Midlevel Ethanol Blends Could Have Economic Edge in August

Source: By Tom Kloza, OPIS • Posted: Sunday, July 19, 2020

This was supposed to be the first full driving season where E15 might flourish, thanks to the Environmental Protection Agency’s decision to approve the year-round sale of 15% ethanol blends.

But coronavirus disease 2019 (COVID-19) and incredibly cheap gasoline prices intervened. For a substantial portion of May and June, markets often saw wholesale prices for ethanol that were 30-60cts/gal above the price of conventional blendstock (CBOB). Even a rally in prices for 2020 D6 ethanol Renewable Identification Numbers (RINs) wasn’t enough to motivate many retailers to offer E15 at the pumps earlier this driving season.

Those economics appear ready to change. Ethanol in bulk markets like Chicago and delivered destinations like Florida and New York Harbor is still far more expensive than CBOB, but futures trading points to different economics next month.

July still finds Chicago ethanol prices just shy of $1.50/gal, or about 25-30cts/gal above gasoline blendstock values. But August futures for ethanol traded Wednesday morning for as little as $1.14/gal, slipping below the price of CBOB in the Chicago market. The action in futures markets is very thin, but if the relationships persist, there could be a substantial move to market E15 at numbers well under the standard E10.

Blending an E10 with $1.16/gal blendstock and $1.14/gal ethanol results in an initial value of $1.158/gal, and with RINs at 47cts, the net price of the finished blend works out to $1.111/gal.

If cheap ethanol futures come to pass in the actual wet markets, the economics for E15 improve substantially. The higher-level blend of 85% hydrocarbon at $1.16/gal and $1.14/gal ethanol results in an initial value of $1.157/gal, but the generation of more RINs results in a deduction of 7.05cts/gal. The outright net price of the finished E15 blend works out to $1.087/gal.

Some blenders are skeptical that cheap forward ethanol numbers will slip below the value of gasoline blendstocks. The last time Chicago CBOB was cheaper than ethanol was March 5, 2020. That was a few weeks before COVID-19 lockdowns and subsequent demand destruction eventually lopped more than $1.20/gal off the value of conventional blendstock. CBOB eventually traded at just 21.5cts/gal on April 7, or about one-fourth of the price of ethanol at the time.