Gasoline Price Plunge in U.S. Slowed by Higher Ethanol Costs

http://www.bloomberg.com/news/2015-01-07/gasoline-price-plunge-in-u-s-seen-slowed-by-higher-ethanol-cost.html

The biggest plunge in U.S. gasoline prices since 2008 is slowing as higher ethanol boosts the cost to make the motor fuel.

Ethanol futures surpassed gasoline last month for the first time since March. Faced with higher costs, refiners and blenders used the least ethanol in a year last week. Pump prices have slipped 6.6 cents in the past week, the smallest drop in a month, according to AAA.

Ethanol prices have fallen one-third as much as gasoline since late June because the cost of corn, used to make the biofuel, has increased from a five-year low in September. Instead of blending, refiners are buying credits to meet federal requirements, driving up the cost for those to the highest since August 2013.

“The gasoline price has fallen so fast that in certain markets people are going to look to reduce ethanol blending” and instead buy credits, Andy Lipow, president of Lipow Oil Associates LLC in Houston said in a Jan. 6 telephone interview. “It’s not a good thing for refiners. It slightly impacts the fall of retail gasoline prices.”

Americans are paying an average $2.191 a gallon for gasoline, the lowest since May 7, 2009, according to AAA, based in Heathrow, Florida, the country’s largest motoring group. Ethanol futures on the Chicago Board of Trade were 13.34 cents above gasoline today on the New York Mercantile Exchange.

Ethanol blended into gasoline dropped 7.8 percent to 789,000 barrels a day last week, U.S. Energy Information Administration data show. The percentage of ethanol blended in gasoline was 9 percent, after sinking to a three-year low of 8.9 percent the previous week.

Ethanol Credits

The rise in the cost of the credits, known as Renewable Identification Numbers, has been helped by President Barack Obama’s Nov. 21 decision to delay setting 2014 consumption quotas, leaving refiners uncertain of how much ethanol they should have used last year and how much they’ll need in 2015.

Corn-based ethanol RINs for 2014 have risen 50 percent to 89.03 cents in the past month on the New York Mercantile Exchange. Certificates for 2015 have jumped to 79 cents, data compiled by Bloomberg show.

RINs are serial numbers attached to each gallon of biofuel. Once refiners blend ethanol into gasoline, they can keep the RIN to submit to the Environmental Protection Agency to show compliance with the law, or trade it to another party.

Government Mandate

EPA in November 2013 had proposed to reduce the amount of ethanol consumption to about 10 percent of the gasoline market, rather than a fixed number.

Traders and companies are also buying the RINs to minimize risk in the event EPA issues volume requirements that are higher than what was proposed in 2013, Lipow said.

Meanwhile, a 5 percent increase in corn prices in the past month has eroded margins for ethanol makers and slowed price declines for the fuel, leaving it at a premium to gasoline, compared with a historical discount of about 20 cents, says Scott Irwin, renewable fuels specialist at the University of Illinois in Urbana.

Refiners in the U.S. are operating at a seasonal record, increasing the amount of gasoline blendstock being produced and the ethanol needed.

“Corn-based ethanol prices that have been trading at parity or premium to gasoline in recent months have made the economics less favorable for using the biofuel as an octane enhancer or additive into clear gasoline,” Aakash Doshi, an analyst at Citigroup Inc. in New York wrote in a note to clients today.

RINs are still cheaper than a physical gallon of ethanol and refiners are looking to mitigate any losses from the decline in crude oil and gasoline prices by purchasing the cheaper alternative, according to John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

“That’s one reason consumers aren’t seeing more savings at the pump,” Kilduff said in a Jan. 6 telephone interview. “With the refiners running at a high rate, they’re scrambling for RINs.”

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Charlotte Porter, Richard Stubbe