Hints of Ethanol Price Retreat

STREATOR, Ill. (DTN) -- Ethanol spot prices have increased steadily since early February, reflecting logistical challenges for the industry, according to "This Week in Petroleum" issued Wednesday by the Energy Information Administration.

By late March, New York Harbor spot ethanol prices exceeded the price for RBOB, the petroleum component of gasoline, by more than $1 gallon. Ethanol spot prices in Chicago and Gulf Coast markets also climbed above NYH RBOB prices. The NYH premium over Chicago spot ethanol prices had averaged roughly 25 cents per gallon in January, close to the typical transportation costs of moving ethanol from production centers in the Midwest to terminals on the East Coast in recent years. It widened to $1 gallon in early March.

"Logistical constraints in and around ethanol production centers in the Midwest, mainly involving railroads on which approximately 70% of ethanol is shipped, appear to be a key factor driving recent prices," EIA said.

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Ethanol futures prices suggest that market participants expect the recent price increase to be short-lived. The Chicago Board of Trade ethanol futures curve is heavily backwardated, meaning near-term contracts are selling at a premium to longer-term contracts. On March 31, the futures contract price for May delivery was more than $1 gallon below the Chicago spot price for immediate delivery.

Rail system conditions appear to be improving, EIA said. In addition, the recent ethanol price increase has driven ethanol operating margins and crush spreads to their highest values in recent years, providing a strong incentive for increased ethanol production rates over the coming weeks.

Extremely cold weather this winter led to rail congestion in and out of Midwestern terminals that delayed shipments to other regions and resulted in significant ethanol stock draws. Railcar dwell times at Burlington Northern Santa Fe Corp.'s Galesburg, Ill., terminal nearly doubled in early 2014 to reach a peak of 60 hours in February and remain above year-ago levels. Dwell times are the time loaded railcars spend in a terminal awaiting movement.

While over 70% of ethanol producers are equipped to load unit trains, only 35% of gasoline blending terminals are equipped to receive them.

The average speed of manifest trains decreased by 20% -- from 22 miles per hour to 17 mph, over the past 12 months. Manifest trains include cars carrying different products and are often used to deliver ethanol to gasoline blending terminals that are not equipped to handle unit trains.

Ethanol stocks were drawn down nationwide by nearly 2 million barrels (bbl) from mid-February to mid-March, partially recovering to 15.9 million bbl on Mar. 28. This is more than 4 million bbl below typical March levels, which averaged more than 20 million bbl from 2011 through 2013. East Coast inventories were especially hard hit, and on March 14 reached their lowest level of 4.5 million bbl since EIA began recording data in June 2010.

Despite an abundant corn supply and strong ethanol margins in early 2014, ethanol production rates also appear to be have been adversely affected by rail system problems and other weather-related issues in recent months. After averaging more than 900,000 barrels per day (bpd) for four consecutive months beginning in November 2013, ethanol production dropped below 900,000 bpd during March.

(BM/AG)

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