U.S. domestic ethanol demand suffered this spring relative to 2017, despite consistently favorable blending values and increasing Renewable Fuel Standard (RFS) requirements. The decline, following a period of historically low ethanol prices this winter, forced the ethanol industry to diversify and seek new demand opportunities across the globe, as captured in Genscape’s Ethanol Exports Monitor, which showed record high export levels in February and March. The downward U.S. ethanol demand trend appeared to be reversing in early June, according to Genscape Supply Side data, as gasoline-to-ethanol price spreads recently hit four- year highs, incentivizing increased ethanol blending.
Ethanol Prices Rise as Summer Begins, but Remain Weak Relative to 2017
Ethanol prices remained below 2017 levels in early June due to the combination of anemic gasoline demand and reduced ethanol blending percentages despite increased exports. Earlier in December 2017 and January 2018, ethanol pricing hit historical lows when the front-month Chicago Board of Trade (CBOT) ethanol futures dipped to $1.26/gal, a 12-year low. Targeted U.S. ethanol export activity, mainly to Brazil, rallied CBOT futures from these historical lows by $0.26/gal to $1.52/gal in mid-March.
Gasoline-to-ethanol price spreads were favorable for blending through early June this year, a reversal of the negative spreads seen in the winter and spring of 2017. So far in 2018, the rally in CME RBOB futures pushed prices as high as $2.27/gal in May, up $0.60/gal from the lows of February, widening gasoline’s premium to ethanol to nearly $0.79/gal. The rally’s positive impact on blend values coupled with increased requirements for ethanol blending (via the Environmental Protection Agency’s (EPA) RFS) weren’t enough to boost ethanol’s content in the U.S. gasoline pool for April and May. Gasoline demand experienced its own decline compared to 2017, likely capping ethanol demand. Across all PADDs, blenders do not appear to be breaking through the E10 “wall,” as evidenced in Genscape’s Supply Side rack data. Ethanol volumes in finished gasoline (regular, midgrade and premium) sold at the rack level stayed consistently below 2017 levels through early June, falling seasonally in May to as low as 9.32 percent of finished gasoline volumes. Genscape found ethanol blend percentages in finished gasoline steadily declined in 2016 and 2017, and so far, 2018 is no different.
Genscape Analysis Shows Reverse in Demand Decline Trend
These high prices for finished gasoline began to erode gasoline demand relative to 2017 in April. Ethanol demand appeared to follow, falling as much as 2.6 percent to 908,000 bpd for the week ending April 20 relative to 2017 EIA levels, according to Genscape Supply Side biofuel data. Using a linear regression analysis, Genscape predicted that EIA Net Input of Fuel Ethanol would increase 3 percent to 940,000 bpd for week ending June 8, reversing the trend in year-on-year ethanol demand declines. On June 13, the EIA reported Weekly Net Input of Ethanol at 947,000 bpd for the same week, a 5 percent increase, confirming Genscape’s data. In general, Genscape’s data on biofuel amounts in gasoline sold by rack correlates to EIA weekly net input of fuel ethanol data at a 0.97 R-squared for January through May.
Higher prices for regular gasoline eroded gasoline demand in April and May when CME light sweet crude oil prices began to rally. Average U.S. gasoline rack prices rallied $0.50/gal from mid-February to as high as $2.29/gal on May 23, based on Genscape’s Supply Side rack prices.
Genscape’s Weekly Gasoline Demand Report, a weekly estimate of U.S. gasoline demand (comparable to EIA’s Weekly Products Supplied for Gasoline), showed U.S. gasoline demand dipped below 2017 levels beginning on week ending March 30, falling as much as 1.42 percent below 2017 levels to 9.53mn bpd for the week ending May 4.
By early June, a recent decline in gasoline prices and the beginning of the summer demand appeared to reverse the demand decline. Genscape reported U.S. gasoline demand for the week ending June 8 at 9.68mn bpd, 0.6 percent above 2017 levels.
