Up until crude oil hit $90 per barrel, ethanol had seen some hard times, trading down to around $1.50 per gallon, which is near or below the break-even point for producers.
The issue has largely been one of over supply. The U.S. government has mandated very aggressive goals for ethanol production, including a subsidy of more than 51¢ per gallon to fuel producers who mix ethanol with gasoline. And producers responded strongly, there are projections that 2012 production goals will be met in 2008; but that over supply has hit producers where it hurts: in the profit margin. For example, On Monday, the Denver Post reported that Denver based Bio Fuel Energy Corp. has delayed plans to build more ethanol plants until prices come up.
So we have a lot of ethanol being produced and motivated refiners to mix it, but the next hurdle is distribution. As anyone who has ever mixed a vodka tonic can tell you, alcohol mixes well with water, and that is a problem because water in tanks and pipelines corrodes them, and new tanks and pipelines will be necessary to distribute all of that ethanol. Until that happens, supply will probably continue to out strip demand.
From a futures stand point, ethanol hasn’t failed, but it has failed to thrive, trading down from $2.60 per gallon last summer to $1.50 two weeks ago (it bounced back to $1.75 yesterday) while crude oil price have increased by almost 50%. This indicates a pretty serious disconnect.
A couple weeks ago, the CME Group de listed its ethanol futures contract; and while it’s true that they in effect had two ethanol contracts ever since it bought the Chicago Board of Trade (CBOT), this is interesting for a couple of reasons:
1. The CBOT, which has been the center of grain trading, has an ethanol contract that has gained somewhat limited traction. On Tuesday, fewer than 40 contracts traded and open interest was just more than 1,500. That’s not huge.
2. The CME, home to electronic trading of Nymex oil, gasoline and natural gas, de listed its native contract due to a lack of interest.
From these two facts, you might infer that the real interest in ethanol is somewhat limited to grain traders, and that energy traders have not yet taken ethanol very seriously as an energy solution.
Everyone wants to decrease our dependence on non-U.S. oil, but until we can buy it at the retail level (click for E-85 gas station finder), ethanol is likely to languish. For ethanol to go from alternative fuel to mainstream retail product, oil companies are going to have to get on board.
We are still waiting.
Tags: Bio Fuel Energy Corp., CBOT, CME Group, E-85, ethanol
