Trump’s package key as oil price spike offers little to US ethanol sector

16 Sep 2019 | Tim Worledge

A surge in oil prices globally is unlikely to offer support to the US ethanol sector as the approaching end of maintenance at key facilities and the release of US strategic crude oil reserves are expected to boost oil supply while biofuel demand remains hesitant.

That leaves the industry, which is a key consumer of US corn, looking to a support package from the Trump administration in order to stave off further deterioration in margins and boost demand, after as many as 20 facilities were mothballed in recent months, according to industry sources.

However, any increase in demand for ethanol – as its price relative to oil falls – is unlikely after the Trump administration dampened US oil prices by releasing oil from its strategic reserves. 

“With the release of strategic reserves in the US for crude oil, prices for gasoline are not expected to go through the roof,” Futures International’s Terry Reilly told Agricensus on Monday.

“The short term appreciation of RBOB may entice blenders to use as much ethanol as possible over the short term, but the blend rate is already high,” Reilly said, referring to the generic specification for US petrol.

With ethanol demand unlikely to receive a substantial jolt from higher oil prices, President Trump’s much-vaunted 'giant package' takes on ever greater significance as the industry reels under the twin impact of trade war cutting export demand and blend waivers for refiners that has cut domestic demand.

High corn prices have also impacted producers’ bottom line, with the POET facility at Fostoria in Ohio bidding on Monday at 60 cents over the December contract for corn delivered in September – meaning it is bidding at higher levels internally than FOB cargo offers at the US Gulf.

And with production margins picking up after the industry idled so much capacity, the arrival of new crop corn supply coming in from October onwards is likely to usher in a return of this lost production.

“I’m hearing some of these companies are prepared to run, even though they see negative margins. With the new crop round the corner, I think many of the ethanol plants will be back up and running at normal levels by late October,” Reilly said.

Giant Package

President Trump, stung by criticism from farmers after his administration confirmed it would be issuing 31 waivers to small refiners absolving them from their biofuel blending mandates, has scrambled to claw back the initiative after farmers and biofuel groups vented their fury.

Trump trailed a “giant package” via social media in a statement that was light on detail.

However, Reuters reported Monday that the Trump administration is contemplating a solution that explicitly links future biofuel mandates to the average of demand lost by waivers granted in the previous three years.

That has been a key demand of the biofuel sector, which has claimed that the granting of 31 waivers for the 2018 obligation cut up to 1.5 billion gallons of biofuel demand from the Renewable Fuel Standard’s blend mandates, with no redress.