Ethanol's Discount To Gasoline Could Pressure Refiners
April 01 2010 - 6:51PM
Dow Jones News
Corn-ethanol futures are trading at their biggest discount to
gasoline futures since the summer of 2008, which could encourage
more biofuel blending and pressure the margins of oil refiners.
Over the past several weeks, gasoline prices have surged during
the usual seasonal rally ahead of the peak summer driving season.
Meanwhile, ethanol prices have been dragged lower by rising output
of the biofuel and a drop in corn prices amid ample supplies and a
drop in demand for animal feed.
Attractive ethanol prices could push fuel retailers, the
middlemen who deliver fuel and even some refiners to blend more of
the biofuel, which would damp the recovery in gasoline demand that
is crawling back from depressed levels. Refiners are required to
blend a certain amount of ethanol into their gasoline or buy
credits to meet the mandate.
"One should put as much ethanol as possible into the gasoline
pool because ethanol is at a very strong discount to gasoline and
corn is relatively weak," said Olivier Jakob, managing director of
Swiss consultancy Petromatrix.
On the New York Mercantile Exchange, ethanol for April delivery
closed at $1.522 a gallon Thursday, compared with $2.3296 for the
front-month benchmark gasoline contract. The 80.8-cent discount is
the biggest since August 2008, when it widened to nearly 85 cents
largely on the summer's record-breaking rally in crude and gasoline
prices, according to data from Thomson Reuters.
The wide spread could hit refiners because higher biofuel
blending would tamp down demand for crude-derived gasoline and
narrow margins.
Nearly all of the gallons of gasoline sold in the U.S. contain
nearly or as much as 10% ethanol, the maximum required by U.S.
regulators. This so-called blend wall likely will be raised to 15%
this summer, which would hurt oil refiners, said Geoff Cooper, vice
president of research for the Renewable Fuels Association, a trade
association for the ethanol industry.
Meantime, discretionary blending could rise in regions that
haven't yet reached the current blend wall, such as the Southwest.
This year California, the largest U.S. consumer of gasoline
accounting for roughly 15 billion gallons a year, lifted its
ethanol blend wall from 5.7% to 10%.
Refiners are concerned because U.S. gasoline demand, which fell
sharply during the recession, has only improved incrementally. The
high unemployment rate, in particular, has hit fuel demand with
fewer commuters on the road.
Corn-ethanol futures sold at a slight premium to gasoline in
December, but the discount has deepened as gasoline futures prices
rebounded off of the low hit Feb. 5. Since then, the front-month
gasoline contract is up 23%, beating the 18% rise in crude oil,
which closed just shy of $85 a barrel Thursday. Meanwhile, ethanol
futures fell 13% over the same period.
While the big discount to gasoline is boosting discretionary
blending of ethanol, the blend wall will prevent a large increase,
said Cooper. However, if regulators allow a 15% blend limit, "with
the spread being what it is today, you would see a lot of folks in
the marketplace move to E15 or somewhere higher than E10
voluntarily because the economics are just too good not to."
In the meantime, even a slight increase in blending could weigh
on the gasoline crack spread--the per-barrel price difference
between the motor fuel and crude oil.
The gasoline crack spread has already more than doubled on Nymex
to $12.50 from its February low and from the abnormally depressed
$2 level hit in September. This has given refiners, struggling to
return to profitability, some breathing room but some analysts and
traders wonder whether the crack spreads will be sustainable above
a healthier level of $15 a barrel, if they even manage to get that
high.
Crack spreads have remained fairly pressured through much of
2009 due to high crude oil prices, weak demand for refined
products, persistently high inventories and rising global refining
capacity. Higher ethanol blending could act as one more bearish
factor capping refining margins.
"I don't think it's going to expand very much" from current
levels, Jakob said.
-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210;
naureen.malik@dowjones.com
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