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Schork Oil Outlook: 2011 Looks Tough for Distillers

Twilight in the Corn Belt?

"The undersigned diverse group of business associations, hunger and development organizations, taxpayer advocates, agricultural groups, religious organizations, environmental groups, budget hawks, and public interest organizations urge you to allow the refundable Volumetric Ethanol Excise Tax Credit (VEETC) to sunset this year.

"At a time of spiraling deficits, we do not believe Congress should continue subsidizing gasoline refiners for something that they are already required to by the renewable fuels standard…"

Letter to U.S. House and Senate leaders From the so-called Friends of the Earth
Nov. 29, 2010

“Allowing the provisions to expire or remain expired would threaten jobs, harm the environment, weaken our renewable fuels industries and increase our dependence on foreign oil…”

Letter to U.S. Senate Leaders
Senators Chuck Grassley, R-IA and Kent Conrad, D-ND
Dec. 1, 2010

Now that Al Gore has admitted his “mistake,” the U.S. ethanol industry finds itself at the center of what is setting up to be one ugly political spectacle. In the weeks ahead, as politicos on both ends of the ideological spectrum trip over themselves to pander to the least common denominators in their respective districts, Big Ethanol will have a bounty placed on its head.

"Oil is high, natural gas values can only go higher from here and corn values remain stubbornly strong." " -The Schork Report, Stephen Schork

If that were not bad enough, market conditions for ethanol distillers are getting tougher, i.e. margins are narrowing. Last night the crush between prompt f.o.b. ethanol in Chicago and the bid for ?2 yellow corn was $0.48 per bushel of corn. Three weeks ago the margin was trading upwards of $1.65 a bushel. Moreover, a rebound in natural gas is now squeezing DDG basis.

Finally, should crude oil prices remain around $90 a barrel (which loosely translates into +$3.30 gasoline at the pump) then demand for gasoline (and therefore ethanol) will suffer. It has to, because history teaches us so. According to the most recent outlook from the DOE, fuel ethanol demand from the transportation sector is forecast to rise 18.3% in 2010 to 313.1 MMbbls (1.108×1015 Btus). That is an increase of 75 bps from last month’s forecast. On the other hand, estimated demand for 2011 dropped by 93 bps for an increase of 2.71% to 321.6 MMbbls.

As written in today’s issue of The Schork Report , the bottom line is that oil is high (which will adversely impact demand elasticity for transportation fuels), natural gas values can only go higher from here and corn values remain stubbornly strong. Now toss in the pissing match brewing in Washington over industry tax credits and import tariffs, and you can appreciate that 2011 is not going to be an easy year for distillers.

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