Schork Oil Outlook: Ethanol’s Late Season Surge

Since the end of June, spot ethanol CBOT futures for October delivery have surged 43% on the back of a strong export market along with substantial spikes in corn and sugar feedstocks.

The corn market in Chicago has been the fourth best performer (rolling contracts) over the last three months on the S&P GSCI, up 31.7% as of last night (Thursday).

Strength in this market is motivated by new estimates from the USDA. In short, the crop yield forecast has been lowered and the volume dedicated to ethanol output has been raised. On Wednesday, the contract for December delivery closed the gap at 490.00 from October 2008 and finished last night, 496.00, within 13 ticks of our 499.25 weekly top (reference Biofuels section in today’s issue of The Schork Report).

Meanwhile, dry weather and strong global demand for sugar has ignited a firestorm in the New York futures market. For the three months ended last night, this market has been the strongest performer, up 62.6%, on the S&P GSCI.

On Wednesday, the spot contract for October delivery hit a life-of-contract high of 24.88 and settled last night at 24.48. As we look ahead to today the market is within 1.35 points of our 25.83 weekly top.

The strong demand for sugar has hampered Brazil’s ethanol production. As such, U.S. exports of corn-based ethanol are flooding the Brazilian market!

According to OPIS which cited sources from the U.S. Department of Commerce (DoC), exports to Brazil surged 51% from June to 620 Mbbls in July. A saturated market for domestic demand is now finding viable markets abroad, including inroads to the EU, Middle East and India.

Expectations are that U.S. ethanol exports remained strong through August as well. The development of viable export markets has been a much needed shot in the arm to a moribund industry. Thus, perhaps one of these days in the not too distant future, the U.S. taxpayer will not have to subsidize it and the Congress will lift the tariff on Brazilian product.

Hey, one can always dream…..


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.