Ethanol Advances Versus Gasoline as Backwardation Causes Squeeze

Ethanol strengthened for a second day, narrowing its discount to gasoline, as blenders expecting lower prices later this year bought the biofuel to shore up supplies for the short term.

Futures rose 5.7 percent after jumping 3.8 percent yesterday. The spread tightened 7.69 cents to 69.8 cents a gallon. October ethanol’s premium to November widened 6 cents to 27.9 cents, a phenomenon known as backwardation, when prompt deliveries are more expensive than later ones. The December contract was 8.5 cents below November.

“People aren’t wanting to buy much on a prompt basis, just their immediate needs,” said Michael Slider, director of business development at Fauser Energy Resources in Oregon, Illinois. “They’re just getting enough to get by.”

Denatured ethanol for October delivery rose 10.9 cents to $2.007 a gallon on the Chicago Board of Trade, the highest settlement in three weeks. Futures have slumped 18 percent in the third quarter and 8.4 percent this year.

Gasoline for October delivery added 3.21 cents, or 1.2 percent, to $2.705 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Slider said backwardation causes price squeezes when end users of the biofuel get caught short product.

An Energy Information Administration report yesterday showed stockpiles of the additive dropped 3.5 percent to 15.6 million barrels last week, the lowest level since June 28.

Production, Inputs

Ethanol production sank 0.7 percent to 832,000 barrels a day, the lowest level since Aug. 30, data from the Energy Department’s statistical arm showed. Blender inputs, a measure of demand, jumped 1.2 percent.

Corn for December delivery rose 2 cents, or 0.4 percent, to $4.5675 a bushel in Chicago. The December crush spread of corn to ethanol was minus 2 cents, little changed from yesterday. All crush spreads through July 2016 were negative.

Ethanol is part of U.S. energy plans to reduce dependence on fossil fuels. The government maintains compliance with consumption targets with Renewable Identification Numbers, or RINs, tracking certificates attached to each batch of biofuel that can be traded among refiners and later submitted to the Environmental Protection Agency.

Corn-based RINs rose 2 cents to 51 cents, compared to 7 cents in January, while advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol jumped 0.5 cent to 58.5 cents, from 37 cents in January, data compiled by Bloomberg show.

In cash market trading, ethanol in the U.S. Gulf climbed 17 cents to $2.495 a gallon; in New York the additive increased 12.5 cents to $2.40; on the West Coast prices gained 6 cents to $2.32; and in Chicago the biofuel lost 6.5 cents to $2.405 a gallon, data compiled by Bloomberg show.

Chicago’s premium to New York dwindled 19 cents to 0.5 cents, while the West Coast’s discount to the Gulf widened 11 cents to 17.5 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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