While European undenatured ethanol physical spot prices have rallied 51% since the beginning of 2021, a persistently abnormal prompt structure continues to reflect demand uncertainty, although there are signs that the market is starting to normalize further down the curve.
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The EU T2 ethanol market has been experiencing extreme price and structure volatility since the start of the COVID-19 pandemic with physical spot prices swinging between an all-time low of Eur350/cu m in March 2020 and an all-time high of Eur840/cu m last September. Currently spot prices are at their highest for seven months, assessed at Eur663.75/cu m FOB Rotterdam on May 18 -- a level last seen in October prior to the implementation of second lockdown restrictions across Europe.
Similarly, the structure for physical spot and T2 futures prices as well as inter-month paper market values have also been affected by the on-off enforcement and easing of mobility restrictions across the EU, leading to historically abnormal market structures as market players grapple with sudden changes in ethanol supply and demand dynamics.
T2 physical spot prices versus second-month futures, a spread indicating market strength or weakness, reached its steepest ever backwardation at Eur223/cu m last August -- reflecting very strong prompt demand. Since November, however, it has been trading abnormally in a contango structure, with prompt prices lower than forward values. In January it reached its widest ever contango of Eur77/cu m.
"In 2019 the T2 market was heavily backwardated almost every month, this has not been the case since the pandemic," a market source said.
Prompt T2 futures reflecting uncertainty
Demand uncertainty for EU ethanol has been evident in the prompt futures, in particular with the front-month versus second-month (M1-M2) spread trading in a persistent contango structure since October, S&P Global Platts data shows.
"Historically it is normally a flat to backwardated curve at this time of the year," another source said. "We don't' have that as we are still in lockdown, but demand should be stronger in the future and the market should return to normality at some stage as the supply and demand norms revert."
But the anticipated rebound in ethanol demand has continually been pushed back to the next month since the start of the year because of ongoing mobility restrictions, keeping the market in an atypical structure, market sources said.
Transition to post -lockdown
However, in the week to May 9 economic land-based mobility in Germany, the UK, Spain, France and Italy rose sharply over prior-week levels, according to Google data, with France seeing the biggest rebound, from 38% below pre-pandemic levels to 29% below. Overall, mobility in Europe's five biggest economies rose by four percentage points to average 25.6% below pre-crisis levels, the Google data shows, the highest level since Oct. 30 last year.
"The improvement in European mobility is fairly broad-based, with the lifting of restrictions in the UK and continental Europe boding well for continuing uplift of mobility and reinforcing the expected jump in road transport in June and in to July," S&P Global Platts Analytics said in a note May 12.
The M3-M4 futures spread, which currently captures market expectations for August and September, has started normalizing to a more typical backwardated structure since the beginning of April, reflecting a transition from lockdown to post-lockdown demand as well as the introduction of E10 fuel in Sweden and the UK come August and September, respectively, according to several sources.
"The UK [introduction of E10] will move the European ethanol market from a balanced-to-tight to a consistently structurally short market in need of imports. Even with Vivergo's 400,000 cu m capacity [at its previously idled UK ethanol plant] coming online the excess demand in the UK will need more than that," a source said.
Moreover, Sweden's E10 launch in August is forecast to increase ethanol demand by 150,000 cu m/year, and with the driving season across the EU starting slightly later than usual in 2021 due to lockdown restrictions, a spillover in increased demand into October is also expected, said a producer commenting on the M5-M6 structure.
The M5-M6 backwardation currently stands at Eur10/cu m, compared with the historical average of plus Eur3/cu m backwardation, Platts data showed, further indicating that market expectations are the T2 ethanol market is set to turn the corner and return to normality as the year unfolds.