Chicago ethanol market in steepest backwardation in two years


The Chicago ethanol market Friday remained in its steepest backwardation in two years after the December Chicago ethanol swap reached a 20-cent premium to its January counterpart on Thursday.

The December swap was indicated at $1.8050/gal Friday morning while the January paper contract traded at $1.57/gal. S&P Global Platts heard the December swap at $1.7975/gal Thursday while assessing the January swap at $1.5975/gal.

Prices have diverged as the front of the curve found support from tightness for product at Kinder Morgan's Argo, Illinois terminal, a key hub for physical ethanol trade in the US. The back of the curve, especially January and February, has been pressured by a new record-level in production.

Weekly Energy Information Administration data released Wednesday showed production climbed 17,000 b/d to an all-time high of 1.040 million b/d in the week ended December 9.

"If that's a new watermark, we're going to be building in January and February," said one source about the production level.

The looming build in the first quarter of 2017 has put pressure on prices in those months.

But in the near term, prices are being bolstered by strong demand.

Robust export demand has encouraged US producers to make export-grade ethanol that they can sell at a premium.

Monthly export data from the US Census Bureau showed that the US exported 131.6 million gallons of ethanol in October, the highest monthly total since December 2011.

As producers make export-grade ethanol and ship it abroad, they enter the market as buyers. They produce export-grade ethanol that goes directly to staging in the Gulf Coast or New York Harbor.

But to cover the obligations they already have, they buy Argo and send barges from the Chicago-area terminal to domestic refiners. The high number of barges booked out of Argo through the end of December led market participants to trade higher and higher, according to market sources.


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