Gasoline, Ethanol Prices Equal Again, Signaling Return To Work Is Imminent

Source: By Sal Gilbertie, Forbes • Posted: Wednesday, June 10, 2020

The relationship between gasoline and ethanol returns towards normal as huge unemployment decline foretells of a back to work, commuter driven increase in gasoline demand

  • Gasoline prices are sending a clear signal that workers will return to workplaces very soon, and they’ll get there in their own cars.
  • Increased gasoline demand generates increased demand for both crude oil and ethanol.
  • When the price of ethanol is at a discount to gasoline, the cost of finished gasoline is reduced, benefiting producers and consumers alike.

Gasoline futures prices jumped higher after the Friday, June 5, 2020 Unemployment Report release that showed workers returning in droves to payrolls across the US. The increase was really only icing on the cake for a gasoline price rally that began in late April. Most significant was that after Friday’s issuance of the report, the price of gasoline finally equaled again, and actually surpassed for a while, that of ethanol on a per gallon basis, ending a 13 week abnormal trend that saw gasoline trading at a discount to ethanol.

The price increase in gasoline, along with the return towards normal in the relationship between gasoline and ethanol, has repercussions across the energy spectrum. Crude oil is refined to make gasoline, and gasoline is then blended with ethanol to make it burn more efficiently.

Normally, the price of ethanol is below the price of gasoline, which provides an incentive for gasoline blenders to use more ethanol. The math is simple: there is a mandated ten percent blend rate of ethanol into gasoline, which means if ethanol is ten cents per gallon cheaper than gasoline, then the price of a gallon of gasoline is reduced by one cent once the ten percent blend of ethanol is added.

The onset of mandated stay at home orders annihilated demand for gasoline, and its price fell below that of ethanol as the economy remained shuttered. Ethanol demand fell too, but showed more price resiliency than gasoline, perhaps because ethanol producers acted quickly to reduce supply.

Now, as states begin to reopen, workers return to their jobs, and travel becomes less restricted, demand for gasoline is sure to increase, which will in turn increase demand for crude oil, ethanol, and the raw materials used to make ethanol like sugar and corn.

Whether or not the recent price exuberance in gasoline and crude oil can continue remains to be seen, but at least one price relationship, gasoline versus ethanol, looks to be returning to normalcy. It may very well be a leading indicator for the rest of the economy as well.

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