12017 ENERGY AND FERTILIZER REPORT & OUTLOOK

EnergyHIGHLIGHTS

• Crude oil futures hit their highest level recently since July of 2015, but demand concerns and rising U.S. shale production (for the 12th consecutive month) offset growing Middle East tensions and a possible OPEC extension of their 1.8 million barrels per day crude oil production limit commitment.

• The market continues to attract buyers (funds are now long 317,806 vs. the record long level of 413,637 as on 02-21-2017) on expectations that the cut will get extended to the end of 2018 for an additional 9-months at the Nov. 30 meeting.

• According to Wells Fargo, crude oil prices could be stuck in a bear market “super –cycle” for another decade- trading between $30 - $60/barrel.

• 2018’s biggest risk is that crude oil could top $200 per barrel if Saudi-Iran war breaks out.

• Crude oil prices above $60 is unsustainable as market is likely to tilt back to a surplus in 2018.

• We remain bearish crude oil prices near-term and into 2018, but global growth at

+3.8% in 2018 is price supportive. Fill your fuel tanks as needed and no need to book

propane forward- prices are too high and all the news is already baked in.

• Look for an opportunity to book your 2018 fertilizer needs by the end of 2017 or early

2018, to take advantage of lower fertilizer prices. tToo much global supplies and low

crop prices continue to weigh.

Crude oil prices above $60/barrel in 2018 unsustainable as market tilts back to surplusCrude oil futures hit their highest levels since July of 2015 as traders added a risk premium amid ongoing concerns about rising tensions between regional powers Iran and Saudi Arabia, as well as uncertainty about the Saudi crown prince’s political purge. There has also been continued rhetoric from OPEC about extending its cut of 1.8 million barrels per day into 2018 to continue to rebalance supply and demand with a November 30th meeting to extend out 9 months but Russia is looking to postpone the decision until March of 2018. Anything but an extension is bearish and in fact OPEC will most likely need to extend even further

and make more cuts if 2018 if it’s a surplus year again? This has provided a short-term stimulus and pushed prices above $55/barrel and a sustained move above this level could project to a high of $60! (Please see chart below)

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Source: www.qtmarketcenter.com

This contrasted with OPEC’s outlook which raised its demand outlook by 130,000 bpd from its previous estimate. It now expects oil demand to rise by 1.51 million bpd next year.

Saudi Arabia actions proving underlying support Saudi Arabia is actively supporting market management, willing to extend the OPEC cut deep into 2018, and moving ahead with the planned sale of a stake in Aramco. Saudi rulers likely also would like to keep oil prices stable ahead of the planned IPO of state oil company Saudi Aramco expected next year.

The market continues to

attract buyers (funds now

long 317,806 vs. record long

413,637 on 02-21-2017) on

expectations that the cut will

get extended to the end of

2018 and on continued robust

demand as demand and supply

rebalances? (Please see chart below)

However, the latest IEA (International Energy Association) monthly report cut its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated 1.5 million bpd in 2017 and 1.3 million bpd in 2018 as warmer temperatures could reduce consumption, while sharply rising output from outside the producer group OPEC might mean the global market tilts back into surplus in the first half of 2018. In fact, U.S. oil output, has grown by more than 14% since mid-2016 to a record 9.62 million barrels per day (bpd) and U.S. shale production in December would rise for a 12th consecutive month, increasing by 80,000 bpd. A cooling Chinese economy also stoked some concerns about demand, although so far, the country’s refiners are processing crude oil near record levels of 11.89 million bpd. China’s roughly 9 million bpd of imports have surpassed those of the U.S. to top the world’s crude importer list.

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Longer term, however, the crown prince’s rule could be bearish for oil. He is trying to diversify the kingdom away from its reliance on crude revenues. The Aramco IPO is part of that process. A new $500 billion mega-city powered by renewable energy is part of that diversification plan as well.

Crude oil could remain in a bear market super cycleDespite all this noise, crude oil prices could remain in a bear market super cycle. According to Wells Fargo, the bear market in oil may last another decade, with U.S. crude stuck between $30 and $60 a barrel. The last commodity bear super-cycle lasted about 16 years from 1983 to 1999.

