European T2 ethanol market backwardation steepens on expectations of supply tightness in Q2

Backwardation structure in the European undenatured ethanol market has rapidly widened, as participants speculate on the impact of the closed import arbitrage since the start of the year.

Platts, part of S&P Global Commodity Insights, assessed the prompt April/May paper structure in a Eur20/cu m backwardation March 23, jumping from a Eur9/cu m backwardation on March 22. Additionally, the May/June structure was assessed in a Eur24/cu m backwardation March 23, compared to a Eur19/cu m backwardation the day before.

The steepening of the structure lifted paper positions through Q2, as April-loading paper was assessed at Eur910/cu m March 23, up Eur20/cu m on the day and Eur40/cu m on the week.

May-loading and June-loading positions also increased due to the structural change, rising Eur24/cu m and Eur12/cu m week on week respectively to be assessed at Eur890/cu m and Eur866/cu m March 23.

Anticipated stock tightness in Northwest Europe through Q2 has been the key sentiment for the steep backwardation, sources said, a result of the closed import arbitrage from major exporters US and Brazil since the start of 2023.

"The arbitrage will be coming in from June onwards, until June things can get real tight," a trader said. "March hasn't been performing really, so [this] will have to happen either in April or May."

The European Union is a net importer of ethanol and is dependent on T1 imports to cover its annual consumption. Data from S&P Global Commodity Insights showed that the EU+UK imported a record volume of 973 million liters of ethanol from Brazil in 2022, a 590% increase from the 141 million liters imported in 2021.

Pressure resulting from strong imports pushed the ethanol market into a steep contango partly through Q3 and in Q4, prompting buyers to purchase volumes and store for further along the curve. With the closure of the arbitrage and European producers cutting their production rates through late 2022 and early 2023, market structure has reverted to a full backwardation from April onwards which should incentivize stock draw through Q2, sources said.

"We're in a declining stocks environment," a second trader said. "Demand is good, the import arbitrage is closed at least for now, which should help prices. There's still some stuff in tanks [in ARA] but that will come out in Q2."

A third trader said that some imports have still been arriving from the US but shipments from Brazil have dried up. "It's crop harvest season there so less molecules are available," the source said.

European ethanol prices have also been supported by firm Q1 demand to start 2023, with France, Germany and the Netherlands having been identified as major destinations for product. Some buying was evoked by strikes at French refineries from February with participants determined to secure product sooner rather than later, a fourth trader said.

While bullish factors have given support to the front of the ethanol curve, positions through Q3 have decreased on account of the steeper structure. The July-loading paper position was assessed at Eur835/cu m March 23, down Eur6/cu m week on week. Bigger drops were seen for other Q3 months, as August-loading and September-loading positions dropped Eur19/cu m and Eur25/cu m, respectively, on the week to Eur804/cu m and Eur779/cu m March 23.

"In Q3, some participants are worried that people [in the US and Brazil] will start to export again, so currently it is better priced because the product will arrive," the fourth trader said. "If people start to import T1 again, Europe will have the volume and that could explain [the curve] in Q3 and Q4."