Tuesday, August 3, 2010

Ethanol Market Volatility

So what is going in the ethanol markets? What is driving the recent surge in ethanol prices and will it continue?

1)Agriculture prices are up. The US corn crop looks like it is going to meet market expectations but the potential shortfall in the wheat harvest across Europe and Russia due to heat stress this summer is driving corn prices higher as an alternative feed grain. The extent of the impact on wheat in Europe/Russia will become clearer over the next few weeks with the harvest just getting started.

2)Brazilian ethanol producers are exhibiting much greater discipline this year by holding onto inventory and not participating in panic selling to raise cash in the early part of the sugarcane harvest. Brazilian exports of ethanol are 50% lower than same time last year. Sugar prices are also strong adding to financial strength to hold ethanol inventory

3)European prices are being pressured by wheat prices that have increased 35% in the last 45 days due to potential crop yield problems mentioned earlier. Europe also is net short ethanol and must import to meet its biofuel requirements. In the past Brazil has filled that role but with anhydrous ethanol at $600/cbm FOB Santos and European T1 prices at only $565/cbm FOB Rotterdam, Europe is turning to US material to fill the gap.

4)In the US, the EIA reported that ethanol producers had slowed down their production by approximately 5% to 816,000 bpd and traders consummated export deals that will soak up another 10,000 bpd over the next 20-30 days. This caused NYH prices to blow out and trade at 18 cpg over Chicago versus typical differentials of 10 cpg over Chicago.

5) The US market has moved into a 3-5 cpg backwardation that appears to have staying power as a market feature if producers maintain production discipline and exports continue at a 10,000 bpd pace. Record gasoline production is also helping on the domestic demand side and it remains to be seen if this level of production will continue for the summer driving season.

The Wednesday release of EIA data will be very interesting to see if these trends continue in both ethanol (down) and gasoline (up) production.

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