Oversupply, oil price, spring cleaning contribute to less ethanol

By Kris Bevill | April 25, 2011

The U.S. DOE’s Energy Information Administration has been reporting a continuous decline in ethanol production since early April, down to 865,000 barrels per day, or about 36 million gallons per day, for the week ending on April 15. Industry analysts said several factors are likely at play in this month-long downward trend.

Jerry Gidel, an associate at North America Risk Management Services Inc., said the pullback in production can be linked to reduced gasoline demand, which is a result of high gas prices. “This lead to reduced orders from the blenders and a drop back in ongoing demand, with Big Oil already having their ethanol stocks inflated because of the current 50 to 60 percent price differential of gasoline over ethanol,” he said. “Big Oil is in the driver seat on ethanol demand.”

Chris Highsmith, senior commodities research and strategy analyst at Eco-Energy Inc. said ethanol blend margins for refiners are the highest they’ve been since last May which should create a huge incentive to blend, but ethanol stockpiles and a saturated market have prevented that from happening to a large extent. “In previous years, when we weren’t blending close to the E10 level nationwide, there were opportunities for significant increases in blending,” he said. “Now that’s just not the case. You might be able to pick up a tenth of a percent. It’s not the same market that we had a couple of years ago and obviously the oversupply situation is playing a role. We’re sitting on over 14 billion gallons of running capacity on stream, with less than 13.5 billion gallons of domestic demand.”

Highsmith believes ethanol exports are another reason for the EIA’s reported drop in ethanol production. Exports of U.S. ethanol to Brazil have been high over the past few weeks in response to that country’s supply shortage, which translates to reduced stocks on the U.S. side without being accounted for elsewhere in the EIA’s reports. Highsmith said it’s possible that the EIA could have recognized the reduced stocks, but couldn’t reconcile it with export data because that tends to lag a few weeks behind the correlating production report. “I don’t there was a huge ratcheting down in production,” he said. We did have a plant shut down, but other plants are ramping up. So when you balance it all out, I think it may just be exports. Spikes in exports are hard for them [EIA] to follow.”

Spring cleaning at ethanol plants could also be a contributing factor in reduced production numbers, according to both Gidel and Highsmith. Gidel said his industry contacts have mentioned seasonal maintenance downtime as being the reason for reduced output and noted that many plants have been running “at a very rapid pace” for the past year or so.

Gidel said gasoline demand going into the summer months will determine how much corn the ethanol industry grinds for fuel production this growing season, and gasoline demand will be driven by prices at the pump for consumers. Highsmith agrees that high gas prices could negatively impact the ethanol industry, because shrinking gas demand also shrinks the available ethanol blend pool, but he doesn’t predict a huge decrease in gasoline demand. “It’s not the summer driving season yet, so people may be backing off of some unnecessary trips, but you still have to drive to work, you have to drive to the grocery store. People don’t have alternate means of transportation a lot of the time.” Highsmith noted that the EIA also does not predict a significant decrease in gasoline demand. Even with gas prices peaking at nearly $4 per gallon on average, the agency is estimating a 0.5 percent increase gasoline demand over last year, he said.