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UK's E10 gasoline launch seen to boost demand for ethanol in Europe

Highlights

Non-oxy, E10 ready gasoline at premium to oxy gasoline

UK gasoline demand remains below pre-pandemic levels

Ethanol hits highs; structure switches to backwardation on E10 rollout

UK ethanol demand to jump 40% in 2021: Platts Analytics

The UK on Sept. 1 formally launched E10 specification gasoline at the pump, which contains up to 10% of ethanol in the blend, with the aim of reducing carbon emissions.

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In light of this, on Aug. 1, S&P Global Platts adjusted the premium unleaded CIF NWE cargo assessment specification with a lower oxygen content of maximum 0.1% by weight, or "non-oxy", to allow for up to 10% ethanol blending.

The UK's launch of E10 as the country's standard gasoline blend is expected to significantly increase demand for ethanol in Europe's third largest market, with analysts and market sources estimating an increase of the UK's market share as a percentage of European demand between 14% to almost 20% in 2022 onwards.

Non-oxy premium over oxy gasoline

Sources said that the higher cost of producing this specification of non-oxy blendstock gasoline would command a premium of around $5-$8/mt over the previous specification.

Prior to the launch of the adjusted specification, the premium unleaded 10 ppm CIF NWE gasoline cargo averaged at $12.73/mt premium over the Eurobob FOB AR barge market in the four months to Aug. 1. After the launch of the new specification on Aug. 1, the premium has averaged $17.94/mt to date, and assessed at a $19/mt premium to Eurobob barge market on Aug. 31.

In the European barge markets, non-oxy, E10 barges typically hold a premium over the oxygenated, E5 Eurobob barges, although this premium may rise if inland demand for E10 gasoline rises in markets such as Germany.

In the second half of 2021 to date, the E10 FOB AR barge market was assessed by Platts at an average premium of $3.50/mt over the E5 Eurobob barge market.

Muted UK demand for non-oxy gasoline imports

Sources said that demand for non-oxy, E10 ready gasoline cargoes delivered into the UK was thin, partly due to the lower demand environment for gasoline amid the pandemic.

"I have not really seen any increase in demand for non-oxy gasoline cargo imports into the UK," a trader said.

Sources added that non-oxy specification gasoline had already been delivered into the UK prior to the launch of the adjusted Platts premium unleaded CIF NWE gasoline cargo assessment, and prior to the UK introducing E10 gasoline.

Non-oxy specification gasoline can be blended into oxy gasoline, although this typically represents a value "giveaway" by adding more premium gasoline into cheaper blendstocks.

A muted increase in non-oxy gasoline cargoes delivered into the UK may be reflective of the current demand environment.

"UK gasoline demand is OK, but still not back to where it was before the pandemic, and has slowed down a bit," a second trader said.

Prompt ethanol demand

In the week prior to the E10 launch, European ethanol prices reached their highest level in 2021, with Platts assessing T2 ethanol FOB Rotterdam at Eur690/cu m on Aug. 27, before easing slightly to Eur689.25/cu m on Aug. 31.

Sources said they were seeing more demand interest for September, with the market showing tightness for the prompt which supported physical spot T2 prices.

The rise in spot prices switched the structure between physical spot and second-month Platts futures to backwardation on Aug. 25, as it continued to fluctuate between a pandemic-induced persistent contango structure and its historical norm backwardation.

"I think ethanol demand will come up and the market will remain in backwardation due to the E10 rollout in the UK," a source said.

Blending rates

While the switch to E10 could theoretically double the ethanol blending rate, prices for ethanol and its greenhouse gas savings alternatives and consumer sentiment also play an important role.

"E5 [above 97 RON] will continue to be sold at service stations that offer two grades of gasoline for sale. Further, some rural, remote and small stations will be allowed to sell E5 as standard. Therefore, despite the government's heavy push toward E10, forecasts that the UK will double its ethanol consumption over the next year are misguided," S&P Global Platts Analytics said on June 29.

However, Platts Analytics forecast UK ethanol consumption to jump 40% in 2021 to 14,000 b/d, driven by a rebound in post-pandemic demand and E10 rollout, and rise by a further 28% to 18,000 b/d in 2022 -- accounting for almost 15% of total European ethanol demand, its latest forecast published Aug. 31 showed.

The full effects on UK and European ethanol demand continues to elude market participants, with one source saying: "E10 introduction is still a question mark regarding demand."

Another source said: "In Germany, 10 years ago they had to reintroduce the E5 option after people were buying the more expensive grade worrying about their engines. So, let's hope this doesn't happen in the UK."

High biodiesel premiums -- which are alternatives to achieving greenhouse gas savings obligations -- means ethanol is currently more economical for reducing emissions, several sources said. It makes sense to blend the maximum rate in the UK, they added.

"The demand for ethanol in the UK will blow up. I won't be surprised if its market share jumps to 20%, and surpasses France as the second largest ethanol market in Europe by 2022," another source added.