It is still too early to draw long-term conclusions on the direction of ethanol inventory and production. But the sharp drop in ethanol inventory levels is tightening up supplies through the spring months.
According to the latest EIA report released Wednesday, ethanol inventory levels fell 46.2 million gallons from previous week levels. This drew total domestic ethanol supply levels to 730.8 million gallons. This is the lowest level since December 2011.
A brief history lesson for those that may not remember: Ethanol stocks rose sharply through the last quarter of 2011 as producers focused on the end of the blenders credit. The thought then was that these supplies would easily be utilized with normal gasoline demand in 2012.
But gasoline demand, and thus blending demand for ethanol, was not normal in 2012. It was much lower than expected. This lower demand kept ethanol supplies burdensome through the year, thus creating the term "ethanol glut".
However, the combination of early spring gasoline and ethanol demand and deteriorating ethanol production levels, due to high corn prices and poor processor margins, has led ethanol supplies to move back to manageable levels.
With ethanol supplies shrinking, this could draw additional price support back into the ethanol market and narrow the discount ethanol futures are trading to gasoline.
Before too much celebrating can be done, there remain significant questions about the ability of gasoline demand through the summer driving season. Will gasoline demand follow a typical demand curve or will it be tied to the lower 2012 levels? This will make a big difference across the ethanol market over the next several weeks.
Rick Kment can be reached at firstname.lastname@example.org