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Ethanol Strengthens Against Gasoline on Below-Average Production

Ethanol strengthened against gasoline on speculation the lowest corn prices in more than nine months won’t be enough to spur a rebound in output.

The spread, based on the May gasoline and ethanol contracts, contracted 9.37 cents to 68.18 cents a gallon. Stockpiles have tumbled a record eight consecutive weeks to 17.4 million barrels, the lowest level since December 2011, and production is down 9.4 percent from a year earlier and the lowest for this time of year in records going back to June 2010, data from the Energy Information Administration show.

“We’re drawing down stockpiles and our production rates aren’t changing a whole lot,” said Mike Blackford, a consultant at INTL FCStone in Des Moines, Iowa. “The blender should be pretty aggressive.”

Denatured ethanol for May delivery climbed 3.3 cents, or 1.4 percent, to settle at $2.359 a gallon on the Chicago Board of Trade. The April contract, which expires tomorrow, rose 2.7 cents to $2.388.

Gasoline futures for May delivery declined 6.07 cents, or 2 percent, to $3.0408 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

One bushel of corn makes at least 2.75 gallons of ethanol. The grain surged to a record in August after drought devastated yields, forcing as many as 20 ethanol plants to idle output, according to the Renewable Fuels Association in Washington.

Corn Inventories

Corn tumbled after a March 28 Agriculture Department report showed domestic inventories on March 1 totaled 5.399 billion bushels, exceeding analysts’ estimates of 4.995 billion.

Corn for May delivery fell 1.75 cents to $6.405 a bushel in Chicago, the lowest price since June 25. Futures have fallen 13 percent since the March 28 USDA report.

The corn crush spread, representing gains or losses from turning corn into ethanol and based on May contracts, was 3 cents a gallon, up from minus 1 cent yesterday. The amount doesn’t include revenue from the sale of dried distillers’ grains, a byproduct of ethanol production, which can be fed to livestock.

“That drives the cost of producing ethanol down substantially, which makes it more attractive to blend,” said Will Babler, a broker at Atten Babler Risk Management LLC in Galena, Illinois.

Declining Production

Production of the fuel in the week ended March 22 averaged 805,000 barrels a day, down 16 percent from the record 963,000 in December 2011, the March 27 report from the Energy Department’s analytical arm showed. The agency is scheduled to release last week’s data at 10:30 a.m. tomorrow in Washington.

“We’re maybe having a little pre-buying before tomorrow’s numbers in case they’re friendly,” Blackford said.

Ethanol-blended gasoline made up 95 percent of the total U.S. gasoline pool on March 22, little changed from the previous week’s all-time high in records going back to May 2004.

Demand for the biofuel could be stunted by lower gasoline consumption and slow adaptation of higher blends of ethanol in the motor fuel, a phenomenon known as the blend wall, Babler said.

A 2007 energy law requires the U.S. to consume 13.8 billion gallons of ethanol this year and 14.4 billion next year. The additive is mixed with gasoline in a formula of up to 10 percent of the biofuel.

Gasoline demand is projected to be 133.5 billion gallons this year and next, according to the Energy Department’s Short-Term Energy Outlook on March 12. That wouldn’t be enough to use the required amount of ethanol at a 10 percent ratio.

RINs Rising

Concern about the blend wall has boosted the value of Renewable Identification Numbers, or RINs, certificates assigned to each gallon of biofuel produced. Once refiners blend the biofuel into petroleum, they can keep the credit to show compliance with federal mandates or trade it to another party. RINs reached record highs on March 8.

Corn-based ethanol RINs rose 2 cents to 71 cents at 5 p.m. New York time, the highest level in two weeks, data compiled by Bloomberg show. Advanced RINs, which include biodiesel and Brazilian sugarcane-based ethanol, declined 1.5 cents to 75.5 cents.

In cash market trading, ethanol rose 2 cents to $2.54 a gallon in New York, 2.5 cents to $2.385 in Chicago, 2.5 cents to $2.445 on the Gulf Coast and 3 cents to $2.655 on the West Coast, data compiled by Bloomberg show.

West Coast ethanol’s premium to the Gulf Coast swelled 0.5 cent to 21 cents, the widest since March 22. Chicago’s discount to New York Harbor narrowed 0.5 cent to 15.5 cents.

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