Ethanol futures have rallied nearly 30 cents from historic lows set in March, but increased uncertainty remains about the short- and long-term direction of the ethanol market. Traditionally, April through early July is seen as a strong demand period for gasoline and ethanol markets, with prices moving higher accordingly. But during early 2020, ethanol has been plagued with increased supplies. And a significant supply of crude oil and gasoline products, combined with significantly lower domestic and global demand due to the COVID-19 pandemic, has caused underlying concern throughout the energy market. There are several factors that may keep overall ethanol demand limited and prevent prices from moving significantly higher through the upcoming weeks and months.
Even though moderate gains have been seen in ethanol and RBOB gasoline prices through the past month, ethanol remains at a significant premium to RBOB gasoline futures prices. The relationship between the gasoline and ethanol market has changed significantly during the oil and gasoline price tumble in early March.
Historically, ethanol has continued to trade at 17- to 40-cent discount to the RBOB gasoline market. But over the past two months, this relationship has been totally reversed, with ethanol futures holding a premium to the gasoline market of 20 to 47 cents. This represents a 40- to 80-cent total change in the relationship between the two markets. As long as gasoline prices remain at a discount to the ethanol market, the incentive to blend any amounts above regulated levels disappears.
Overall demand for gasoline and ethanol through the upcoming summer months is extremely uncertain. There is some expectation that demand in the coming weeks will grow from current levels. But due to coronavirus restrictions and current economic conditions, it is uncertain just how much demand will change from year-ago levels and previous three-year levels. Typically, the upcoming Memorial Day weekend travel predictions are a major part of gauging overall demand for both gasoline and other products for the summer. But even some of these estimates are going undone due to the uncertainty in the near future.
Ethanol production has slowed significantly with extremely negative plant margins seen due to the low ethanol prices and lack of product movement. Even with strong pressure in corn prices through the spring, ethanol producers are cutting back on spring production. But this is not expected to change the strong supply levels seen across the country.
Ethanol supplies remain burdensome given the production levels seen through the end of 2019 and early 2020. At that point, producers were focused on a "normal" driving season that traditionally takes months to prepare for in order to not have a shortage of ethanol supplies during the summer months. But since demand essentially dried up due to the coronavirus pandemic, supplies are expected to remain extremely high through most of the summer.
Even though significant challenges remain in the ethanol and energy markets, it seems that the worst is behind us and that the industry is on a slow road to recovery. Ethanol prices have rallied nearly 30 cents off of March lows, RBOB gasoline prices have bounced over 55 cents per gallon over market lows. The ethanol-to-RBOB-gasoline price spread has been cut by two-thirds in the last two months, and ethanol stocks moved lower last week, hitting a seven-week low. It is still going to be a long time before "normal" is reached in the ethanol market, but the slow-but-steady steps seen during early May seem to be revealing promising signs.
Rick Kment can be reached at firstname.lastname@example.org
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