US ethanol’s dog days of summer

Source: By Jordan Godwin, The Barrel Blog, Platts • Posted: Monday, August 11, 2014

The increasingly stagnant US ethanol market is getting downright weird. Remember the first four months of 2014 when wild volatility was rampant and almost expected in the market?

With the benchmark Platts Chicago Argo ethanol assessment, we hit a 2014 low of $1.78/gal one quiet January day. Throw some ice and railroad logistics issues into the mix, and that price more than doubled in a matter of two months, hitting an eight-year high of $3.76/gal on March 31.

That seems like such a long time ago now.

In June and July, prices mellowed. In fact, the prices mellowed at a historical level for the fledgling industry. The Argo assessment has not strayed more than 10 cents away from $2.16/gal in more than two months, the second longest flatline of its kind in the assessment’s 11-year history.

The root cause of the sudden stability is mostly a result of good old supply/demand balancing. Unlike the roller coaster start to the year, production has been steadily strong, pumping more than 3 million barrels into the US stockpile of 18.26 million barrels in a matter of four months, US Energy Information Administration data released August 6 showed.

The funny thing is, more and more ethanol industry leaders are now saying they don’t even need strong RFS and EPA hand-holding in 2014. With cheap feedstock corn prices and relatively strong and stable ethanol prices, producer cash flow has been huge. Even after prices deflated, margins have held strong, with a current weekly average that is more than twice the returns seen in 2013 and 2012, according to the Platts model.

The iconic Texas ice cream company Blue Bell often uses the phrase “we eat all we can and we sell the rest,” and, similarly, ethanol producers are looking at increasingly attractive export opportunities to be a big money-maker in the coming months.

The big question is whether this is all sustainable and how much longer the trend can hold. Ask any trader or broker who has been burned by the market before, and they’ll tell you something’s gotta give.

The EIA reported August 6 that production for the week ended August 1 plunged 52,000 b/d to a three-month low of 902,000 b/d. The drop came as a shock to most market players as the number had previously topped 950,000 b/d in consecutive weeks for the first time in three years.

Is that the final snowflake that launches the avalanche? We’ll see.