Ethanol Strengthens Against Gasoline on Higher Production Costs

Ethanol futures in Chicago strengthened against gasoline on higher production costs for the biofuel and gasoline’s biggest decline in two weeks.

The grain-based additive’s discount to the motor fuel narrowed to 32.55 cents a gallon from 37.15 cents yesterday, based on December futures prices. Gasoline’s premium was 99.8 cents on Sept. 28.

Corn has soared 15 percent this year as drought in the Midwest shrank the crop to the smallest in six years, raising costs for ethanol producers. Gasoline, which includes the reformulated variety called RBOB, declined today as Hess Corp. (HES) returned its New Jersey refinery to full production for the first time since Hurricane Sandy struck Oct. 29.

“Corn and RBOB keep diverging and that’s the problem,” said Julie Ward, assistant vice president at R.J. O’Brien & Associates, a broker in Des Moines, Iowa.

Denatured ethanol for December delivery rose 0.4 cent to $2.387 a gallon on the Chicago Board of Trade. Prices have gained 8.4 percent this year.

Gasoline for December delivery decreased 4.2 cents, or 1.5 percent, to settle at $2.7125 a gallon on the New York Mercantile Exchange, the biggest drop since Nov. 7. The contract covers reformulated gasoline, which is made to be blended with ethanol before delivery to filling stations.

Corn for March delivery climbed 4.75 cents, or 0.6 percent, to $7.4725 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol.

Producers’ Loss

In cash market trading ethanol in the U.S. Gulf climbed 5.5 cents, or 2.3 percent, to $2.475 a gallon and on the West Coast the additive gained 3 cents, or 1.2 percent, to $2.535, data compiled by Bloomberg shows. Ethanol in Chicago advanced 2.5 cents, or 1.1 percent, to $2.38 a gallon and in New York the biofuel added 2 cents, or 0.8 percent, to $2.475.

Based on December contracts for corn and ethanol, producers are losing 32 cents on each gallon of the fuel made, up from 31 cents yesterday, excluding the revenue that can be pocketed from the sale of dried distillers’ grains, a byproduct of ethanol production that can be fed to livestock, data compiled by Bloomberg show.

Ethanol is blended with the motor fuel to stretch supply and meet federal mandates. A 2007 energy law mandates that about 13.2 billion gallons of the biofuel be blended into gasoline this year.

Inventory Report

The Energy Department will probably report tomorrow that gasoline supplies rose 1 million barrels last week, according to the median estimate of 11 analysts in a survey by Bloomberg.

Tepid gasoline demand and steady output have combined to create an ethanol supply glut, Ward said.

“It just keeps stocks heavy,” she said.

Stockpiles of the fuel were 17.9 million barrels in the week that ended Nov. 9, 4.3 percent higher than a year earlier, Energy Department data show.

Ethanol-blended gasoline made up about 90 percent of the total U.S. gasoline pool in the week ended Nov. 9, Energy Department data show, down from 92 percent in the prior period and the lowest level in four weeks.

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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