13 June 2011: CME Group

Ethanol industry tries to expand demand: The ethanol industry already recognizes that it is likely to lose at least part of the 45-cent per gallon VEETC subsidy for ethanol blenders and the 54-cent tariff on imported ethanol when they expire at the end of this year.

The ethanol industry has therefore been making a push to try to expand demand and availability of ethanol.  In that regard, the EPA last Thursday approved the new E15 label for fuel pumps, a move that will allow E15 to become available to consumers by the end of September.  However, the speed at which E15 becomes available to consumers is  likely to be very slow because fuel stations will have to install new blender fuel tanks and convince consumers that E15 is safe for their vehicles.

Meanwhile, lobbying groups Growth Energy and the Renewable Fuels Association are both pushing for Congress to adopt the Open Fuel Standard bill that is under consideration.  The bill would require auto manufacturers to produce 50% alternative fuel vehicles by the 2014 model year, 80% by 2016, and 95% by 2017.  Alternative fuel vehicles that would qualify under the law would be vehicles that use E85 ethanol-gasoline mix, methanol, natural gas, hydrogen, biodiesel, or fuel cells.

Weekly EIA report shows inventories declining for two straight weeks -- Ethanol production in the latest reporting week of June 3 rose for the fourth straight week to 915,000 barrels/day where production is now only 0.8% below the adjusted record high of 922,000 bpd posted in late February.  However, demand appears to be strong because ethanol inventories in the last two weeks fell by a total of 5.5% to 19.644 million barrels from the record high of 20.797 million barrels posted in the May 20 week.  Inventory levels are roughly at expected levels given the higher inventories that usually exist at the beginning of the summer driving season.

Ethanol Market Action -- July ethanol futures prices last week rallied sharply to post a new 3-year high and close the week up 12.7 cents (+4.8%) at $2.776 per gallon.  Bullish factors included the 4.4% rally in corn prices,  the +0.8% rally in gasoline prices, and two straight weeks of ethanol inventory declines.

Ethanol/Gasoline --  July gasoline futures last week continued to consolidate below the recent 3-year high and closed the week up 2.46 cents (+0.8%) at $3.01.77 per gallon.  Bullish factors centered on below-average U.S. refinery production and generally strong global oil demand.  Bearish factors included reports that Saudi Arabia will raised production by 7.5% to 10.0 million bpd and last Friday's sharp rally in the dollar index.  July ethanol prices closed last week at a 24.2 cent per gallon discount to gasoline prices, which equates to a 69-cent ethanol discount including the 45-cent ethanol tax credit.

Ethanol/Corn -- July corn futures prices last week rallied sharply to post a new record high and close up 33 cents (+4.4%) at $7.87 per bushel.  Last Thursday's USDA report drove corn prices higher as the USDA cut its harvested acreage estimate by 2.2% to 83.2 million acres, cut its production estimate by 2.2% to 13.2 billion bushels, cut its ending stocks estimate to 695 million bushels from 900 million bushels, and cut the stocks/use ratio to a multi-decade low of 5.2%.  The July ethanol-corn crush margin last week rose 0.9 cents to -3.5 cents/gallon.  Including DDG, the July corn for ethanol crush margin rose 0.9 cents to 32.9 cents/gallon.

Ends --

Ethanol Calendar

June 15: EIA Weekly Petroleum Status Report

June 22: EIA Weekly Petroleum Status Report

June 27: Next CME Ethanol Outlook Report

June 29: EIA Monthly Ethanol Report

July 12: USDA WASDE Crop Supply-Demand

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