CME Group Ethanol Outlook Report

The ethanol market this week will focus on:

* corn prices as the market carefully watches the weather for harvesting conditions and any frost threat,
* this Thursday's monthly USDA report, which is expected to show an upward revision in the summer corn crop size, and
* gasoline prices, which rallied last week on a higher fuel demand report.

November CBOT Ethanol futures prices rallied sharply again last week to post a new 4-month high and close +12.2 cents (+7.5%) at $1.748 per gallon. Bullish factors included (1) strength in corn prices early in the week and last week's 6.4% rally in gasoline prices, (2) last Tuesday's monthly EIA ethanol report which indicated strong ethanol demand since inventories in July remained under control despite a sharp 8% m/m increase in production, and (3) technical buying with the sharp upside breakout.

Last Tuesday's monthly report from the U.S. Energy Information Administration (EIA) showed that U.S. ethanol production in July rose sharply by 8.4% m/m to a new record high of 948 million gallons from 875 million gallons in June. The higher production resulted from bankrupt ethanol plants coming back on line under new management and from stepped-up production by existing plants to take advantage of much-improved ethanol profitability. The increase in production drove capacity utilization in July higher to 89.6% from 82.6% in June, implying that only about 10.4% of production capacity is not currently being used.

Despite the sharp 8.4% increase in production, ethanol inventories remained under control and in fact fell to a new record low of 63.3% of production (i.e., 600 million gallons vs production of 948 million gallons). The low level of inventories indicated that demand for ethanol was strong enough during July to absorb nearly all the production boost and prevent inventories from building up. The market took that as a bullish sign of strong demand for ethanol.

Ethanol/Gasoline - Nov gasoline futures prices last week rallied sharply to recover most of the previous week's decline and closed the week up 10.49 cents at (+6.4%) at $1.7409. Gasoline prices rallied last week on short-covering after the previous week's sharp 21-cent loss and on last Wednesday's report showing a +3.8% w/w increase in implied gasoline demand in the latest reporting week, which placed demand 4.5% above the year-earlier level. Ethanol prices last week again rallied by more than gasoline prices, causing the spread of November ethanol prices minus gasoline prices to rise by 1.7 cents to +0.7 cents per gallon.

Ethanol/Corn - Dec corn futures prices last week closed slightly lower by 0.5 cents (‑0.1%) at $3.3450 per bushel. Bearish factors included (1) the continued lack of frost, and (2) the market consensus that the USDA this Thursday will boost its 2009/10 corn crop estimate to more than 13.0 billion bushels from its last estimate of 12.954 billion bushels. The main bullish factor is slow harvesting which was at 6% as of Sep 27, slightly behind last year's pace in the same week of 8% and well behind the 5-year average of 18%. The slow harvest continues to leave the corn crop vulnerable to an early frost. The Dec ethanol-corn crush margin last week improved substantially by 9.1 cents to 51.4 cents per gallon, where it posted a new 1∂-year high.

source: insidefuture