US ethanol’s recent pursuit of gasoline’s nosedive has reminded me of the Gin Blossoms classic, “Follow You Down.” In the chorus of that 1996 hit, the band sings, “Anywhere you go, I’ll follow you down. I’ll follow you down, but not that far.”
That’s basically where US ethanol prices are at right now: Looking at gasoline prices, saying, “I’ll follow you down, but not that far.”
Ethanol maintained a discount to gasoline as long as possible, following gasoline all the way down to levels not seen in more than a decade.
As gasoline tracks crude into 12-year lows, ethanol has also ventured into its cheapest price since before the US Renewable Fuel Standard was originated in 2005, when the government began requiring blenders to use ethanol at escalating levels.
On January 13, the Platts benchmark Chicago Argo ethanol assessment reached $1.2650/gal, the lowest level since June 2005.
Meanwhile, the Platts CBOB Chicago pipe assessment was at 90.33 cents/gal, which was a fourth straight record-low assessment that was further topped in the ensuing four sessions, dipping to 82.25 cents/gal on January 20.
The ethanol assessment, on the other hand, shifted gears, stringing together its first five-day rally since October.
Ethanol seems to be putting its foot down, unwilling to go any lower. While gasoline wanders lower and lower, flirting with the treacherous $1/gal threshold, ethanol prices seem to have reached a floor.
Ethanol producers have seen the writing on the wall for a while now.
With all indications pointing to lengthy bearishness in the petroleum complex, US ethanol production was pushed to the limit as producers sought out maximum margin returns while they were still there.
Ethanol production finally topped the milestone 1 million barrels per day mark for the first time in November and has done so two more times since then, US Energy Information Administration data shows.
Because those mammoth production rates outpaced the escalating flow of exports, stockpiles approached 22 million barrels for the first time since March 2012.
The swelling supplies alongside the steady production allowed wiggle room for producers to continue to chase gasoline prices down toward the $1/gal mark, not to mention the fact that an ethanol RIN is still worth a healthy 65-70 cents to keep the blending incentive there.
But now that corn has taken an unexpected nudge north and China has again closed shop on the flow of dried distillers grains that helped prop up margins throughout 2015, holders of ethanol finally have a few reasons to be bullish.
Basically, without the extra help from DDGs and cheap corn, producers can’t afford to chase gasoline prices anymore.
The biggest question is, where do we go from here?
Do US ethanol producers continue to pump out 1 million b/d and seek export opportunities to thrive around the 10% blend wall?
E85 is steadily growing, but competing with gasoline prices near $1.50/gal is a far less-than-ideal environment to push higher ethanol blends, especially if you have to ask consumers to pay more for the fuel.
Until gasoline prices rebound significantly, US ethanol might be forced to settle into its new-found role as a costlier fuel option. Ethanol simply can’t follow gasoline down that far.