Oil drops below $100, ethanol trades 23 cents lower than gas

By Holly Jessen | February 25, 2011

Oil dropped more than $1 on Feb. 24 to $96.50 a barrel, down somewhat from a high earlier in the week of $103 a barrel—the highest it’s been in two years. At the same time ethanol prices are 23 cents lower than gas prices, providing opportunities for discretionary blending, said Rick Kment, ethanol analyst for Telvent, a commodity market information company.

Volatility in the marketplace has been fueled by speculative buyers and fears over what could happen to oil supplies around the world. Oil production levels in Libya could only have a slight affect on U.S. oil shipping activity and Egypt even less so, Kment said, but it’s the fear of the future that’s really driving prices. “Will this spread to Saudi Arabia,” Kment asked. “Will this spread to other sections of the Middle East? And there’s even been speculation, ‘Will this continue to spread into other markets such as China and other areas that may not affect oil, but may affect the world economy more significantly than just one commodity such as crude oil.’”

Prices don’t reflect a tight supply of oil, he told EPM. U.S. commercial crude oil stockpiles for the week of Feb. 14 averaged 347 million barrels, well above 330 million barrels, the five-year average stock level in the same time period. In addition, it’s nearly 8 million barrels above where stockpiles were last year at this time.

Instead, higher prices are driven by noncommercial, speculative buyers, such as fund buying and investment buying, he said. Speculative buying has not reached record levels as it did in 2008, however it’s certainly been a recent factor in keeping the market volatile. And it’s not just oil prices that have prompted speculative buying. “They have pretty much been in all commodities markets,” he said.

Gasoline trading is up as well, going from a short-term low of $1.91 per gallon in September to $2.71 per gallon today for Reformulated Blendstock for Oxygenate Blending, commonly known as RBOB. Prices rallied sharply from $2.43 on Jan. 31. “So we’ve seen an almost 30 cents jump in 3 weeks,” he said.

The price spread between gas and ethanol has been widening in the last two weeks. On Feb. 10, ethanol was at $2.47.5, a half cent more than RBOB.  “That’s when we saw corn near or right at $7 a bushel and overall gas prices had dipped though the first week in February,” he said.

Now, gas is 23 cents per gallon more than ethanol, which climbed only slightly from Feb. 10 to $2.48. There is speculation that gas could continue to rise, reaching $5 a gallon. There’s certainly a potential for that, Kment said, but nothing is set in stone.

Unlike in 2008, when high gas prices prompted public outcry and a significant pullback in demand and driving, Kment doesn’t think consumers will use less gas this year. Drivers may be slightly desensitized to the price—in 2008 consumers made noise when gas hit $3 and that’s not happening now. Attitudes have changed significantly since 2008, with consumer optimism down and unemployment up. Demand for gas still hasn’t risen back up to 2008 levels and Americans have already made cuts in a lot of areas, such as by moving to more fuel efficient vehicles. “You can only cut back so much,” he said.

Volatile oil prices show the need for more fuel choices, ethanol industry advocates say.  Ethanol is the only alternative oil that is available in significant quantities now and the industry needs government support to continue to expand to fight the country’s dangerous addiction to foreign oil, they said.