Ethanol Trades Near Parity With Gasoline on Transport Congestion

Ethanol traded near parity with gasoline for the first time since March as congestion along the nation’s railroads slows deliveries.

The grain-based fuel settled at a 2.25-cent discount to gasoline. It earlier traded a premium to the motor fuel, the first time that’s happened since March. Ethanol averaged a historical discount of about 21 cents since the futures contracts began trading in 2005.

Gridlock along U.S. railways has been so bad this year that Warren Buffett’s BNSF Railway Co. said Nov. 12 that it’s blocking some shippers from adding tank cars to the already over-burdened network. About 70 percent of ethanol is transported by rail, a virtual pipeline for the additive to be delivered from Midwest plants to population-dense areas along the U.S. East, West and Gulf Coast.

“There’s a couple of things,” said Michael Slider, director of biofuels at Fauser Energy Resources in Sycamore, Illinois. “The rail delays, obviously, and there’s also a shortage of trucks because of diesel for the harvest.”

Denatured ethanol for December delivery rose 3.8 cents, or 1.9 percent, to $2.02 a gallon on the Chicago Board of Trade, the first time the fuel has been above $2 since September. Futures have gained 5.8 percent this year, making ethanol the best-performing transportation fuel this year.

Gasoline for December delivery climbed 4.09 cents, or 2 percent, to settle at $2.0425 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations. Prices have tumbled 27 percent this year.

Transport Complications

Ethanol producers and traders are coming up empty in securing trucks to ship the fuel as a way to dodge the railroad traffic jam, Slider said.

“You call a carrier to haul ethanol and they say they don’t have any trucks,” he said.

The premiums to get rail shipments are unfolding in the spot market as well, says Mark Ruyack, a manager at StarFuels Inc., a Jupiter, Florida-based brokerage.

In cash market trading, ethanol on the West Coast rose 28 cents to $2.72 a gallon and on the Gulf Coast it increased 13.5 cents to $2.41, data compiled by Bloomberg show. New York Harbor ethanol climbed 10 cents to $2.45 and in Chicago, the biofuel jumped 7 cents to $2.45 a gallon.

“These are phenomenal premiums that we haven’t seen in a while,” Ruyack said. “Rail prices have gone through the roof. We’re getting a lot of demand for trucks.”

Federal Rules

Ethanol accounts for about 10 percent of U.S. gasoline consumption, data from the Energy Information Administration show.

Under a 2007 energy law refiners are required to blend escalating amounts of the fuel in gasoline. As of tomorrow it will have been a year since President Barack Obama proposed to temper the amount of the fuel to be used to align with about 10 percent of motor fuel demand.

The Environmental Protection Agency has yet to issue the final ruling. Slider said that part of the increase in ethanol prices may be bets by refiners and blenders that it will soon be released and that the consumption targets may be higher than what was proposed last November.

An EPA spokeswoman declined to comment.

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