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Why are the oil majors MIA in ethanol? CRB/CME Group Weekly Ethanol Report

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The ethanol market this week will focus on:
- the corn market where the focus remains on weather, yields, and exports,
- gasoline prices, which recovered last week on short-covering and Friday’s stock rally, and
- whether ethanol can continue to find such strong support based on rising corn prices.

Why are major oil companies MIA in biofuels?

Biofuels Digest last week ran an interesting article entitled “Why don’t oil majors invest in biofuels in scale? (see link on page 2 news digest item).  The simple answer, according to Biofuels Digest, is that the upstream oil exploration and production (E&P) business is so massively profitable that the oil majors have no interest in investing their capital in the lower margin biofuels business.  The corn ethanol business is a dangerous game that is completely dependent on the ethanol-corn price spread, while cellulosic and algae-based ethanol can be as much of a chemical refining business as it is a biofuels business, meaning it falls outside the oil majors’ wheelhouse to some extent.  Biofuels Digest argues that the oil majors will only show up to invest at scale in biofuels if oil prices plunge to $30 per barrel and wreck their E&P returns, forcing them to look elsewhere for profits.
Ethanol Market Action -  September CBOT Ethanol futures prices last week extended the 9-week rally to a total of 34%, posting a new 2-year high and closing up 6.8 cents (+3.7%) at $1.926 per gallon.  Bullish factors included the 1.2% rally in gasoline prices, the upward rebound in corn prices from early-week lows, and last Friday’s sharp stock market recovery, which suggested a little better view of the economy and fuel demand.

Ethanol prices were also boosted by last Wednesday’s weekly EIA report showing a 2.9% decline in weekly ethanol production to a 4-week low of 835,000 barrels/day, the third weekly decline. In addition, inventories fell sharply by 7.0% to a 7-month low of 17.858 million barrels, which suggested that strong ethanol demand continues.  Ethanol inventories are now down by 10.4% from the record high of 19.921 million barrels posted in the week ended July 2.

Ethanol/Gasoline – September gasoline futures prices last Wednesday posted a new 13-month low but then rebounded higher to close the week up 2.28 cents (+1.2%) at $1.9479 per gallon.  Gasoline inventories rose to a new 5-month high, but gasoline prices rallied mainly on short-covering after the sharp decline and on last Friday’s stock market recovery.  The spread of Sep ethanol prices minus gasoline prices last week rose by another 4.5 cents to a meager -2.2 cents, the narrowest spread since Dec 2009, although ethanol is still 47 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn – Sep corn futures prices last week overcame an early-week sell-off to close 0.25 cents lower (-0.1%) at $4.21 per bushel, just slightly below the recent 7½-month high of $4.2525. Bullish factors continued to center on strong demand for U.S. corn exports with China buying 193,896 metric tons of U.S. corn in July, double the June level.  Corn was undercut by last Monday’s news that the good-to-excellent rating for the U.S. corn crop rose by 1 point to 70%.  Strength in ethanol prices allowed the Sep ethanol-corn crush margin to rise by another 6.9 cents to a 6-month high of 42.2 cents/gallon.  Including DDG, the Sep corn for ethanol crush margin rose by 6.9 cents to 76.1 cents/gallon.

Ethanol Calendar
- Aug 30: EIA June Monthly Ethanol Report
- Sep 1: EIA Weekly Petroleum Status Report
- Sep 10: USDA WASDE Crop Supply-Demand
- September: EPA’s E15 decision due

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