Ethanol Weakens on Gasoline as Tighter Discount Lowers Demand

Ethanol weakened against gasoline as the biofuel’s discount to the motor fuel tightened near the lowest level in two weeks, reducing demand for the additive.

The spread, or price difference, expanded 0.57 cent to 45.23 cents a gallon, snapping ethanol’s four days of gains against the motor fuel, the longest string since Feb. 21, and rebounding from the smallest differential since March 19.

“The blend margin took a little bit of a hit,” said Mike Blackford, a consultant at INTL FCStone in Des Moines, Iowa. “We’ve had a pretty good run. Maybe the market needs to take a breath here.”

Denatured ethanol for May delivery rose 4 cents, or 1.7 percent, to $2.457 a gallon on the Chicago Board of Trade. Prices have gained 12 percent this year.

Gasoline futures for May delivery rose 4.57 cents, or 1.6 percent, to $2.9093 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

The motor fuel fell last week by the most since Oct. 5, reducing gasoline’s premium over the grain-based additive. Ethanol last week dropped 1.4 percent, less than corn’s 9.5 percent decline, boosting returns for turning a bushel of the grain into the biofuel.

Corn for May delivery climbed 4.5 cents, or 0.7 percent, to $6.335 a bushel today in Chicago, the lowest level since June 25. One bushel makes at least 2.75 gallons of ethanol.

Crush Spread

The corn crush spread, representing gains or losses from turning corn into ethanol and based on May contracts, was 15 cents a gallon, up from 13 cents April 5. The amount doesn’t include revenue from the sale of dried distillers’ grains, a byproduct of ethanol production, which can be fed to livestock.

Output of the biofuel averaged 807,000 barrels a day in the week ended March 29, data from the U.S. Information Administration show, down 16 percent from the record in December 2011, as production suffered from higher corn prices caused by the worst drought since the 1930s.

Blackford said the better returns may not be enough to lift production.

“That’s the job of the market, to improve margins enough to encourage production,” Blackford said. “They just can’t do it on a whim. It takes time to get them going. Some of them have laid off workers.”

The lower output has helped to drain inventories of the fuel. Stockpiles in the week ended March 29 were 17.5 million barrels, compared with 17.4 million the previous week, the lowest level since December 2011.

Ethanol Imports

Imports of the biofuel averaged 49,000 barrels a day last week, down 60 percent from the record 122,000 barrels a day in October, EIA data show.

Spot ethanol in Sao Paulo cost $2.28 a gallon last week, data compiled by Bloomberg show.

Ethanol-blended gasoline made up 92 percent of the total U.S. gasoline pool, the least since Feb. 22, EIA said, and up from 91 percent a year ago.

Under a 2007 energy law, known as the Renewable Fuels Standard, refiners are required to use 13.8 billion gallons of ethanol this year and 14.4 billion in 2014.

Each gallon of biofuel is assigned a Renewable Identification Number, or RIN, to show compliance with the program. Once the biofuel is blended into petroleum companies can keep the RIN or they can trade it.

CME Contract

CME Group, owner of the world’s largest futures exchange, said today that it plans to start a contract for the certificates by the end of May.

Prices for the credits rose to a record last month and petroleum and ethanol industry representatives have argued over the effects on retail gasoline prices. Corn-based ethanol RINs rose 14 percent today to 86 cents, the biggest one-day gain since March 8 and the highest price since March 11, data compiled by Bloomberg show. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, jumped 9.1 percent to 89.5 cents, the highest since March 12 and the steepest gain since March 8.

In cash market trading, ethanol slid 4 cents to $2.585 in New York. The biofuel gained 2 cents to $2.495 in Chicago, 1.5 cents to $2.55 in the Gulf and 3 cents to $2.715 a gallon on the West Coast, data compiled by Bloomberg show.

West Coast ethanol’s premium to the Gulf Coast expanded 1.5 cents to 16.5 cents, while Chicago’s discount to New York narrowed by 6 cents to 9 cents, the lowest level since March 11.

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