Ethanol's dramatic rally this summer may not be repeated: sources

Ethanol's dramatic rally this summer may not be repeated: sources

Houston (Platts)--4Aug2006

The dramatic rally in US ethanol prices this summer, which crested as
high as $3.59/gal over New York Harbor spot reformulated blendstock for
oxygenate blending and $3.81/gal over NY 87 conventional unleaded gasoline on
July 20, is unlikely to occur again because the price surge was part of the
initial switch from MTBE to ethanol, market sources said Friday.

Typically, market sources say, the "natural" premium for ethanol to
regular unleaded gasoline should be roughly equate to the ethanol tax break at
the pump, the equivalent of 50 cents/gal. On Thursday, NY Harbor ethanol was
only 38 cents/gal above both NYH RBOB and 87 conventional.

This unprecedented widening of the ethanol to gasoline spread in May
and June was a direct result of logistical constraints and "growing pains" in
the early summer MTBE phase-out, said market sources, and with nearly 2.43
billion gal/year of ethanol production plants currently under construction,
according to the Renewable Fuels Association, the ethanol market should not
see such dramatic premiums to gasoline in perpetuity.

Also, market sources indicated that with the large volumes of ethanol
production coming online, spot ethanol prices in the US may need to stay below
the 50 cents/gal premium to encourage gasoline blending with ethanol, thereby
increasing demand.

The natural logistical constraints for ethanol should still allow for
some volatility and isolated supply shocks in the spot market, market sources
said, as the blendstock must be transported via rail from production centers
in the Midwest to end-user hubs in Texas, California and the Northeast. When
rail traffic is heavy, bottlenecks can occur.

--Suzanne Evans, suzanne_evans@platts.com

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