January 2017 will be a month for the record books. The question is, will it be an anomaly or will it be a marker for a larger shift in ethanol market fundamentals? Anyone who watches these fundamentals has become acutely aware of just how exceptional the start of 2017 has turned out to be. Three simple facts suffice to describe the current state of the market. Ethanol production broke records for three consecutive weeks in January, and continues at levels well above historical norms. Over that same period, refinery input as a percentage of ethanol demand has increased to levels that were unheard of a couple of years ago. Finally, nationwide ethanol inventories rose by over 3.4 million bbls between December 30, 2016 and February 3, 2017. This means that domestic ethanol consumption is high, but it is unable to keep pace with the rapid rate of production. Strong exports to Canada, Brazil, and Asia have served as a release valve to the domestic supply imbalance, and the future of the industry has become dependent on those exports.
The current conditions raise more questions than answers, meaning that February could shape up to be a very interesting month in the ethanol industry. Here are just a few of the questions that industry players are looking at this month:
- After 15 straight weeks, will production continue to remain above the million barrels/day mark? What will be the impact of the maintenance season this year? Will maintenance be the only factor to affect production, or will decreasing prices cause some plants to cut back?
- Will exports remain as strong as they were at the end of 2016? What will the impact of Chinese Tariffs be? Beginning this year, tariffs have increase from five percent to 30 percent. It is clear that industry groups have moved this to the top of their agenda. Will the RFA and the USGC be able to push for U.S. action in response to the tariffs?
- After nearly six months of zero imports, will the D4-D5 split and the low-carbon fuel standard (LCFS) credit value open up the arbitrage window to spur Brazilian imports into California? A combination of increasing regulatory certainty regarding California's LCFS and increasing uncertainty about the RFS RVOs for 2017 could create a window of opportunity for importers.
Instead of speculating on the outcome of these questions, our team at Genscape works hard to find real-time, market data to help our customers understand these fundamentals. When it comes to production, Genscape’s Ethanol Production Monitor combines proprietary infrared monitoring at some of the nation’s largest plants, including a comprehensive collection of natural gas nominations for nearly 50 percent of the industry to create a near real-time snapshot of the ethanol production in the U.S. Our proprietary ethanol production data also enables us to detect shutdowns at the moment they occur, whether they are planned or unplanned.
With Genscape's ethanol storage data, logistic bottlenecks can be seen well before it is widely known in the market. Just recently in February, our data indicated that Kinder Morgan Argo was back to levels not seen since March of 2016, when the company had to divert trucks to other facilities. Two days after the report was released, Kinder Morgan announced that it would be diverting trucks again. In both the Gulf and New York Harbor, our storage data is often used to gain insight into export activity.
The storage data is even more useful when it can be combined with real-time vessel location services using Genscape Vesseltracker™. Earlier this month, for example, a large draw from a collection of export tanks in Oiltanking Texas City correlated with the loading of Sten Fjord, a chemical cargo tanker that is now heading to the Port of Itaqui in Brazil. This kind of real-time intelligence will soon be combined with more frequent storage monitoring in order to create a new report ethanol export product later in 2017.
As ethanol production continues to rise it is important to stay ahead of the changes to make more informed and strategic decisions. When taken together, Genscape's three Ethanol Inventory Reports, the Ethanol Production Monitor, and the forthcoming Gulf Coast Ethanol Export Monitor can be used to gain a wide range of insights into what is becoming a more uncertain market. To learn more about these Genscape products, or to request a trial, please click here.