Commodity bear super-cycles typically last 20 years, but have been shortening over the last century. The last commodity bear super-cycle lasted about 16 years from 1983 to 1999. The current cycle, sparked by a “flash flood of production” as U.S. drillers learned to extract oil and gas from shale rock formations, sent prices spiraling to $26 a barrel in February 2016 from more than $100 a barrel in the summer of 2014. Bear markets in commodities are a consequence of human behavior in the preceding bull market. The bear market has already gone through the first step of the healing process: weeding out the weakest players. Roughly 22% of exploration and production companies went bust during this phase, compared with about 26% in the 1986 oil price crash. (Please see chart below)

The biggest 2018 risk is if a Saudi-Iran war was to break outThe threat a Saudi-Iranian war is looking increasingly credible as tensions rise in the Middle East. The impact on the global economy would be severe and crude oil prices could top $200 per barrel. Major OPEC oil producers export almost 20% of the world’s oil supply through the Strait of Hormuz, which connects the Persian Gulf to global markets. The strait, a mere 34 miles wide at its narrowest, sits pinched between Iran to the north and Oman to the south where a war between Saudi Arabia and Iran to erupt, and could easily be closed.

2017 ENERGY AND FERTILIZER REPORT & OUTLOOK

For example, the Suez Crisis of 1957 saw 10% of the world’s oil production taken off the market. Within a month, the U.S. and Europe were facing a recession which would last the better part of a year. In 1973, the Arab-Israeli War and resulting Arab OPEC embargo would bring long lines to gas stations as the oil price quadrupled. On an annual basis, global oil production held steady, but Persian Gulf exports to the U.S. fell by 1.2 million barrels / day, or about 7 percent of total U.S. consumption. This oil shock would plunge the U.S. into a recession which lasted for two years.

U.S. import dependence has fallen dramatically since the start of the shale revolution. Those countries without material oil production would suffer the most, notably Europe and East Asia, and in particular Japan and South Korea. The U.S. needs to calm the tensions down before it gets out of hand.

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In our last report (in March of 2017), we suggested that the “risk remains to the downside as $50- $55 is most

likely going to be a ceiling rather than a floor with prices potentially slipping down to $40 as the world is awash

with oil and there continues to be an endless supply of it. Demand could offset and push prices to $60 but that

would be a stretch.”

There is no opportunity to book your fuel needs forward, just fill up your tanks as needed. We remain bearish near-

term and into 2018 but global growth at +3.8% in 2018 is price supportive. (Please see chart below)

2017 ENERGY AND FERTILIZER REPORT & OUTLOOK

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Natural Gas / PropaneNatural Gas and Propane prices on the riseNatural gas prices after hitting new lows in 2016 below $2.00 amid a global supply glut has since recovered as global demand starts to outpace. IEA is forecasting that the U.S. will be a major exporter by mid-2020’s as China the world’s third-largest gas buyer is importing more LNG as the government looks to become less dependent on dirty coal as part of its drive to clear the skies. Total annual LNG output is on track to more than double from 270 million metric tons to 650 million metric tons by 2040. By 2040, OPEC estimates oil and natural gas will still account for more than half of the world’s total power generation. (Please see chart below)

Source: www.qtmarketcenter.com

2017 ENERGY AND FERTILIZER REPORT & OUTLOOK

Heating demand in the winter season runs from Nov 1 to Mar 31 and a colder than normal winter could increase demand and push prices higher. However, prices for January, at the height of the winter heating season, now command a premium of almost 32 US cents over April, up from just 16 cents at the start of the month.

Until recently, hedge funds had become progressively less optimistic about the outlook for gas prices this winter. Hedge funds and other money managers cut their net long position in the two main futures and options contracts by almost half to 1,408 bcf by the end of October from 2,693 bcf in September. Portfolio managers held just 1.58 long positions for every short on October 31, compared with 2.93 on September 19, and the lowest ratio for almost a year. Recent weather patterns which have been mildly positive for gas demand. Significantly warmer than average temperatures in late September and early October, followed by a slightly colder than average late October and early November, have boosted cooling and heating demand respectively.

