CRB/CME Group Weekly Ethanol Report: Next Seven Weeks Will Be Critical for the Ethanol Industry

by: Biofuels

There are three critical items on the near-term agenda for the ethanol industry. First, the market is waiting to see if Congress during the lame duck session that resumes today will extend the ethanol tax measures that are currently providing strong support for the industry but that expire on Dec 31 (i.e., the 45 cent per gallon excise tax credit and the 54 cent per gallon tariff on imported ethanol). The industry is hoping for at least a 1-year extension of a reduced excise tax credit, although time is short and some Republican fiscal hawks are targeting the ethanol tax credit for elimination. Second, the EPA this week is expected to release its final rule for the Renewable Fuel Standard, which will lay out the exact breakdown of ethanol that must be blended in 2011. Third, the EPA is due to rule by early to mid January on whether to allow E15 in vehicles with model years of 2001-06. The EPA has already approved E15 for model years 2007 and newer, which should provide a small boost for ethanol demand later in 2011.

Ethanol Market Action -- Dec ethanol futures prices last week closed mildly higher by 4.1 cents at $2.145 per gallon. Bullish factors during the week included the higher closes in gasoline (+0.7%) and corn (+3.4%), the 0.4% decline in weekly ethanol production, and improved U.S. economic data. Bearish factors included the 0.5% rise in weekly ethanol inventories and the 2.4% rally in the dollar index.

Weekly DOE report shows second straight inventory rise -- Last Wednesday’s weekly DOE ethanol report was mixed. Ethanol production in the week ended Nov 19 fell slightly by 0.4% to 891,000 barrels per day from the previous week’s record high of 895,000 bpd. However, ethanol inventories rose slightly by 0.5% to 16.802 million barrels, adding to the previous week’s rise of 4.1%. Ethanol inventories are now up by 4.8% from the 8-month low of 16.034 million barrels posted in mid-October, although they are still sharply lower by 15.7% from the record high of 19.921 million bbl posted in early-July.

Ethanol/Gasoline -- Dec gasoline futures prices last Tuesday posted a 1-month low but then recovered to close the week up 1.43 cents (+0.7%) at $2.2103 per gallon. Gasoline prices were supported mainly by strong US economic data with initial unemployment claims falling sharply by 34,000. Gasoline prices overcame bearish factors including the 2.4% rally in the dollar during the week and the 1.91 million bbl increase in weekly gasoline inventories versus expectations for a 1.25 million bbl decline. Dec ethanol prices last week were a little stronger than gasoline prices, producing a 6.5 cent discount of Dec ethanol prices relative to gasoline, which equates to a 51.5 cent discount including the 45-cent ethanol tax credit.

Ethanol/Corn -- Dec corn futures prices last Tuesday fell to a new 7-week low but then recovered late in the week to close up 17.50 cents (+3.4%) at $5.3825 per bushel. Corn prices saw support from stronger economic data, dry weather in South America, and the tightest U.S. corn stocks/use ratio (6.2%) in 1-1/2 decades. Corn prices were able to overcome bearish factors including the rally in the dollar, China’s effort to curb grain prices, and weaker export demand. The Dec ethanol-corn crush margin last week fell by 2.2 cents to 22.3 cents/gallon. Including DDG, the Sep corn for ethanol crush margin fell by 2.2 cents to 57.4 cents/gallon.

Ethanol Calendar
Nov 29: EIA Sep Monthly Ethanol Report
Dec 1: EIA Weekly Petroleum Status Report
Dec 10: USDA WASDE Crop Supply-Demand
Early to mid-Jan: EPA’s E15 decision expected for 2001-06 model vehicles.

Disclosure: No positions