U.S. Ethanol Stockpiles Surge as Fuel Demand Fizzles

Source: By Karen Braun, Reuters • Posted: Sunday, December 6, 2020

(Reuters) – The second half of November featured the most successful weeks for U.S. fuel ethanol production since the coronavirus pandemic hit earlier this year, but demand trended the wrong way during that period, leading to a large boost in inventory.

Further, travel during Thanksgiving week, usually the busiest travel week of the year, was lackluster as motor gasoline demand lost ground versus prior years.

U.S. fuel ethanol production in the four weeks ending Nov. 27 averaged 975,750 barrels per day, a nine-month high, according to the Energy Information Administration.

This is not surprising since output of the corn-based fuel typically increases during the last three months of the year. But in the latest two weeks, the gap in the four-week average versus the previous three years was the narrowest yet in the pandemic era at minus 7.7%.

Ethanol stocks climbed 8% in the latest four weeks to 21.24 million barrels as of Nov. 27, close to a six-month high. Outside of the virus-fueled April surge, that is the largest rise in a four-week span since January, and such an increase during November is uncommon.

The four-week average implied ethanol use in the latest week fell more than 13% from the three-year mean, the largest departure since the first week of September. The recent trend is unfavorable as ethanol usage had averaged close to 9% below prior years during October.

Given the stock boost, it would not be surprising to see near-term ethanol output widen the gap with prior years, placing additional pressure on a spring recovery. Refining margins to produce ethanol in the U.S. Corn Belt also declined throughout the month of November.

DEMAND CHALLENGES

The U.S. ethanol industry relies on strong overall fuel demand, but Thanksgiving travel failed to lift that demand as the country continues to battle the novel coronavirus.

The American Automobile Association (AAA) two weeks before Thanksgiving predicted that travel for the holiday would be at least 10% lighter than in the previous year, the largest one-year drop since the recession in 2008. Travel by car was projected to account for 95% of the total.

U.S. motor gasoline demand typically falls throughout November, but Thanksgiving week demand was slightly worse relative to previous years than during the leadup weeks. Finished motor gasoline supplied to the U.S. market averaged 8.28 million barrels per day in the four weeks through Nov. 27, down 10% from Thanksgiving week in the previous three years.

Gas demand in October was down an average of 8% from the prior three years, and the first three weeks of November featured a 9% drop.

AAA had predicted a 50% decline in Thanksgiving airline travel, but that assumption was likely too aggressive. The U.S. Transportation Security Administration reported that it screened a total of 4.6 million passengers between Wednesday and Sunday of Thanksgiving week, down 61% on the year.

Americans have generally been less mobile in recent weeks as COVID-19 cases remain elevated and hospitalizations rise to new highs. Travel heading in to the Christmas and New Year period may also be on the lighter side, but recovery may be more likely in the spring or summer, months after vaccinations would presumably begin.

Britain on Wednesday became the first country to approve Pfizer Inc’s COVID-19 vaccine, which will start going out next week, a sign that U.S. regulators may soon follow suit.

RECORD CORN USE

In the first quarter of 2020-21 that began on Sept. 1, weekly U.S. fuel ethanol production averaged about 8.5% below the same period in the previous few years. The U.S. Department of Agriculture pegs total 2020-21 corn used for ethanol down 7.7% from the three-year average ending with 2018-19.

That deviation probably does not suggest USDA is overly optimistic, but it does require improvements versus previous years over the next nine months. The potentially imminent authorization and widespread distribution of a vaccine across the United States would certainly boost those chances.

Seasonal trends must not be forgotten either. It is common for ethanol production to increase through most of December, but flat to downward is more likely in the first three or four months of any given year.

USDA’s 2020-21 corn for ethanol projection of 5.05 billion bushels aside from last year would be the lowest since 2012-13. But the agency predicts total U.S. corn use to climb to a record 14.825 billion bushels thanks to strong exports and feed usage.

(Editing by Matthew Lewis)

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