Ethanol’s Discount to Gasoline Widens on Signs of Higher Output

Ethanol’s discount to gasoline widened after a report showed production of the biofuel climbed to a two-week high and on speculation output will increase to meet demand in the summer driving season.

The spread, or price difference, expanded by 4.84 cents to 23.3 cents a gallon after an Energy Information Administration report showed ethanol production last week rose 1.7 percent to 857,000 barrels a day. That was the most since April 26 and the biggest weekly gain since April 19. Returns to make the biofuel from a bushel of corn are near the highest since December 2011, according to data compiled by Bloomberg.

The EIA report “shows a nice increase in production to 853,000 barrels a day, but we’re still 33,000 below last year’s levels,” said Justin Dirico, manager of the biofuels desk at Eagle Energy Brokers LLC in New York.

Denatured ethanol for June delivery decreased 1.9 cents, or 0.7 percent, to $2.634 a gallon on the Chicago Board of Trade. Futures have gained 24 percent in the past year.

Gasoline for June delivery added 2.94 cents, or 1 percent, to $2.867 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Demand for motor fuels and ethanol will increase as the summer driving season begins on the U.S. Memorial Day holiday weekend later this month, Dirico said.

“Production needs to increase in order to meet this demand,” he said.

Gasoline Pool

Ethanol-blended gasoline made up 95 percent of the total U.S. gasoline pool in the week ended May 10, down from a record 97 percent the previous week, EIA data show. For a third week, there were no U.S. imports, the longest such period since March 2012.

Stockpiles of the fuel fell 2.5 percent to 16.4 million barrels, a third weekly decline and the lowest level since Dec. 3, 2010, today’s report showed.

Ethanol is made primarily from corn in the U.S., with one bushel of the grain distilling into at least 2.75 gallons of the renewable fuel. Drought last summer wilted crops and boosted manufacturing costs to make the biofuel.

Corn for July delivery slipped 1.75 cents, or 0.3 percent, to $6.5075 a bushel in Chicago.

Crush Spread

The corn crush spread for July was 15 cents, compared with 17 cents yesterday and minus 35 cents on Dec. 31. 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 2007 energy law requires the U.S. to use 13.8 billion gallons of ethanol this year. Compliance with the law is tracked by Renewable Identification Numbers, or RINs, certificates attached to each gallon of biofuel that can be submitted to the government or traded between refiners.

The value of corn-based ethanol RINs climbed 5 percent to 83.5 cents at 3:41 p.m. New York time, data compiled by Bloomberg show. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, advanced 1.1 percent to 91 cents.

In cash market trading, ethanol sank 7.5 cents to $2.76 a gallon in New York, 4.5 cents to $2.66 in Chicago and 4.5 cents to $2.72 on the Gulf Coast, data compiled by Bloomberg show. On the West Coast, the biofuel was unchanged at $2.825 a gallon.

New York Harbor’s premium to Chicago shrank 3 cents to 10 cents, the smallest since April 8, while the Gulf’s discount to the West Coast widened by 4.5 cents to 10.5 cents, the largest gap since May 1.

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