EPA's E15 Decision: Bullish Long-Term; Near-Term Impact Minimal

by: Biofuels

The EPA last Wednesday as expected approved the voluntary use of up to a 15% ethanol blend (E15) for cars and light trucks with a model year of 2007 and newer. The EPA denied the E15 waiver request for vehicles of 2000 and older and for motorcycles, heavy-duty vehicles, and non-road engines, vehicles and equipment. The EPA deferred a decision on E15 for 2001-06 vehicles until after the DOE finishes its testing on those vehicles in November. The EPA opened a public comment period on labeling E15 at fuel stations.

The EPA’s decision will not result in any significant increase in ethanol demand until at least the second half of 2011. There are still serious issues to address such as whether legislation is needed to enforce auto warranties when an owner uses E15. In addition, most retailers are not likely to sell E15 because they are concerned about misuse by consumers, liability, whether their pumps are UL-approved for E15, and the likely cost for installing new pumps. Progress on selling E85 has been glacial and E15 is likely to face the same hurdles. Still, the EPA has started down the road of allowing more ethanol to be used in 2007+ vehicles that represent one-third of U.S. fuel consumption, which at least opens the door towards an eventual increase in U.S. ethanol consumption.

Ethanol Market Action -- November CBOT Ethanol futures prices last week pushed upwards to a new 2-year high and closed up 3.7 cents (+1.7%) at $2.221 per gallon. Ethanol prices were supported by the 6.6% rally in corn prices but were undercut by the 2.2% sell-off in gasoline prices. Ethanol prices did not show much reaction to the EPA decision approving E15 for 2007+ vehicle models. The DOE reported last Wednesday that U.S. ethanol production in the week ended Oct 8 rose by 1.6% to a new record high of 877,000 barrels/day, taking out the previous record of 857,000 bpd posted Sep 3. However, ethanol demand remains strong and inventories in the latest week fell by 3.2% to 16.365 million barrels, the lowest since November 2009.

Ethanol/Gasoline -- November gasoline futures prices last week fell from the recent 5-month high and closed 4.74 cents lower (-2.2%) at $2.1038 per gallon. Gasoline prices fell Friday on the mild recovery in the dollar index, long liquidation pressure after the recent rally, and the dovish outcome of Thursday’s OPEC meeting where there was no serious pressure for reducing over-production. Ethanol was stronger than gasoline again last week and ethanol prices moved up to an 11.7-cent premium to gasoline prices, although ethanol is still 33 cents cheaper than gasoline including the 45-cent ethanol tax credit.

Ethanol/Corn -- December corn futures prices last Wednesday posted a new 2-year high but then fell a bit on Thursday and Friday to close the week up 34.75 cents (+6.6%) at $5.63 per bushel. Corn prices last week continued to see support from the USDA report on Oct 8 which cut the size of the corn crop by 3.8% and implied an extremely tight stocks/use ratio of 6.3%, the tightest since 1996/97. Ethanol prices (+1.7%) did not fully keep up with corn prices (+6.6%) last week, meaning the Dec ethanol-corn crush margin fell by 9.5 cents to 13.8 cents/gallon. Including DDG, the Sep corn for ethanol crush margin fell by 9.5 cents to 48.9 cents/gallon.

Ethanol Calendar

Oct 21: EIA Weekly Petroleum Status Report

Oct 28: EIA July Monthly Ethanol Report

Nov 9: USDA WASDE Crop Supply-Demand

Mid-Dec: EPA’s E15 decision expected for 2001-06 model vehicles.

Disclosure: No positions.