April 3 (Bloomberg) -- Ethanol’s discount to gasoline narrowed on concern that improving margins for making the biofuel out of corn won’t be enough to boost output to the levels before last year’s drought.
The spread, based on May contracts, contracted 17.98 cents to 50.2 cents a gallon, after the Energy Information Administration said output increased 0.2 percent to 807,000 barrels a day in the week ended March 29. That’s 16 percent below the December 2011 record high and 4.8 percent above the all-time low reached Jan. 25.
“Production has been holding steady,” said Julie Ward, assistant vice president at R.J. O’Brien & Associates, a broker in Des Moines, Iowa. “So many of the plants are down long-term.”
Denatured ethanol for May delivery rose 5.3 cents, or 2.3 percent, to $2.412 a gallon on the Chicago Board of Trade. The April contract, which expired today, gained 1.8 percent to $2.432 a gallon.
Gasoline futures for May delivery slumped 12.68 cents, or 4.2 percent, to $2.914 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 production has plunged after the worst drought since the 1930s sent corn to a record high and eroded returns for making the biofuel from the grain.
Margins improved after a March 28 Agriculture Department report showed domestic corn inventories totaled 5.399 billion bushels as of March 1, higher than analysts’ estimates of 4.995 billion.
Corn for May delivery added 1 cent to $6.415 a bushel in Chicago, rebounding from the lowest price since June. 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 8 cents a gallon, up from 3 cents 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.
“A lot of these plants, when they shut down, planned to be shut until the harvest,” Ward said. “Everybody knows the summer will be tough. Who wants to get back out there and have to duke it out again?”
Ethanol stockpiles rose 0.2 percent to 17.5 million barrels last week, snapping a record of eight consecutive weekly declines, according to the report by the EIA, the Energy Department’s statistical arm.
“That’s all what supply and demand is about,” Ward said. “Finding that balance.”
Ethanol-blended gasoline made up 92 percent of the total U.S. gasoline pool, the least since Feb. 22, the EIA said. That’s down from a record 95 percent in the week ended March 15.
Imports of the fuel averaged 49,000 barrels a day last week, the highest level since Jan. 18 and up from 9,000 barrels a year earlier, EIA said.
In cash market trading, ethanol increased 2.5 cents to $2.68 a gallon on the West Coast, 2 cents to $2.465 in the Gulf, 1.5 cents to $2.40 in Chicago and 1 cent to $2.55 a gallon in New York, data compiled by Bloomberg show.
New York Harbor’s premium to Chicago narrowed 0.5 cent to 15 cents while the Gulf Coast’s discount to the West Coast widened 0.5 cent to 21.5 cents, the most since March 22.
A combination of lower production, higher biofuel consumption targets and lackluster gasoline demand, a phenomenon known as the blend wall, has increased the value of Renewable Identification Numbers, or RINs, certificates assigned to each gallon of biofuel produced.
Once refiners blend the renewable fuel into petroleum, they can retain 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 fell 1 cent to 70 cents today, data compiled by Bloomberg show. They traded at 7.1 cents on Jan. 7.
Advanced RINs, which include biodiesel and Brazilian sugarcane-based ethanol, increased 1 cent to 76.5 cents. Those certificates traded at 37 cents on Jan. 7.
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