US ethanol recovery tested by second wave Covid-19 fears
The US ethanol industry is likely to continue to ramp up production and bring mothballed capacity back online, as the sector rushes to capture improved production margins ahead of the key US driving season.
But fundamentally, the outlook for road fuel demand remains delicately balanced, with analysts now eyeing the potential impact of a second wave of Covid-19 outbreaks on energy demand in a move that has checked – even if only briefly – the recovery in oil prices.
“We are expecting major (US) cities to extend lockdowns due to the recent spike in cases… many of the new spikes include states that are [very] dependent on cars, like Texas and Arizona,” Futures International’s Terry Reilly told Agricensus.
For the US biofuel sector, spearheaded by its giant ethanol base, production has rallied strongly in recent weeks, but signs that gasoline demand is no longer keeping up with supply raises red flags for the ongoing production increases and seemingly caps the potential for a full recovery.
Margins for producers have rallied in recent weeks with a model from Iowa State University suggesting they touched bottom around March 23 at minus 12 cents a gallon for the average Midwest ethanol producer.
Since then they have stormed back to peak at just under 27 cents a gallon by June 10 – a level that should encourage more capacity to come online when data for the week to June 12 is released by the Energy Information Administration on Wednesday, a move that would also support corn prices.
Bellwether
The weekly EIA data has become the bellwether charting the impact of the Covid-19 lockdowns, providing a statistical illustration of the collapse initially in gasoline supply and subsequently ethanol production.
In three weeks, the supply of finished US gasoline fell 48% to 5 billion gallons by April 3, according to the data, with US ethanol production falling 50% over a longer eight-week period to the week ending April 28.
Both have recovered week-on-week, with US gasoline supply now 18.5% below the week of March 13, when supply hit its pre-Covid-19 peak, while ethanol production is now 22% below its February 28 peak.
But inventories also remain key and US ethanol inventories ballooned rapidly as lockdowns were imposed.
Stocks have been heavily reduced after topping out at a record 27.6 million barrels, falling 21% to 21.8 million barrels in the week of June 5 – putting them at exactly the same level as the corresponding week of June 2019.
Of the main US road fuels, however, ethanol is the only one where stocks have continued to decline – stocks of both conventional gasoline and gasoline blend components have increased for two consecutive weeks.
A third week of increases could set alarm bells ringing.
Despite the improvement in margins, the week also brought confirmation from the fifth-biggest ethanol producer in the US, Flint Hills, that it has permanently shut its production operation at Camilla, Georgia – a location that was capable of using 40 million mt of corn a year.
The company, a wholly-owned subsidiary of oil group Koch Industries, cited “oversupply of ethanol in the marketplace and the loss of demand due to the Covid-19 pandemic… forcing a rationalization of US ethanol production,” in a statement confirming the shutdown.
The sector continues to tread a fine line, and the instinct to capture firmer margins and the apparent strong recovery in US road fuel demand could tempt a wider ramp-up in production as the country heads deeper into the typical US driving season.
But, with no significant sign of export interest and doubts creeping into the domestic demand outlooks, the industry is not out of the woods yet – and that renews questions for the primary feedstock, corn.
“While we see a recovery in ethanol demand due to rising gasoline consumption, ethanol mixed with gasoline will likely not get back to the earlier 2020 peak for the remainder of the year due to job losses, permanent changes in the office environment and lockdown extensions,” Reilly said.