Ethanol Advances Versus Gasoline as Heat Wave May Slow Output

Ethanol futures jumped to the highest price in more than five weeks, slashing their discount to gasoline, on concern a heat wave in the U.S. Midwest will force plants to reduce operations and threaten corn crops.

The spread, or price difference, shrank by 12.75 cents to 44.37 cents amid forecasts that temperatures in southern Minnesota and northern Iowa may be as much as 15 degrees above normal through the rest of this week. Most ethanol plants in the U.S. are in the corn-rich Midwest.

“The heat wave will probably slow production some,” said Mike Blackford, a consultant at Intl FCStone in Des Moines, Iowa. “This market has a herd mentality. Either they all want to buy or they all want to sell.”

Denatured ethanol for September delivery rose 7.2 cents, or 3 percent, to $2.508 a gallon on the Chicago Board of Trade, the highest price since July 17. Futures have gained 15 percent this year.

Gasoline for September delivery slipped 5.55 cents, or 1.8 percent, to $2.9517 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations. Ethanol’s discount to gasoline is the narrowest since July 8.

Blackford said ethanol is also gaining because of higher gasoline demand. Consumption of the motor fuel averaged over four weeks reached the highest level since July 2011 in the week ended Aug. 16, the Energy Information Administration said.

Ethanol Demand

Ethanol blender input, a measure of demand, rose to the most since July 5, according to data from the Energy Department’s statistical arm. Supply last week was 16.5 million barrels, a record low for this time of year, data compiled by Bloomberg show.

Ethanol is mostly transported by rail from the Midwest to high-demand regions on the East and West Coast. Rail delays have added to the lower supply, Blackford said.

“It’s already a ‘just-in-time’ market,” he said. “Logistically, the pipeline is kind of empty right now.”

Corn for September delivery gained 20.25 cents, or 4.1 percent, to $5.1575 a bushel in Chicago. The more actively traded December contract advanced 30.5 cents to $5.005.

The corn crush spread, or the cost difference between a gallon of ethanol and the corn needed to make it, based on September contracts, was 63 cents, down from 64 cents on Aug. 23, the highest level this year, based on front-month contracts. One bushel of corn makes at least 2.75 gallons of ethanol.

RINs Pricing

The government uses tracking certificates, known as Renewable Identification Numbers, or RINs, to determine compliance with mandates to use the fuel.

Corn-based ethanol RINs gained 2 cents to 74 cents while advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, were unchanged at 80 cents, data compiled by Bloomberg show.

Ethanol production fell 1.5 percent to 844,000 barrels a day in the week ended Aug. 16, from the previous week, the lowest since July 26, according to EIA data.

Imports fell 47 percent to 19,000 barrels a day, the lowest in three weeks, the report showed.

Anhydrous ethanol in Sao Paulo cost $1.98 a gallon as of Aug. 16, the cheapest since May 7, 2010, data compiled by Bloomberg show.

In cash market trading, ethanol rose 12.5 cents to $2.81 a gallon in New York, 10.5 cents to $2.765 on the West Coast, 9.5 cents to $2.73 in the U.S. Gulf, and 8 cents to $2.64 a gallon in Chicago, data compiled by Bloomberg show.

Chicago’s discount to New York Harbor widened 4.5 cents to 17 cents, while the West Coast’s premium to the Gulf gained 1 cent to 3.5 cents.

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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