Start covering fall fuel needs OPEC unity stabilizes oil market for now By Bryce Knorr, senior grain market analyst

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1 Start covering fall fuel needs OPEC unity stabilizes oil market for now By Bryce Knorr, senior grain market analyst OPEC and its allies are a strange bunch. Iran hates Saudi Arabia as much as it dislikes the U.S., maybe more, because the two are regional rivals for hearts and minds in the Middle East and North Africa. So when President Trump asked Saudi Arabia to increase crude oil production to keep gasoline prices lower in the U.S., agreement by the cartel wasn t a done deal. Venezuela, which isn t exactly on speaking terms with Washington either, badly needs oil revenues from its shrinking output. Iran is expected to sell less petroleum due to tightened U.S. sanctions. Russia, an OPEC ally though not an official member, also depends on oil to grease the wheels of its economy. Even more curious: Crude oil prices jumped more than $2 a barrel today on reports the exporting nations agreed to an increase of production of 1 million barrels a day. Why would increased supply cause prices to go up? The reaction is similar to the sell the rumor, buy the fact type of trade often seen in the grain market. Oil prices already factored in an increase, so when it came true, the market moved on to the next thing. Unfortunately for farmers needing to buy fall fuel for harvesting and drying crops, that may not be lower prices for diesel and propane. While U.S. production ran at ever rising record levels this year, the market paused last week. Rig counts actually dropped, in part because the U.S. prices traded at a discount of more than $11 a barrel to the Brent world benchmark price. Like water in The Rime of the Ancient Mariner, there was plenty of oil, thanks to the fracking boom. But getting it onto world markets was hard thanks to limited pipeline and port facilities. Saudis are betting they can have their cake and eat it too, to mix one too many metaphors. Global supplies are shrinking in the wake of the previous OPEC cutbacks and improving demand spurred by economic growth that hasn t gone off the rails yet. Of course, raising prices could take the help of money managers, who sold off holdings of crude oil futures and options for much of this year. If Wall Street starts buying again, the market could keep rising, or at least keep from breaking. But if trade disputes threaten growth or send investors back to their bunkers, energy prices could follow suit. Right now crude oil looks fairly valued around $65 a barrel, near its close from earlier this week. Futures could take a run past $70 over the next month, with potential for more over the rest of the year. But a market meltdown could also knock $10 off today s price of $67-plus. Midwest cash wholesale benchmarks hit their lowest level this week since planting got serious, but basis against ULSD futures delivered in New York Harbor has yet to weaken on the seasonal pullback in demand from farmers despite rising inventories. Overall diesel supplies remain near five-year lows, so production problems, hurricanes and other issues could keep the supply chain from functioning. Lock in a third of fall diesel needs now, and be ready to pull the trigger on the rest over the next month. Propane on average follows crude, so prices are higher this year despite rising inventories. The wholesale benchmark in Conway, Kansas broke below 65 cents this week, a nickel from my recommended buying target. I previously recommended locking in half the propane needed for fall drying, doing the rest if the market can get back to 60 cents. Cheap corn costs are helping boost margins at ethanol plants, keeping production strong while the market waits for the EPA to announce its RFS mandates and perhaps require larger blenders to absorb waivers from smaller producers. USDA is likely still 20 million bushels too low on its forecast for corn usage, which should help tighten old crop carryout this summer.

2 net position long/short Crude Oil Futures and Options Managed Money Crude Oil Futures $ $ $ $ $ $20 0 1/1/2014 7/1/2014 1/1/2015 7/1/2015 1/1/2016 7/1/2016 1/1/2017 7/1/2017 1/1/2018 $0 Source: CFTC, NYME/CME Crude Oil Commitment of Traders - Crude Oil ,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 - Crude Oil Open Interest

3 U.S. CRUDE OIL PRODUCTION AND RIG COUNTS Production Rig Counts thousand barrels/day oil and gas rigs Source: U.S. EIA, Baker-Hughes U.S. CRUDE OIL STOCKS Current 5-Year Min. 5-Year Max. million barrels

4 Stocks WEEKLY ETHANOL PRODUCTION AND STOCKS Production thousand barrels /1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 5/1/ thousand barrels/day Ending stocks Daily Production 2.95 ETHANOL PRODUCTION GALLONS FROM EACH BUSHEL USED Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18

5 Average Corn Belt Ethanol Plant Margins $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $0.50 $1.00 Average Corn Belt Ethanol Prices $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00

6 U.S. GASOLINE STOCKS 270 Current 5-Year Min. 5-Year Max. 250 million barrels DAYS OF GASOLINE SUPPLIES Current Year Prior Year

7 REFINERY CAPACITY UTILIZATION 100 Current Year Prior Year 95 per cent TOTAL PETROLEUM PRODUCT EXPORTS thousand barrels per day

8 thousand barrels MIDWEST DIESEL Stocks Production thousand barrels/day

9 MID CONTINENT DIESEL SEASONAL cents/gal /5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5 MID CONTINENT DIESEL SEASONAL BASIS $0.20 $ cents/gal $0.10 $0.05 $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5

10 330 GROUP 3 DIESEL SEASONAL /1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1 $0.15 $0.10 GROUP 3 DIESEL SEASONAL BASIS $0.05 $0.00 $0.05 $0.10 $0.15 $0.20 7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1

11 U.S. DIESEL STOCKS 180 Current 5-Year Min. 5-Year Max million barrels DAYS OF DISTILLATE SUPPLIES

12 ENERGY FUTURES PRICE CURVE Crude oil $67 $65 $63 $61 $59 $57 $55 $53 Crude oil Diesel $51 $49 $47 Jul 2018 Jul 2019 Jul 2020 Jul 2021 Diesel $2.20 $2.15 $2.10 $2.05 $2.00 $1.95 $1.90 $1.85 $1.80 $1.75 $ DIESEL SWAPS Mid Continent Group 3

13 U.S. PROPANE STOCKS 115 Current 5-Year Min. 5-Year Max million barrels DAYS OF PROPANE SUPPLIES

14 TOTAL PROPANE SUPPLIED (DEMAND) thousand barrels per day Spot propane prices vs Crude oil $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Mid-Continent Propane Crude Oil

15 Seasonal propane prices (Mont Belvieu, Texas) Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Av e rage Seasonal propane prices (Conway, Kansas) Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16 CME Swaps Curve Mont Belvieu, TX wholesale price $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $ Jun 18 Sep 18 Dec 19 Mar 19 Jun 19 Sep 19 Dec 20 Mar 20 Jun 20 Sep 20 Dec 21 Mar 21 Jun 21 Sep 21 Dec 22 Mar 22 Jun per gallon 22 Sep 22 Dec Source: CME Group $0.80 CME Swaps Curve Conway Kansas wholesale price per gallon $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 Source: CME Group