Prices between RBOB gasoline and ethanol markets have been quickly narrowing over the last two weeks following strong and aggressive buying support in front-month ethanol contracts. The current price spread now stands at 33 cents per gallon, meaning that front-month RBOB gasoline contracts are priced 33 cents per gallon over the ethanol contract price. On a weekly price chart, this is the narrowest spread seen since June of 2013. The recent reduction of ethanol production over the last couple of weeks, combined with tumbling inventory levels has created aggressive buyer interest in ethanol contracts.
This could lead to additional support over the near future. Given the current margin potential for ethanol producers, and price of corn, production of ethanol may start to quickly increase over the next couple of weeks. Getting this ethanol to end users may take additional time and planning, but over the next several weeks there could be some major shifts in both production and inventory levels seen through the complex. Traders may see additional interest as summer driving demand grows, but growing demand will not likely narrow the price spread long term.
Rick Kment can be reached at email@example.com
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