CME Group Ethanol Outlook Report - August 31, 2009

The ethanol market this week will focus on:
* this week's key economic data (the ISM manufacturing index on Tuesday and August unemployment on Friday) and the implications for fuel demand,
* gasoline prices as the market looks ahead to next Wednesday's OPEC meeting where the cartel is generally expected to leave its production quotas unchanged, and
* corn prices as the market focuses on the weather for the remainder of the growing season.

September CBOT Ethanol futures prices last week traded on a generally firm note and closed the week slightly higher by 0.1 cent at $1.612 per gallon. Bullish factors included the +3.3% rally in gasoline prices and the gathering consensus that the economic recovery has arrived and that fuel demand will eventually improve. Bearish factors included (1) the slightly lower -0.2% close in corn prices, (2) the small +0.4% rally in the dollar index, and (3) last Friday's report of a record high in U.S. ethanol production in June.

Last Friday's monthly ethanol report from the U.S. Energy Information Administration (EIA) indicated that U.S. ethanol production in June rose by +0.3% m/m to a new record high of 874.5 million gallons, adding to May's sharp increase of +8.0%. However, the recent increase in production has not put major downward pressure on ethanol prices because blender demand for ethanol remains strong due to the 45-cent discount of ethanol to gasoline, plus the 45-cent excise tax credit. In fact, the EIA report also showed that ethanol stocks in June fell by -0.7% m/m to the lowest level of the year. The stocks/production ratio in June of 68.8% was below the 5-year average of 72.1%. Ethanol industry utilization rose slightly to 82.6% in June, the highest level since December as bankrupt ethanol plants came back on line under new ownership.

Ethanol/Gasoline - Sep gasoline futures prices last week continued to consolidate below the recent 10-month high and closed the week up 6.62 cents (+3.3%) at $2.0618 per gallon. Gasoline prices were supported by (1) increased signs of a U.S. and European economic recovery, and (2) the -0.8% decline in DOE U.S. gasoline inventories for the fifth consecutive weekly decline. Despite that decline, gasoline inventories are still 2.4% above the 5-year seasonal average due to poor demand. Forecasts are for weak gasoline demand for the Labor Day weekend, the official end of the summer driving season, due to the late date of this year's holiday. Ethanol prices lagged gasoline prices last week, pushing the spread of ethanol minus gasoline prices lower by 6.5 cents to ‑45.0 cents, where it was just mildly above the recent 11-month low of -50.1 cents.

Ethanol/Corn - Sep corn futures prices last week consolidated above the recent 9-month low and closed the week down 0.75 cents (­‑0.2%) at $3.21 per bushel. Corn prices continue to see downward pressure from favorable weather and the prospect of the second largest U.S. corn crop in history. However, unseasonably cool weather continues to present the threat of an early frost that could damage the late-developing U.S. corn crop. The September ethanol-corn crush margin last week hit a new 17-month high of 47.5 cents and closed the week up 0.4 cents at 46.6 cents.

Ethanol Calendar

* Aug 31: Weekly USDA Crop Progress
* Sep 2: Weekly DOE Gasoline Inventories
* Sep 9: OPEC quarterly meeting
* Sep 11: USDA WASDE Crop Supply-Demand
* Sep 29: EIA Monthly Ethanol Report


Source:insidefutures