New York — The European T2 ethanol price surged Eur51 week on week to Eur715/cu m FOB Rotterdam on August 4, just surpassing the November 2019 high of Eur714.50/cu m and reaching the highest point since September 2012.
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This also saw the ethanol premium to gasoline balloon to $559.49/cu m, the highest on record since the ethanol assessment began in 2007.
Just five months ago the T2 price plummeted to all-time lows at Eur350.25/cu m as the effect of the coronavirus pandemic and nationwide lockdowns across Europe saw fuel demand dissipate. But quicker-than-expected demand recovery against a lag in an equivalent increase in supply resulted in considerable tightening of fundamentals in the Amsterdam-Rotterdam-Antwerp hub.
Lagging supply, low stocks as demand recovers
Demand is not quite at pre-corona virus levels but market participants report demand as "almost back to normal", bearing in mind that this is also, in theory, the peak summer demand season. Switching from public transport to private cars and less flying to holiday destinations has also likely supported demand.
But this ethanol rally is mostly a supply story. Domestic EU producers were quick to cut run-rates over April-May, and perhaps many were hesitant to ramp up despite margin recovery beginning in June, due uncertainty around a second wave of infections hitting demand. In addition, the surge in demand for disinfectant and hand sanitizers also contributed to the start of this higher fuel demand period with low stocks.
Imports also slowed over the period, and any that did make their way into Europe were mostly denatured, leaving the standard fuel undenatured segment even tighter. Despite arbs being open, many were conservative with booking cargoes, partly due to demand uncertainty and partly as the steep backwardation made it difficult to hedge.
Ethanol moves counter to gasoline, high octane components
The ethanol rally is in sharp contrast to trends in gasoline and other blending components, with rising cases of coronavirus dampening sentiment and gasoline stocks rising in the ARA region. Data from Insights Global showed that in the week to July 31, gasoline inventories rose 4.9%, while in the previous week to July 24, gasoline inventories rose 5%.
If such a high ethanol premium over gasoline is sustained, this could eventually harm ethanol demand as blending becomes too uneconomical. Historically, the correlation between ethanol and gasoline prices has been weak, but at extreme spreads the impact starts to be felt.
"I don't see much support for the gasoline market; the blending margins are awful," a trader said, adding that out of the Mediterranean gasoline market, there were few opportunities for exports either.
European gasoline prices have retreated from trading around $400/mt in July, with the Eurobob FOB AR barge assessed at $373.50/mt on August 4, down 0.4% on the day. Sources said the recovery in gasoline demand, which had previously been expected to be close to pre-pandemic levels this month, was now looking more bearish towards the back end of August. Furthermore, the poor blending margins had deterred some buyers of European gasoline grades, particularly in the key West African gasoline market of Nigeria.
In a sign of the weaker demand-side outlook in the gasoline market, the August gasoline crack spread has fallen from highs of $5/b seen in mid-July, to just 90 cents/b on Aug. 4.
Soaring ethanol prices have also meant production margins for the high octane ethanol derivate ETBE have been under severe pressure. Based on feedstock price calculations, ETBE production margins were around two to four times lower than the other ether -- MTBE -- because of the significantly higher prices of ethanol, used for ETBE production, compared to methanol, MTBE's feedstock.
ETBE's premium over MTBE was assessed at $233.75/mt on Aug. 4, up from $223/mt on Aug. 2-5, 2019. However, given the weaker gasoline component prices after the coronavirus pandemic, ETBE was priced at a 153.5% premium over MTBE on average at the beginning of August, compared with a 129% premium for the equivalent period of 2019.
Indicative of the low blend values of high octane components, gasoline blendstock MTBE's premium over the Eurobob gasoline front-month swap kicked off the month at $56.50 on Aug. 3-4, a significantly lower value than the $187.67/mt seen on average in the same period in August 2019.