OUTLOOK ’19: US fuel ethanol must return to balance

HOUSTON (ICIS)–With US fuel production margins under pressure due to record low pricing in the fuel sector over 2017, ethanol supply must return to balance. Additionally, shifting dynamics from the regulatory side combined with the tariff dispute with China will continue to paint a strong headwind for the US fuel ethanol market. However, increasing demand for high-octane gasoline components will continue to make fuel ethanol a desired commodity.

According to the US Energy Information Administration (EIA), ethanol production and inventories were at all-time highs. This led to downward price pressure, but the market could have found a floor.

Producers in the Midwest will be forced to decrease operational levels, much of whom have already done so, but due to risk of damage to pipes and other equipment, will not entirely shut plants down, leading to continued production. Producers must weigh which plants have access to cheapest feedstock and how to throttle back those with higher corn feeds.

Farmers are also weighing options with storage of corn harvests, as holding onto the grains and feeds for the higher price down the curve, with the contango in the corn futures market as more attractive than offloading to the fuel plant.

The US tariff dispute with China will continue to weigh down the market, as China’s biofuel blending plan was a potential outlet for excess US supply. Exports, however, have halted and US fuel ethanol sellers are keen to reinvigorate that market if the Trump administration ever smooths out the trade clash with Beijing.

On the regulation front, the approval of year-round 15% ethanol (E15) blends into gasoline appears, on paper, while bullish for demand, this has yet to be a proven panacea for plateauing domestic motor gasoline demand.

Much of the E15 plan depends on the speed at which blenders and distributors can blend higher amounts of ethanol into gasoline, but this is countered by automobiles not designed for higher blends and the risks to engines ethanol can pose.

The following table shows the blending volumes for the various classes of biofuels. The category for renewable fuels includes both conventional ethanol and advanced biofuels.

	2017	2018	2019	2020
Cellulosic biofuel (m gal)	311	288	418	n/a
Biomass-based diesel (bn gal)	2.0	2.1	2.1	2.43
Advanced biofuel (bn gal)	4.28	4.29	4.92	n/a
Renewable fuel (bn gal)	19.28	19.29	19.92	n/a

Source: EPA

The blending volumes are mandated under the renewable fuel standard (RFS).

Congressional leaders are weighing the future of the Renewable Fuel Standard (RFS), with some groups calling for its sunset but others propose strengthening the RFS.

Oil industry groups, unwilling to further see market share dissipate due to regulations, are joining with the auto industry to push forward a national octane standard.

Because of the potential for an octane standard, ethanol has a light at the end of the tunnel as automakers are making smaller, higher-compression engines that demand higher octane.

Focus article by Steven McGinn

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