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Ethanol production hits new record high, but so does demand

|Includes: Archer Daniels Midland Co. (ADM), ANDE, AVR, BIOF, CZZ, EPG, GPRE, GRH, GU, NBF, PEIX, VLO, VRNM

The ethanol market this week will focus on:
corn prices as the market continues to closely watch planting weather, 
gasoline prices, which saw some long liquidation pressure last week although refining demand appears strong and gasoline inventories are falling, and
ethanol demand, which seems to be strengthening with cheap ethanol prices relative to gasoline. 

Ethanol production hits new record high, but so does demand - U.S. ethanol production in January hit a new record high of 1.065 billion gallons, up 3.9% m/m and 30% y/y, according to last week’s monthly EIA report.  However, the market showed only a mildly bearish reaction to the report since (1) demand also hit a record high, (2) inventories remained under control, and (3) the industry utilization rate rose to a record 98.1% of capacity, which means production cannot rise much farther over the near-term.  The Renewable Fuels Association pegged demand in January at 1.021 billion gallons (+4.6% m/m and +21.9% y/y), which implied a modest surplus of 44 million gallons or 4.2% of production.  The fact that ethanol is $1.20 cheaper than gasoline (including the 45-cent excise tax credit) means the market is absorbing most of the record level of production.

Ethanol inventories in January rose but remained generally under control, thus limiting the bearish impact of the EIA report.  Ethanol inventories on an absolute basis rose to a record high of 748 million gallons, but that was only 70.2% of production, lower than the 5-year seasonal average of 73.1%.  In terms of inventory days, the RFA reported that inventories were at 22.7 days of usage, which was up from 22.3 days in December but slightly below the 4-year seasonal average of 23.0 days.

Ethanol closes the week slightly lower - May CBOT Ethanol futures prices last week fell to a new 8-month low and closed the week down 2.3 cents (-1.5%) at $1.537 per gallon.  Bearish factors included the 1.5% sell-off in gasoline and the EIA’s report that U.S. ethanol production in January hit a new record high.  The decline in ethanol prices was limited by the fact that January inventories remained generally under control and that corn prices rose slightly  by 0.4%.

Ethanol/Gasoline – May gasoline futures prices posted a new 18-month high early last week but then faded and closed the week down 3.44 cents (-1.5%) at $2.2893 per gallon.  The market was pressured last week mainly by long liquidation pressure.  However, gasoline prices received underlying support from the fourth consecutive weekly decline in gasoline inventories, which are now only 0.8% above the 5-year seasonal average, the tightest level of inventories in 9 months.  In addition, the refinery utilization rate rose to a 6-month high of 84.5%, which bodes well for gasoline demand in coming weeks.  The spread of May ethanol prices minus gasoline prices last week rose by 1.1 cents to -75.2 cents, which is just slightly above the recent 20-month low of -76.4 cents.

Ethanol/Corn – May corn futures prices last week closed slightly higher by 1.25 cents at $3.4575 per bushel, just slightly above the recent 7-month low.  The corn market received a boost from a positive export report, but saw pressure from improved planting weather and the prospects for a near-record corn crop this summer.  The May ethanol-corn crush margin last week fell by 2.7 cents to 30.2 cents per gallon, mildly above the recent 9-month low of 25.1 cents.

Ethanol Calendar
Apr 14:  Weekly DOE Gasoline Inventories
Apr 29: EIA Monthly Ethanol Report
May 11: USDA WASDE Crop Supply-Demand
Late Summer: EPA’s E15 decision due

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