Ethanol Weakens Against Gasoline as Better Returns Ignite Sales

Ethanol weakened against gasoline as distillers sought to capitalize on the best returns in eight months for turning a bushel of corn into the biofuel.

The spread widened 51 cents to 66.84 cents a gallon based on settlement prices one day after the corn crush spread, which shows the loss from turning corn into ethanol, narrowed to 14 cents a gallon, the least since June and up from a loss of 30 cents a month ago. Distillers have reduced output and idled plants as earnings fell below production costs.

“They haven’t seen this in a while, so they’re trying to lock it in,” said Jerrod Kitt, an analyst at Linn Group in Chicago. “You were in such a drought in terms of margins that anything close to break-even looked like manna from heaven.”

Denatured ethanol for March delivery fell 2 cents, or 0.8 percent, to $2.367 a gallon on the Chicago Board of Trade. Prices have risen 8.1 percent this year and are up 5.9 percent from a year ago.

Gasoline for March delivery dropped 1.49 cents, or 0.5 percent, to $3.0354 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, which is blended with ethanol.

Ethanol traded at 99.8 cents below the motor fuel on Sept. 28. The crush spread was minus 16 cents today.

Corn for March delivery decreased 0.75 cent, or 0.1 percent, to $6.955 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol.

Shuttered Plants

At least 19 plants have been idled since June as the worst drought since the 1930s boosted corn prices to a record and trimmed profits for ethanol makers.

Poet LLC, the second-biggest U.S. ethanol producer, Valero Energy Corp., the third-largest, and Abengoa SA, are among companies that have idled operations.

Kitt said the improving crush spread may entice companies to restart production. The spread doesn’t include earnings from the sale of dried distillers’ grains, a byproduct of ethanol production that can be fed to livestock.

“Ready or not here it comes,” he said.

An Energy Information Administration report today showed production rose 1.9 percent last week to 789,000 barrels a day, the highest level since Jan. 4. Output was up 2.5 percent 770,000 barrels a day on Jan. 25, the lowest level since the Energy Department’s statistical agency began tracking weekly data in June 2010.

Steep Decline

Ethanol stockpiles dropped 3 percent to 19.5 million barrels, the lowest level since Nov. 30 and the steepest decline in 11 weeks, EIA said. Inventories wilted 9.3 percent from a year earlier and are below average for this time of year, data compiled by Bloomberg show.

Ethanol stands to benefit from higher gasoline demand. Consumption of the motor fuel over the past four-weeks was up 4.4 percent to 8.44 million barrels a day from a year earlier, the EIA said.

Ethanol-blended gasoline made up 89 percent of the total U.S. gasoline pool last week, little changed from the previous week, according to EIA.

Imports of the fuel may be limited as Brazil plans to raise the amount of ethanol blended into gasoline to 25 percent in May from 20 percent now and after Petroleo Brasileiro SA, the country’s state-controlled oil company, said earlier this month that it would raise gasoline prices by 6.6 percent, Kitt said. Brazil is the biggest source of U.S. ethanol imports.

Imports in the week ended Feb. 8 averaged 11,000 barrels a day, up from none the previous week and none a year earlier, the EIA report showed.

Brazilian Prices

Spot ethanol in Sao Paulo cost $2.29 a gallon last week, according to data compiled by Bloomberg, 3.1 percent cheaper than futures in Chicago.

In cash market trading, ethanol prices fell in most major regions. Ethanol slid 1 cent in New York to $2.49 a gallon; 2 cents in Chicago to $2.38 a gallon; 1.5 cents to $2.43 in the Gulf; and 1 cent on the West Coast to $2.55, the highest price in the nation, data compiled by Bloomberg show.

The value of Renewable Identification Numbers, known as RINs, for advanced forms of ethanol, which includes the Brazilian grade, rose to 58 cents yesterday, or more than double the worth of the conventional sort, data compiled by Bloomberg show.

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