Ethanol Discount Narrows as Weather Delays Deliveries by Rail

Jan 09, 2014 5:12 pm ET

Jan. 9 (Bloomberg) -- Ethanol’s discount to gasoline narrowed as ice and snow are slow railroad deliveries across North America.

The discount to the motor fuel tightened 2.57 cents to 71.76 cents as ethanol deliveries by rail are taking twice as long as normal, according to Chad Conn, a vice president of operations for Franklin, Tennessee-based Eco-Energy Inc.

“Logistical issues are playing a role in the surprising firmness of the market,” said Sean Wever, a biofuels broker at Green Key Markets LLC in Chicago.

Denatured ethanol for February delivery gained 1.2 cents, or 0.6 percent, to settle at $1.925 a gallon on the Chicago Board of Trade. Prices have dropped 14 percent in the past year.

The cold snap pummeled energy infrastructure and prompted railroad companies BNSF Railway Co., Union Pacific Corp. and Norfolk Southern Corp. to warn customers earlier this week to expect delays. About 70 percent of U.S.’s ethanol is transported by rail.

“It’s a very challenging environment,” Eco-Energy’s Conn said in a telephone interview. “You have severe weather, maintenance at railroads and congestion because you have more commodities on the rail.” The company handles about 10 percent of the biofuels market in North America, according to its website.

Gasoline for February delivery fell 1.37 cents, or 0.5 percent, to settle at $2.6426 a gallon on the New York Mercantile Exchange. The futures cover reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Fat Margins

Corn for March delivery declined 5 cents, or 1.2 percent, to $4.12 a bushel in Chicago. One bushel makes at least 2.75 gallons of the fuel. The corn crush spread, or the difference between the cost of corn and the price of ethanol, was 33 cents, up from 31 cents yesterday, data compiled by Bloomberg show.

Ethanol production is expected to keep rising amid cheap corn and high crush margins, Wever said. Corn prices have slumped 41 percent in the past year.

“Crush margins are extremely healthy and should cause production to stay bid as producers capture as much profit as possible,” he said.

Output will average 913,000 barrels a day this year, the Energy Information Administration said Jan. 7 in its Short-Term Energy Outlook. That compares with a December estimate of 900,000 barrels.

Spot Market

In the spot market ethanol rose 6 cents to $2.41 a gallon in New York and 0.5 cent to $2.175 in Chicago, data compiled by Bloomberg show. Prices fell 7.5 cents to $2.275 on the Gulf Coast and were unchanged at $2.60 in the West Coast.

New York’s premium to Chicago expanded 5.5 cents to 23.5 cents, while the Gulf’s discount to the West Coast widened 7.5 cents to 32.5 cents.

The U.S. keeps compliance with ethanol consumption mandates with Renewable Identification Numbers, tracking certificates attached to each gallon of biofuel and that can be traded among refiners.

Corn-based ethanol RINs for 2014 declined 1 cent to 29 cents and 2013 RINs lost 2 cents to 29 cents, data compiled by Bloomberg show.

--With assistance from Mario Parker in Chicago. Editors: Margot Habiby, Bill Banker