But stocks have been tightening fairly consistently compared with the five-year average since the first week of March in a sign the market is persistently undersupplied. The volume of working gas in storage has risen by just 1,728 billion cubic feet since the start of April compared with an average of 2,074 bcf in the previous five years. Stocks have swung from a surplus of almost 400 billion cubic feet over the five-year average at the start of March to a deficit of 70 billion cubic feet by November 3. The market is tighter than it appears because the underlying demand for gas is much higher than five years ago as a result of LNG exports and the growing number of gas-fired power plants.

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The last two winters were mild overall compared with the long-term average which significantly conserved stocks but there is no guarantee the coming winter will be the same.

Propane prices have risen to new contract highs since the lows just 2 years ago amid growing demand and damage from hurricane Harvey and Irma in 2017 despite more supplies in the global export market. The U.S. rack average has risen to $84 cents from just $55, 5 months ago. (Please see chart below)

2017 ENERGY AND FERTILIZER REPORT & OUTLOOK

Source: www.qtplus.com

With prices closer to the higher end of the long-term average no need to book forward to lock in prices all of

the news is baked in. There will be better pricing opportunities in the future for your heating/drying needs.

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FertilizerFertilizer inputs continued to fall in 2017 after hitting lows in late Dec. 2017/early Jan. of 2018 and in fact have hit new lows as of September 14, 2017 as crop prices trend lower. Fertilizer Ammonia, Urea, Nitrogen & MAP all hit new 6-year lows have since recovered but fell sharply again as of Nov. 9, 2017. (Please see chart below)

2017 ENERGY AND FERTILIZER REPORT & OUTLOOK

A global surplus of supply and a slowdown in demand continues to weigh and plaque fertilizer prices. The nitrogen market is still oversupplied as producers add capacity and demand continues to grow slowly. Ammonia prices are also expected to stay low through 2018 because of global oversupply. After hitting a 13-year low Urea prices have rebounded but are headed for the 3rd straight year of declines. Two urea plants will be coming online in the U.S. next year on top of too much supply.

European producers including K+S AG, Eurochem Mineral & Chemical Co. and Belaruskali are adding potash capacity in 2018, and new projects are poised to begin over the next decade in Russia and Belarus. The potash market will have a surplus next year of 8 million to 10 million tons, and a modest rise in prices could temper demand. The “ramp-up” of new capacity in Morocco and extra exports from Saudi Arabia are also weighing on phosphate prices. But further production cuts by China (exports up 25% in the first half of 2017) and Indian demand may offset more supplies. Growth in sales of MAP soaring up 25% is coming from demand from Russia and Brazil.

The opportunity to book and buy 2017 fertilizer needs was when prices were at their low during the end of

2016-early 2017, and it looks like your opportunity to book 2018 fertilizer needs will be repeated again this year.

Look for another opportunity to book your 2018 fertilizer needs towards the end of 2017 or early 2018 to take

advantage of 10-year lows in fertilizer prices as too much global supplies and low crop prices continue to weigh

as the CDN $ resumes its downtrend on stalling GDP, low inflation and stalling higher interest rates until March of

2018. (Please see chart below)

These lower prices could translate into roughly a $10 per acre saving in nitrogen fertilizer for the coming 2018

production year. The $10 per acre in nitrogen savings can vary. Different sources of nitrogen will have different

prices and thereby impact nitrogen savings from 2017 to 2018. Furthermore, prices could change between now

and spring when some or all of the nitrogen will be applied. These price changes can again impact savings. Lower

nitrogen prices should translate into lower per acre nitrogen fertilizer costs. The cut in nitrogen rates will, on

average, increase returns. Cutting back costs in today’s low return environment seems prudent.

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Source: www.qtmarketcenter.com

This Energy Report is for informational purposes only. The statements contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or complete. The opinions and comments expressed in this Energy Report represent the opinions of the commentators--they do not necessarily reflect the opinion of Farms.com and Farms.com Risk Management. This Energy Report is not intended to provide individual financial, tax or investment advice to anyone. Particular investment or trading strategies should be evaluated relative to each individual’s objectives. Farms.com and Farms.com Risk Management will not be liable for any errors or omissions in the information, or for any damages or losses in any way related to this Energy Report. Neither the information, nor any opinion expressed, constitutes a solicitation of the purchase or sale of any securities, futures, or options. Futures trading involves substantial risk, may result in serious financial loss, and is not suitable for everyone. Any trading decisions that you may make are solely your responsibility.

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