In the physical wholesale market, ethanol spot prices have now held a premium to gasoline spot values for a month, with the inversion an infrequent occurrence for the market in which the biofuel feedstock is usually in a discount position. The vast majority of gasoline sold in the United States has a 10% concentration of ethanol referred to as E10.
Ethanol has less energy content than gasoline. Clean Cities reports ethanol with 75,700 British Thermal Units of energy per gallon compared with gasoline at 115,400 Btus per gallon and E10 having 111,430 Btus per gallon. From an energy density perspective, ethanol should always trade at a discount to gasoline.
It’s the second time in 2014 in which spot values for ethanol in the actively traded Chicago market moved into a premium position to spot prices for conventional blendstock for oxygenate blending, with CBOB a baseline gasoline requiring the addition of ethanol to become a finished gasoline.
From mid-March through early April ethanol spot prices traded at a premium to CBOB in the Chicago market atop of a handful of times since 2011 the market was inverted. The inversions are brief, with the current stretch of ethanol premiums the longest of the series.
An analysis by Scott Irwin and Darrel Good with the Department of Agricultural and Consumer Economics at the University of Illinois found that ethanol prices can hold as much as a 10% premium to gasoline and still maintain breakeven ethanol blending economics at a 10% blend ratio. Ethanol boosts the octane in gasoline, and also provides refiners with an oxygenate component needed in parts of the country that require a reformulated gasoline. RFG sales account for more than a third of all gasoline sold in the United States.
There’s also a federal mandate to blend an increasing volume of renewable fuels into transportation fuels that will drive ethanol sales even if blending economics are negative. The Renewable Fuels Standard, the provision within the Energy Independence and Security Act that sets the renewables demand mandate, called for 14.4 billion gallons of renewables to be blended in lieu of petroleum-based fuels this year, increasing to 15 billion gallons in 2015 through 2022.
There are multiple RFS categories, including for biomass-based diesel fuel and cellulosic fuels. The renewables category is primarily satisfied with corn-based ethanol, which makes up the majority of ethanol produced in the U.S.
The Environmental Protection Agency proposed a lower mandate for 2014 at 13 billion gallons in November 2013, reducing the mandate because the gasoline market is saturated at the 10% blend ratio based on current US law and consumer preference. However, the EPA in late November abandoned this position, saying it would review both the 2014 and 2015 annual mandates next year.
Not knowing what the EPA will finalize next year, and a market sentiment that the agency and administrator of the RFS might propose a mandate for 2014 closer to what’s stated in the law is also seen underpinning ethanol sales in spite of price.
Gasoline prices remain under pressure, sliding to a more than five-year low in futures trading during the first week of December from ongoing long liquidation sales for US and international crude grades. West Texas Intermediate crude futures traded on the New York Mercantile Exchange is the U.S. price benchmark and Brent crude traded on ICE Futures is the international marker.
Ethanol prices have been supported by strong demand for blending and logistical woes, with a shortage of railcars to move supply from the Midwest producer region to consumer markets along the coasts creating a tight supply-demand balance that is lifting spot values. Spot ethanol prices are now encountering selling pressure from lower gasoline values, and are expected to return to their typical discount position in the near term.
The new era of low oil and gasoline prices might elongate the current price premium ethanol holds however. Moreover, the Energy Information Administration recently reported that changes in the market, with gasoline production in the United States outpacing demand, joined by seasonal fluctuations that cut into gasoline’s consumption rate now translate into U.S. Gulf Coast and Chicago spot gasoline prices often being the lowest in the world during the fall and winter months.
Based on consumer buying habits, the ethanol premium is sure to have an effect on E85 sales, which is a gasoline blend with up to 85% ethanol. E85 can only be used in flex-fuel vehicles, with roughly 17.4 million FFVs on U.S. roads today.
The EIA estimates 222.3 million gallons of E85 were sold in the U.S. in 2013, with the volume seen increasing to 256.2 million gallons this year, but declining to 205.1 million gallons in 2015. E85 sales are highly contingent on price point, with consumers fueling up with the mostly ethanol blend only when it’s priced at a significant discount to E10 to account for the lost energy and added trips to the retail outlet.