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Article below reprinted from Governors' Ethanol Coalition:
U.S. Ethanol Supply Spike To Keep Lid On Strong Gas Prices
The expected surge in U.S. ethanol supply over the next six months is expected to have a bearish impact on gasoline prices as the ethanol supply growth outpaces the blending need in the gasoline market, some traders and analysts said on Thursday.
More than 30 new ethanol plants were scheduled to come onstream in the U.S. by the end of this year, raising the total capacity by about 2.7 billion gallons to about 9 billion gallons, according to the Global Biofuels Center.
The falling price of ethanol and the switch to winter-gasoline specifications in September will make it very attractive for blenders to use more ethanol in place of the more expensive gasoline.
The reformulated gasoline (RFG) markets are mandated by the states to blend gasoline up to 10% with ethanol, whereas conventional markets have no such requirements.
"The bottom line is that the new ethanol supply is outpacing the ability of the system to get it into the gasoline pool," said Andy Lipow, president of Lipow Oil Associates. Lipow Oil is an energy consulting firm based in Houston.
"Ethanol prices will remain under pressure while increased supplies of ethanol into the gasoline pool will help the tight gasoline situation."
The U.S. ethanol capacity was expected to continue to grow, rising to 11.5 billion gallons by the end of the first quarter of 2008 and close to 15 billion gallons at end-2008.
Under heavy pressure from the supply spike, ethanol spot price in the New York Harbor barge market tumbled from about $2.50-$2.70/gallon in January to about $1.75/gallon on Wednesday.
Ethanol price for calendar 2008 on the Chicago Board of Trade was at about $1.59/gallon, compared with $2/gallon for average NYMEX RBOB price for 2008.
Fresh demand for ethanol in the near term will have to come from the conventional gasoline markets, analysts said.
The conventional markets, which are likely to use more ethanol for gasoline blending, are Florida, Alabama, Montana, Idaho, Washington, the North and South Carolinas, Kentucky and other states in the Southeast. Missouri mandated a 10% ethanol-blended gasoline from January 1, 2008, he said.
California requires gasoline to be blended with 5.75% of ethanol, with the expected increase to 10% in 2009.
Florida would be first on the long list to use more ethanol for blending, Lipow said. The Southeast state could face some ethanol transportation and logistics issues due to a lack of storage and facilities, said Terrence Higgins, director of refining and special projects at Hart Energy Consulting.
However, the bearish impact from the ethanol supply surge could be partially neutralized by an overall gasoline demand growth, said Antoine Halff, the head of energy research at Fimat U.S.A. Fimat is the brokerage arm of Societe Generale bank. The gasoline volume displaced by the higher use of ethanol blend stock would be marginal, he said. Halff pointed out that the overall domestic gasoline demand growth was expected to eat up the higher ethanol supply. In addition, the demand in the RFG markets such as New York, Chicago and Philadelphia was shrinking due to a decline in population, he said. The sharp spike in ethanol production capacity would also be a disincentive for refiners to expand their refining capacities, Halff said.
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