Ethanol Gains on Speculation Pipeline Outage to Curb Production

Jan 28, 2014 4:53 pm ET

Jan. 28 (Bloomberg) -- Ethanol gained the most in five weeks on speculation that natural gas pipeline shutdowns will force distillers to reduce production.

Futures rose 2.1 percent, snapping the longest streak of losses since July, as TransCanada Corp. shut three pipelines after an explosion and fire 50 kilometers (31 miles) south of Winnipeg, Manitoba. Natural gas is used to power ethanol plants.

“That pipeline up in Canada is affecting things,” said Mike Blackford, a consultant at INTL FCStone in Des Moines, Iowa. “That may cause some of these plants to slow down.”

Denatured ethanol for February delivery advanced 3.7 cents to settle at $1.794 a gallon on the Chicago Board of Trade. Today’s increase was biggest on a percentage basis since Dec. 19. Futures have fallen 25 percent in the past year.

Gasoline for February delivery rose 0.61 cent to $2.6278 a gallon on the New York Mercantile Exchange. The futures cover reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Ethanol’s discount to gasoline contracted by 3.09 cents to 83.38 cents a gallon.

The fire caused by the Jan. 25 TransCanada explosion forced emergency deliveries of compressed natural gas, the company said on Jan. 26, and prompted gas providers in North Dakota and Wisconsin to ask for customer conservation.

Pipeline Shutdowns

A line south to Minnesota has restarted, though the other two will require regulatory approval before they can reopen, Carole Léger-Kubeczek, a spokeswoman for Canada’s National Energy Board, said yesterday. Those lines run from Wingham, Manitoba, to Senneville, Quebec, and from McNeill, Alberta, to Senneville.

Green Plains Renewable Energy Inc., the fourth-biggest U.S. ethanol producer, said it had a “slowdown” at one of its Minnesota plants on Jan. 26 and that operations have since returned to normal.

About 89 percent of U.S. ethanol plants are in the Midwest, according to data from the Energy Information Administration, the Energy Department’s statistical arm.

“The damaged pipeline will affect ethanol plants, if not directly by a shortage, indirectly by the spike in natural gas prices,” Sean Wever, an analyst at Green Key Markets LLC in Chicago wrote in a note to clients.

Natural gas for February delivery surged 18.6 cents, or 3.8 percent, to $5.033 per million British thermal units on the New York Mercantile Exchange. It was the fifth increase in six days as a winter storm brought snow and icing to states in the U.S. South, stoking demand for the heating fuel.

Corn Prices

Corn for March delivery rose 0.25 cent to $4.32 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol. The corn crush spread, or the price difference between a bushel of corn and a gallon of ethanol, was 19 cents, up from 15 cents yesterday.

In cash market trading, ethanol fell 1 cent to $1.975 a gallon in the U.S. Gulf while the fuel was unchanged in New York at $2.055, in Chicago at $1.795 and on the West Coast at $2.175 a gallon, data compiled by Bloomberg show.

Chicago’s discount to New York Harbor held at 26 cents while the West Coast’s premium to the Gulf widened 1 cent to 20 cents.

The U.S. tracks compliance with ethanol consumption mandates with Renewable Identification Numbers, certificates attached to each gallon of biofuel that are submitted to the government and also traded among refiners.

Corn-based ethanol RINs for 2014 increased 1 cent to 34 cents and RINs for 2013 increased 1 cent to 34.5 cents, data compiled by Bloomberg show.

--With assistance from Eliot Caroom in New York and Lucia Kassai in Houston. Editors: Bill Banker, Charlotte Porter