Ethanol demand is likely to remain low following destruction from Hurricane Harvey and upcoming Hurricane Irma despite US Environmental Protection Agency waivers allowing retailers to sell more volatile gasoline, sources said Friday.
"Total demand won't see an increase though incremental demand might," said one source. "Even if you put more ethanol in CBOB you'll still lose demand overall from people hunkering down. There are more cars that sat still for two weeks than cars filling up and driving."
The EPA's reformulated gasoline waiver issued last week in most US states east of the Rockies allows CBOB to be sold in areas where RBOB is typically required for pollution control.
CBOB has a lower octane than RBOB and requires more ethanol to reach 87, the typical octane content of US gasoline.
The waiver has narrowed the gap between CBOB and RBOB in Chicago. The spread in favor of RBOB narrowed from 10.5 cents/gal Wednesday to 6 cents/gal early Friday morning, with some market sources saying they consider the blendstocks to be level even though they are not trading there.
The spread should widen in the second half of September as extraordinary market conditions go away, the sources said.
"I am ready for the madness to be over," a US refined products source said. "I typically cover Gulf Coast and the volatility in the Midwest has been crazy."
Even though ethanol might receive a short-term boost from additional blending into CBOB, the crushing effect on gasoline demand of two hurricanes within a few weeks is likely to outweigh any increased blending. In the most recent week of US Energy Information Administration data, gasoline demand, as represented by product supplied, plunged after Hurricane Harvey carved a path of destruction along the Texas-Louisiana coast. Drivers sought safety and stayed off flooded roads, reducing driving demand.
Weekly gasoline demand fell 683,000 b/d to 9.163 million b/d in the week ended September 1. The weekly refiner and blender net ethanol input also plummeted 33,000 b/d as the lower gasoline demand left almost nowhere for ethanol to go, despite production climbing to nearly an all-time high of 1.060 million b/d.
Harvey's effect on gasoline and ethanol is likely to continue to ripple through the markets even as Hurricane Irma looms off the coast of Florida.
Harvey knocked a huge chunk of Gulf Coast refining capacity offline and shut down Colonial Pipeline for several days, creating shortages in the US Atlantic Coast.
Gasoline prices spiked while gasoline became tougher to find across the country right ahead of the Labor Day holiday weekend. Labor Day is typically a last hurrah for gasoline demand as summer draws to a close but the high prices at the pump may have dissuaded drivers from taking road trips.
Chicago, the third largest city in the US, is one of the markets where CBOB is gaining a foothold this week thanks to the EPA's waiver. But even if ethanol demand climbs in the city, the incremental demand could be met by nearby plants.
The city outskirts is home to Kinder Morgan's Argo terminal, the most commonly-traded ethanol hub in the US. But Argo is unlikely to feel anything from increased blending in Chicago, said another source. "There are a lot of local plants near Chicago, and with 1.060 million b/d production, there may be a nominal [demand] increase, but enough supply to mop it up," the source said.
No fresh trade in Chicago CBOB was heard Friday morning. CBOB FOB Chicago through September 14 was assessed Thursday down 3.5 cents/gal at NYMEX October RBOB plus 4.5 cents/gal on a Buckeye Complex trade 50 points higher. Buckeye barrels command a 50-point premium to generic Chicago pipeline assessments.
