CME Group Ethanol Outlook Report

The ethanol market this week will focus on:
* corn prices as the market keys on planting weather and Friday's USDA report,
* gasoline prices, which rallied sharply last week as inventories tighten and seasonal demand for gasoline starts to emerge, and
* Thursday's monthly EIA ethanol report, which may show another record high in U.S. ethanol production and a rise in inventories.

The ethanol market is waiting to see if Thursday's EIA report indicates that U.S. ethanol production in January rose to a new record high. The EIA's last report indicated that U.S. ethanol production in December rose to a record high of 1.026 billion gallons. The sharp 32-cent (17%) sell-off in ethanol prices seen so far this year suggests that U.S. ethanol production in the past three months has continued to rise to new record highs, possibly pushing inventories higher as well.

That sharp sell-off in ethanol prices would normally cause producers to curb supply. However, corn prices have fallen by 16% this year, keeping profit margins at a decent level and encouraging producers to boost their production further. In fact, the last monthly ethanol report indicated that U.S. ethanol facilities were being run at a record high capacity of 94.5%. The main question in Thursday's report will be the extent to which inventories are increasing. The good news is that ethanol is at its cheapest level relative to gasoline in 20 months, which should boost ethanol demand. Nevertheless, if inventories continue to rise, then ethanol prices may need to fall further to stimulate more demand.

May CBOT Ethanol futures prices last week consolidated above the recent 7∂-month low and closed the week slightly lower by 0.8 cents at $1.560 per gallon. Bearish factors included the 3.3% sell-off in corn prices, continued technical weakness, and ongoing worries about record ethanol production. Supportive factors last week included the 5.2% rally in gasoline prices and the 1.1% sell-off in the dollar index.

Ethanol/Gasoline - May gasoline futures prices rallied sharply last week to post a new 18-month high and close 11.52 cents higher (+5.2%) at $2.3237 per gallon. Bullish factors last week included encouraging economic data, news that OPEC cut production by 30,000 barrels per day in March to 19.205 million bpd, and the third consecutive decline in the DOE weekly gasoline inventories report. U.S. gasoline inventories are now only 1.1% above the 5-year seasonal average, the tightest level in 8 months. The spread of May ethanol prices minus gasoline prices last week fell by 12.3 cents to a new 20-month low of -76.4 cents.

Ethanol/Corn - May corn futures prices last week fell sharply to post a new 6½-month low and close the week down 11.75 cents (-3.3%) at $3.4450 per bushel. The main bearish factor was news that quarterly corn stocks were up 11% y/y at a 32-year high of 7.694 billion bushels. The USDA's Prospective Plantings report forecasted spring corn planting at 88.798 million acres, which was slightly below the consensus estimate of 89.00 million acres but still up 2.7% y/y at the second highest level ever. If the weather is favorable this summer, then U.S. farmers could easily produce a record-sized corn crop. The continued weakness in corn allowed the May ethanol-corn crush margin last week to improve by 3.4 cents to 33.0 cents per gallon, mildly above the recent 9-month low of 25.1 cents.

source: insidefuture