K & H Oil Co.

Equipment Manufacturer’s efforts to raise efficiency, raise power and reduce emissions have lead to major changes in diesel engine injection systems. Since 2007, the ultra-high pressure “Common Rail Injection System” has come into widespread use.

For decades, diesel injection systems consisted simply of mechanical injector pumps and rugged low pressure, low tolerance injector nozzles. The injector pumps served as both a pump and a mechanical metering device which timed the injection of fuel based on engine speed and throttle position.

Today, modern Common Rail Injection Systems utilize very fine injector orifices and operate at pressures as high as 25,000 PSI. We are also told that some computerized common rail systems have the ability to stagger as many as 5 individual spray injections during the course of a single power stroke.

The benefits of high pressure, precision orifices and staggered spray patterns are that a much finer, more precise and fully atomized spray pattern occurs which captures the full efficiency and power of the fuel, obtaining a complete burn which lowers emissions.

As you read this, I am sure you can see the added challenges that are now placed on the fuel itself, such as finer filtration and the ability of the fuel to withstand higher pressures and higher temperatures. The need to run a full protection premium grade fuel is becoming more crucial then ever.

Anti-foulants and Fuel Stabilizers:At a recent Cenex Ruby Fieldmaster meeting, we learned first hand how Cenex is addressing these new challenges. The greatest challenge observed so far is a tendency of fuel to cook under the new high pressure systems. Fuel enters the injection system under high pressure and actually enters the injector inside the engine, a percentage of which bleeds back off HOT and re-circulates. Damaged or “cooked” fuel can actually turn black and fuel filters themselves can look almost like a used oil filter when replaced. Cenex Ruby Fieldmaster and Roadmaster now contain a new Antifoulant and Stabilizer additive as standard protection. At this time, this is the only premium fuel that we know of which addresses this modern issue.

Finer Filtration: Modern fuel line filtration now calls for 1^st and 2^nd stage protection. Primary filters are often rated at 15 microns or more and secondary filters rated as low as 2 to 5 microns. In comparison, a human hair would be 70 microns in diameter and 40 microns is visible to the eye. When considering particles this tiny, it becomes clear that filter plugging is going to be a much greater issue than in days gone by. The best defense against filter plugging would be storage tank maintenance and clean filling practices. While premium diesels do not contain any more or less inherent sediment, they do protect the metals in the system and manage the moisture. The consistent use of premium diesel should therefore reduce the frequency of storage tank generate rusts and sediments.

Premium Diesels: We understand the legal definition of premium diesel to be as follows: A diesel fuel containing one or more performance properties exceeding regular diesel fuel standards. Under this vague definition, I believe it is very important that diesel consumers ask questions and know exactly what protections they are being sold. For example, a fuel supplier could add just a fraction of one percent of soy and sell the fuel as “Premium” since the lubricity had been enhanced. In reality, full package protection should include: Higher Cetane (Startibility), Anti-corrosion (Soft Metals), Anti-rust (general metals), pour depressants (cold weather), demulsifies (moisture control), lubricity (pump protection), Detergents (System Cleanliness), injector cleaners (Spray Pattern), Fuel Stabilizers (Storability) and anti-foulants (fuel cooking).

One way you can be assured of what you are buying is if the truck bringing your fuel displays Trade Mark Premium Diesel Logos. Fuel trucks affixed with trademark Premium Diesel logos have entered into trade agreements to carry only that particular premium fuel. Fuel companies not displaying trade mark images on their tankwagons likely have not entered trade agreements and may be selling a variety of grades of fuels depending on which is the cheapest at the pipeline that day. K & H Cooperative holds a Trade Market Agreement for Ruby Fieldmaster and Roadmaster Premium and offers that as our sole Premium Fuel. All K & H Tankwagons carry Ruby Fieldmaster Trade Marks for your assurance.

We would like to introduce our March and August fill program. We would like the opportunity to fill your bulk oil storage and deliver all your oil and grease needs during these months. Filling during these times would make it easier to route our deliveries, making us more efficient. During this time we will be offering a $.25 per gallon oil discount and $.20 per tube discount off grease.

We handle a full line of Premium Cenex Oils and Greases. Recently we have added our own brand of oil. The K & H brand is a high quality, heavy duty, and professionally blended oil. The K and H oil brand was made to meet today’s needs at yesterday’s prices.

We would also like to introduce our oil tote lease program. Oil totes will be leased to you at a one time payment of $100.00. These totes can be used for products such as K & H 15w40, K & H Tractor Hydraulic, and K & H Anti-freeze. These totes will help keep your oil clean, and the dirty old drums out of your way.

The K & H oil brand is manufactured by Pinnacle Resources of Pine Bluff, AR, and distributed by Ottsen Oil Company of Cedar Rapids, Ia. The K & H oil brand is made to American Petroleum Institute (API) specifications.

Due to an ongoing carry in both the oil and the basis, cash fill values continue to be a bargain compared to contracts. Buying the dips within this price band so far is proving to be beneficial.

-Trends are higher and short term setbacks are being viewed now as buying opportunities after resistance levels ($80 Crude) were penetrated. Overall, money re-entering the market on the buy side and perceptions once again turning positive about economic recovery are outweighing any fundamental bearishness. (Country Hedging).

-Now that the $80 objective has been met, there does not appear to be all that much technical resistance up to the 2010 high of 83.95 placed back on 1/11/10 (CHS Market News).

We are also hearing of refineries struggling with profitability the last several months and refining capacities have now fallen to 79% as refiners adjust to weakened demand and lower crack spreads. For much of 2008, refineries were operating up to 96% capacity as they attempted to meet demand and capitalize on strong refining margins. (We all recall many news stories on oil company profits at that time).

RECOMMENDATION: On the fundamental side, we continue to see petroleum demand lagging last year. Demand is not expected to fully recover until employment figures recover. While most commentaries continue to envision an uptrend in energy, none seem to be expecting a blow out to the upside. Under this assumption, disciplined purchases on market pull backs seem to be an excellent strategy at this time. On the dips, fill diesel storage to cover spring needs and purchase spring contracts to refill to cover part of your fall needs. Utilize your storage as much as possible to beat the heavy carry that is presently in the market.

Propane Gas: Purchasing decisions on propane for Fall 2010 and Winter 2011 are going to be rather difficult. I believe it is safe to say that we all must be ready to lock in and accept numbers that are not nearly as attractive as last year. A hard fall and an equally challenging winter have drawn LP reserves down severely. $80 crude oil is not helping any either. At this time, a reasonable target price for 2010-11 would seem to be in the $1.49 to 1.54 range. Presently we are at $1.59 Prepay and $1.62 No Money Down. Historically, the Jan – March time frame has produced some very attractive contract numbers. This year, we have not seen those attractive pull packs. Perhaps bargains will present themselves a bit later and it will be helpful to have realistic target values in mind should bargains present themselves.

Propane Gas Legislation - Iowa: You have likely seen media reports concerning pending regulation of Propane Dealers. The proposed legislation (SF 2235) seeks to regulate how LP Suppliers deliver to accounts with unapproved credit or accounts which have past due bills. This bill has the potential of impacting the price of propane or heating oil that each of us pays by raising debt losses. The LP industry is also concerned with heightened safety and liability risk as the number and frequency of “out of gas” calls will likely increase as Dealers are mandated to deliver whenever cash is presented, rather than operating on a stable, ongoing, revolving credit basis.