While gasoline demand ticked upward, ethanol production through May 2018 remained on par with past years. The only dip in production was induced by regular maintenance in April, Genscape reported 38 plant shutdowns for U.S. ethanol plants in April in its daily Ethanol Production Monitor report, confirming the EIA’s report of 1.017mn bpd, a 2.4 percent decline for April. The combination of reduced domestic ethanol demand and near-consistent production caused a decline in CBOT ethanol prices in December and January, allowing for arbitrage opportunities for exporting ethanol, specifically to Brazil.
Ethanol Producers Look Globally for Relief, but the Opportunity May Not Last
Export opportunities became the relief valve for the U.S. ethanol market this year. So far in 2018, ethanol exports saw extremely large volumes leaving the U.S. in February through April. Most of these exports came from the U.S. Gulf Coast and went to Brazil. This may explain why ethanol production remained consistent, but the blend rate of ethanol into gasoline as of June stayed behind 2017 levels. Genscape’s Ethanol Exports Monitor, which collects daily-level storage changes and detects ethanol vessel loading events in the Gulf Coast, showed May ethanol exports were expected to drop off.
Looking forward, global mandates will likely play a role in domestic ethanol supply and blend rates as many countries have mandates or targets for renewable fuel blending. For instance, China has a mandate in place that expands the mandatory use of E10 fuel to the entire country by 2020. With recent production levels, it is unlikely China will be able to reach this mandate without importing either ethanol or corn from the U.S. Despite the clear need, the U.S. and China have a strained trade relationship exacerbated by recent tariffs levied by the Trump administration. In response, China recently closed the ethanol arbitrage window, complicating the export process between both countries.
Brazil’s mandate requires 27 percent blending, reinforcing this country as a top destination for U.S. ethanol exports. Through May 2018, Brazil received record amounts of ethanol exports, but the trend shows signs of slowing down closer to 2017 amounts.
Other countries, such as India, advocate E5 blending, but India in particular still purses an ultimate goal of reaching 20 percent blend of renewable fuels. Global demand is high, which may push ethanol prices higher domestically, making E15 less attractive.
Last month, an ethanol compromise between oil and ethanol constituencies appeared possible, allowing for E15 use in the summer while allowing Renewable Identification Number (RIN) credits associated with ethanol exports to count toward an obligated party’s Renewable Volume Obligations (RVO) under the EPA’s RFS. White House intervention stalled this progress recently, but the EIA still estimates that the ethanol blend percentage of gasoline will continue to increase slightly through 2019, namely due to continued growth in ethanol production and limited export growth.
If an E15 waiver for the summer is approved for summer 2019, the impact in blending will likely not occur right away as many retail stations don’t have the infrastructure to sell the fuel yet. In other areas, it doesn’t seem there is much of an appetite across the U.S. to push past the E10 wall, even in the winter, according to Genscape’s Supply Side Data historical analysis.
Genscape’s Ethanol Production Monitor and Ethanol Export Monitor give timely and accurate visibility into the inner-workings of ethanol plants and the storage and movement of ethanol during the export process, so that customers can stay in the know on real-time global impacts. Genscape’s Ethanol Exports Monitor uses proprietary ethanol storage information with location data for vessels allowing market participants to have a complete understanding of U.S. ethanol supply chain. Please click here to learn more about Genscape’s Ethanol Supply Chain Services.
Genscape’s Weekly Gasoline Demand Report provides a calculation of total U.S. gasoline consumption based on Genscape’s Supply Side Monitor hourly data. This calculation is sourced from actual rack activity, not estimates or formulas. The report allows users to anticipate demand based on actual secondary to tertiary demand measurements of volumes headed to gasoline retail filling stations. Click here to learn more about our Weekly Gasoline Demand Report.
Genscape's Supply Side Monitor and Analyst provides insight into PADD and rack city-related volumes, biofuel content and average prices for the wholesale transactions of refined products. To learn more, or to request a trial of Genscape's Supply Side Monitor and Analyst products, please click here.