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T2 ethanol displaces gasoline tanks for ARA storage on attractive contango structure

Highlights

Ethanol Physical cash vs. M2 futures average minus Eur36/cu m ytd

Ethanol players add additional storage on summer demand surge expectations

ARA gasoline inventories fall amid strong export demand

A stock build-up for ethanol in the Amsterdam-Rotterdam-Antwerp hub on lower demand and EU producers opting not to cut run rates during the partial lockdown since November 2020 have led some market players to use gasoline tanks for ethanol storage in anticipation of an ethanol demand bounce-back as lockdown restrictions are eased across the EU.

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Despite restrictions on mobility in the EU, European undenatured ethanol physical spot prices have rallied 33% since the beginning of 2021, with T2 ethanol just falling short of levels last seen in December 2020. It was assessed at Eur588/cu m ($705/cu m) FOB Rotterdam on April 14 before dropping to Eur576/cu m FOB Rotterdam on April 15.

An abnormally wide physical spot vs. second-month futures contango structure since January 2021 has spurred buying appetite for storage in the ethanol market as demand continues to be lackluster on the back of COVID-19 led mobility restrictions.

The physical spot versus the M2 futures spread has averaged at minus Eur36/cu m since January 4 and as of April 15, while the average storage cost of ethanol in the ARA trading hub is understood to be around Eur16/cu m per month with some sources quoting levels as low as Eur8-10/cu m per month depending on the counterparty and contract terms.

Some market sources dismissed the feasibility of storing ethanol in clean product tanks such as gasoline due to its highly corrosive nature, which can damage seals and attracts condensed water which could damage fuel systems and engines, as well as highlighting that due to the high beverage tax on ethanol "if you lose a bit of ethanol in the mass balance, customs will fine you with big amount so tanks for ethanol need to be approved by customs," a source said.

However, other market sources said that while gasoline tanks are usually 50,000-60,000 cu m in size compared with 5,000-10,000 cu m for ethanol and in normal circumstances it is not common, with the right infrastructure it can be an easy switch.

"Gasoline tanks are perfectly capable of storing ethanol, it is better to not have an external floating roof though, and internal floating roof (IFR) or geodesic dome is most likely required as the ethanol can absorb water," a source said.

"While the ethanol can eat into some rubber gaskets due to its corrosive nature, it really isn't an issue in terms of cost, so you can quite easily switch between them," the same source added.

As a result of the ethanol wide contango structure, market players have also started leasing additional temporary storage capacity in the ARA hub, with some opting for larger tanks in order not to miss out on an expected ethanol price rally as was the case in August and September 2020, when T2 prices hit all-time highs on market tightness as lockdown restrictions eased in the EU.

During March and April, high exports to the US have seen a drawdown in gasoline inventories in storage in the ARA hub. Data from Insights Global showed 1.259 million mt of gasoline was in storage in ARA in the week to April 15, down 9% on the month and although seen steady this week, stocks had fallen for three consecutive weeks.

A backwardated structure in the forward gasoline paper market, couple with favorable trans-Atlantic arbitrage economics incentivizes sellers to draw down inventories and deliver to the US New York Harbor region.

The US Energy Information Administration expects US gasoline demand to rise by 600,000 b/d during summer 2021 compared with summer 2020, which will likely help maintain gasoline exports from Northwest Europe.

Meanwhile, recovering prompt gasoline demand in some European markets such as the UK could help steepen the market contango in May, and further incentivize producers to free up gasoline from ARA storage. On April 16 the Eurobob FOB AR May swap was assessed with a $2.75/mt premium to the equivalent June swap.