US ethanol fundamentals are likely to remain at odds in the coming months as the market swings from undersupplied to oversupplied amid waning demand and consistently high production.
Starting in the third quarter of 2021, ethanol demand began to outstrip production as high corn prices led plants throughout the industry to reduce output and start fall maintenance early in an effort to avoid the higher feedstock costs. Ethanol production bottomed out in late August at 905,000 b/d, the lowest since February.
Strong demand both in the US and abroad lifted corn futures in May to the highest in more than eight years. Corn futures have since retreated from that peak while remaining above their historical five-year average.
In response to lower ethanol production and elevated corn costs, spot ethanol prices in August rose to the highest in more than seven years. With stocks dwindling, buyers competed heavily to secure volumes, which further lifted prices.
US ethanol stocks spent nine of the first 11 months of the year below five-year averages as fuel demand recovered throughout the year. Tank levels at Kinder Morgan's Argo terminal in Illinois, a critical ethanol hub, fell in October to about 15pc of capacity, market participants said. Ethanol production has struggled to keep up with demand, with stocks falling even as output earlier this year reached the highest since December 2017.
The lower stocks translated into higher ethanol prices late in the year. Chicago Rule 11 railcars reached 400¢/USG on 24 November, the highest since late March 2014. Prompt in-tank transfers at the Argo terminal rose earlier in November to the highest since 2006 at 377.5¢/USG.
More recently, ethanol prices have retreated as demand eased from a November peak. Inventoriesduring the week ended 17 December declined by 0.9pc from a four-month high, while production fell by 3.3.pc to 1.05mn b/d.
As the market contends with fluctuating demand, it also must quantify the effects of the Covid-19 Omicron variant. In early 2020, ethanol prices in New York Harbor and Chicago collapsed to less than 100¢/USG as fuel demand fell sharply amid government lockdown measures and as case numbers spiked.
But a lack of restrictions imposed during the Delta variant spike and comments from President Joe Biden indicate that no such measures are likely in the near future with Omicron. Initial impressions of Omicron being a "mild" sickness further reduces the possibility of lockdowns similar to the ones seen in 2020.
While greater Covid-19 restrictions in other countries could hurt demand for US ethanol, the 2022 outlook for US exports is good as Brazil's sugar crop was less productive than in prior years.
Logistics are another issue recently affecting the industry that could stoke price volatility into next year. At the close of November, backups along the Union Pacific railroad created a bottleneck that led to steep losses in Chicago markets. Market participants are keeping a wary eye on potential fallout from truck drivers and rail crews should vaccine mandates be instituted among those workforces. As many as 2.5mn truckers could quit rather than comply with a federal Covid-19 vaccine mandates, according to shipping industry groups.
Ethanol and other biofuels producers must also keep an eye on Renewable Fuel Standard policy changes instituted by the US Environmental Protection Agency. The agency released ambitious biofuel blending propositions for 2022, which could indicate future demand in broad strokes going forward.
