Gasoline futures are trading at the smallest premium to ethanol in more than a month amid waning demand and low crude prices, threatening to halt the biofuel’s biggest rally since August.
Gasoline for November delivery tumbled 7.51 cents, or 3.3 percent, to close at $2.1802 a gallon on the New York Mercantile Exchange today, the lowest settlement since November 2010. Futures for ethanol, blended into gasoline, gained 3.4 cents to $1.671 a gallon. Ethanol rose 9.7 cents last week, the most since the seven days ended Aug. 15, supported by higher corn prices and increased demand for exports.
“I’m actually getting a little nervous here,” Matt Janney, a broker at Futures International LLC in Chicago, said by telephone today. “Corn’s been rallying, so that’s helped, but this might be short-lived. It’s scary to see gasoline down 7 cents today. At some point, gasoline could get so cheap that it’s going to hurt ethanol.”
Gasoline’s premium to ethanol narrowed to 50.92 cents a gallon today, the least since Sept. 4, from more than a dollar at the end of September. As the spread narrows, gasoline suppliers have less incentive to blend ethanol into their fuel.
“If you bought ethanol recently, you’re making money, but if things turn here, we could sell off pretty quickly,” Janney said. “With gasoline dropping so much, you could see some demand destruction.”
Ethanol, a form of alcohol made from distilling and fermenting grain sugars, has less energy density than gasoline, meaning cars get fewer miles to the gallon when driving on it. Refiners must blend a certain amount of biofuel into every gallon of gasoline sold in the U.S. under a federal mandate or buy credits known as Renewable Identification Numbers, or RINs, to meet their compliance.
The last time gasoline traded at a discount to ethanol was in April, when it dropped to as much as 64.7 cents under the biofuel.