and supply, the price goes up. And it is a favorite spot right now for funds to put their money.

People are doing everything they can to put drills and wells into the ground and get product out when the price is this high. But, obviously, this doesn't happen overnight.

Can OPEC continue to keep producing additional capacity to meet the demand? They've always said that they could. They say there's ample supply and the bottlenecks are downstream. And it's interesting to say what they'll produce versus what they actually produce — there is a fair amount of 'cheating.' (over production).

North America, India, and China are pretty much sucking up all the products. They are basically responsible for the growth in demand. Total global demand in 2006 will be up 2.2% That may not seem like much but it's a lot.

The market is still nervous about demand and the geopolitical situation. That leaves a contango structure to the market — the belief that that price will be higher in the future than it is now. What you're finding is anyone who has storage is buying crude and putting it in storage to sell it in a future month for a higher price.

Chinese demand is quite strong for gas oil, especially diesel, requiring refiners to downblend jet to meet this demand.

With our demand and supply right now with distillate we have about a 20 day supply. And I'd stay that's a bit low.

The funds have put $20 billion into futures. They wield a big stick when it comes to crude prices.

Every time I think they're [the funds] going to bail out, they don't. But that's a lot of money.

This is a volatile market. I always get asked if we're ever going to see $30 again. I don't know — but if you look at the last three years, it doesn't seem like it.

You want to match your hedge to the exact product you're pulling. You don't want to buy a low sulfur hedge and then pull 15 ppm.