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Strong ethanol demand continues

Ethanol inventories in the latest reporting week (Aug. 27) fell by 1.7% to 17.562 million barrels, leaving inventories 11.8% below the peak seen in July and down to the winter levels seen this past January. The decline in inventories indicates that demand for ethanol remains very strong and that inventories are coming down by even more than they should as the summer driving season comes to a close.

At the same time, there is virtually no unused U.S. plant capacity to boost production. The daily production level of 856,000 barrels/day seen in the latest week represents 97% of U.S. ethanol capacity of 13.519 billion gallons per year reported by the Renewable Fuels Association. There is very little construction of new ethanol facilities at present, meaning that the industry cannot boost production much higher from current levels in the near future. Ethanol prices last week briefly moved slightly above gasoline prices, illustrating the continued strong demand for ethanol relative to gasoline. However, even with ethanol and gasoline prices at near-equal levels, ethanol is still 45 cents cheaper due to the ethanol excise tax subsidy. Therefore, there is no reason for ethanol demand to drop off relative to gasoline, suggesting that ethanol prices may be able to hold the bulk of the rally as long as corn prices stay high as well. The main wild card for ethanol prices at present, however, is whether the EPA later this month will approve higher ethanol blends of E12 or E15, which will have a big impact on the medium and long term demand outlook.

Ethanol Market Action

October CBOT Ethanol futures prices last week extended the 10-week rally to a total of 30%, posting a new 2-year high and closing up 6.9 cents (+3.8%) at $1.884 per gallon. Ethanol prices were again led higher by corn’s 6.5% rally during the week. Ethanol prices were also supported by the indications of continued strong demand seen in the weekly EIA report and by the slightly higher 0.2% close in gasoline prices.

Ethanol/Gasoline

October gasoline futures prices last week consolidated just below the recent 3-week high and closed the week slightly higher by 0.47 cents (+0.2%) at $1.9195 per gallon. Gasoline prices were supported during the week by the solid rally in the stock market and by last Friday’s stronger-than-expected August payroll report. The spread of Oct ethanol prices minus gasoline prices last week rose by 6.4 cents to -3.6 cents, although ethanol is still 49 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn

December corn futures prices skyrocketed higher to post a new 2-year high and close 28.50 cents higher (+6.5%) at $4.645 per bushel. Bullish factors included (1) recent news that foreign purchases of U.S. corn in the 2 weeks ended Aug 19 were 3.987 million tons, the biggest 2-week total since at least 1990, and (2) recent hot, dry weather that will reduce corn yields a bit. Ethanol prices failed to fully keep up with last week’s corn rally and the Dec ethanol-corn crush margin fell by 4.5 cents to 15.3 cents/gallon. Including DDG, the Sep corn for ethanol crush margin fell by 4.5 cents to 51.1 cents/gallon.

Ethanol Calendar
- Sep 8: EIA Weekly Petroleum Status Report
- Sep 10: USDA WASDE Crop Supply-Demand
- September: EPA’s E15 decision due
- Sep 29: EIA July Monthly Ethanol Report

Disclosure: No positions.

Source: Strong Demand Continues to Support a Sharp Ethanol Rally