Ethanol’s Discount to Gasoline Expands on Signs of Lower Use

Ethanol’s discount to gasoline expanded on speculation that supply of the biofuel is adequate to meet demand, expected to decline as the U.S. summer driving season concludes.

The spread, or price difference, widened 1.25 cents to 92.16 cents a gallon as yesterday’s U.S. Labor Day holiday marked the end of the peak seasonal consumption of gasoline. Ethanol is blended with the motor fuel to stretch supply and meet federal mandates.

“Stocks are healthy enough for where we are in the year,” said Mike Blackford, a consultant at INTL FCStone Group in Des Moines, Iowa. “We’re at the seasonal trail-off for demand. They’re OK.”

Denatured ethanol for October delivery fell 3.8 cents, or 1.9 percent, to $1.943 a gallon on the Chicago Board of Trade. The September contract, which expires Sept. 5, rose 8.7 cents to $2.48.

Gasoline for October delivery decreased 2.55 cents, or 0.9 percent, to $2.8646 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 October ethanol contract was trading at a 16.8-cent premium to November delivery, a phenomenon known as backwardation, where prompt prices are higher than later ones.

“The backwardation is very steep and that means user groups won’t buy until they absolutely have to,” Blackford said.

Fuel Stockpiles

Ethanol inventories dropped to 16.3 million barrels in the week ended Aug. 23, according to data from the Energy Information Administration, 5.2 percent higher than the all-time low in June.

Production fell 2.8 percent to 820,000 barrels a day last week, the least since March 29, the EIA, Energy Department’s statistical arm, said Aug. 28. That’s near record-low levels for this time of year, according to data compiled by Bloomberg.

The additive is made primarily from corn in the U.S. One bushel makes at least 2.75 gallons of the renewable fuel.

Corn for December delivery slumped 6.75 cents, or 1.4 percent, to $4.7525 a bushel in Chicago. September corn rose 3 cents to $4.98.

The corn crush spread, or the price difference between a gallon of ethanol and the corn needed to make it, was 67 cents, down from 59 cents yesterday, data compiled by Bloomberg show.

Federal Mandate

A 2007 energy law requires refiners to use 13.8 billion gallons of ethanol this year and 14.4 billion in 2014. Compliance is tracked by Renewable Identification Numbers, certificates attached to each gallon of ethanol that are submitted to the government each year and that also can be traded among companies.

Corn-based ethanol RINs climbed 2 cents to 71 cents, data compiled by Bloomberg show. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, added 2 cents to 76 cents.

Ethanol refinery and blender input, a measure of demand, was little changed in the week ended Aug. 23, from the previous week, and down 3.2 percent from this year’s high July 5, EIA data show.

In cash market trading, ethanol in New York slid 6 cents to $2.75 a gallon; in Chicago the additive lost 3 cents to $2.695; in the U.S. Gulf prices sank 3 cents to $2.79; and on the West Coast ethanol plunged 6 cents to $2.78 a gallon, data compiled by Bloomberg show.

Chicago’s discount to New York narrowed 3 cents to 5.5 cents, the smallest since July 23, while the Gulf traded at a 1 cent premium to the West Coast for the first time since July 16.

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