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Schork Oil Outlook: Ethanol Distillers Caught in a Squeeze

Can ethanol distillers make it up on volume?

Over the last five sessions, agricultural feedstocks for the transportation sector have been the darlings of the commodity sector.

Sugar futures in New York have been the strongest performer in the S&P GSCI, up 16.8% and corn in Chicago has been the second strongest, up 16.5%. On Tuesday corn for December delivery hit $5.840. It was the highest price for spot bushels in more than two years. In New York, sugar for March delivery has hit five consecutive life-of-contract highs.

In other words, both markets have gone parabolic on crop yield concerns and strong global demand.

The rally in corn futures has also helped fuel strength in the ethanol market… and that was even before the EPA approved an E15 waiver yesterday (gasoline with 15% ethanol) for the 2007 vehicle model year and beyond. Meanwhile, according to yesterday’s monthly outlook from the EIA, fuel ethanol demand from the transportation sector rose 14% 2009 to 264.8 MMbbls (9.15×1014 Btus).

Production this year through July is averaging 25.5 MMbbls or 305.8 MMbbls annualized. Projections from the EIA peg transportation sector demand for ethanol in 2010 up 17½% to 311.1 MMbbls, thereby creating a potential deficit this year of 5.3 MMbbls or 1.7%.

Transportation demand is expected to grow another 3.6% in 2011 to 322.4 MMbbls. However, with the EPA’s decision to allow higher fuel ethanol blends of up to 15%, demand estimates will likely be upped in the months ahead. What’s more, the EPA is expected to rule by November on whether to expand E15 approval to 2001-2006 model vehicles.

As illustrated in today’s issue of The Schork Report, with spot corn now surging to multiyear highs, ethanol producer margins are non-existent.

Unfortunately for these distillers, demand via government fiat has yet to generate a profit… imagine? With producers losing on each unit, Uncle Sam apparently thinks they can make it back on volume.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.