The ethanol market this week will focus on:

• gasoline prices, which are keying on demand, inventories, and the dollar,
• corn prices where the market is now mainly  watching the weather, and
• improved ethanol blending demand with ethanol prices at their cheapest level relative to gasoline prices in 8½ months.

July CBOT Ethanol futures prices last Thursday edged to a new 7½-month high but then faded on Friday due to weak corn prices and the stronger dollar, finally closing the week slightly higher by +0.3 cents at $1.768 per gallon.  Bullish factors last week included (1) the 4.5% rally in gasoline prices, (2) the International Energy Agency's (IEA) hike in its 2009 crude oil demand estimate, which suggested higher fuel demand for ethanol as well, and (3) the U.S. May retail sales report of +0.5%, which suggested the U.S. economy is stabilizing.

"Peak Oil" but for a different reason -- Proponents of "peak oil," a concept originally developed by M. King Hubbert in 1956, have argued for  years that global oil production will soon peak due to depleted reserves, thus leading to soaring oil prices.  The theory is based on part on the experience of the U.S., which has seen its domestic oil production fall since 1970 due to the depletion of U.S. oil wells.  However, ethanol has helped change the calculus for peak oil.  In fact, BP's CEO Tony Hayward said last week that U.S. gasoline demand has "probably peaked" due to increased ethanol blending requirements, higher fuel efficiency standards, and gasoline-electric hybrids (see p. 3).  He added that BP in the 1st-half of 2008 "probably sold as much gasoline into the U.S. as we'll ever sell."  "Peak oil" may occur, but not because of supply constraints, but because demand for oil may peak long before supplies run dry, which suggests a bearish long-term case for oil prices.

Ethanol/Gasoline - July gasoline futures prices last week posted a new 8-month high and closed up 8.85 cents (+4.5%) at $2.0431 per gallon.  Bullish factors included (1) the continued decline in weekly gasoline inventories, which have now fallen 8.4% since mid-January and are 2.3% below the 5-year seasonal average, and (2) the IEA's hike by 120,000 barrels per day (bpd) in its 2009 demand estimate to 83.3 million bpd, the IEA's first demand estimate hike in a year.  The spread of ethanol minus gasoline prices last week fell by another 8.5 cents to a discount of 27.5 cents, the lowest spread in 8½ months.

Ethanol/Corn - July corn futures prices last week fell from the recent 7½-month high and closed down 18.5 cents (-4.2%) at $4.255 per bushel.  Bearish factors included (1) generally favorable weather for the U.S. corn crop, (2) technical selling on Friday's sell-off, and (3) the stronger dollar.  Due to last week's sell-off in corn prices, the July ethanol-corn crush margin rose by 6.9 cents to a 3-month high of 24.8 cents per gallon, sparking some hopes for a sustained improvement in the profitability of ethanol production. 

The USDA in last Wednesday's monthly WASDE report reduced its corn yield estimate by 2.0 bushels to 153.4 bushels per acre due to the late corn planting in the eastern corn belt.  That led to a 1.3% cut in the crop size estimate to 11.935 billion bushels and a 4.8% cut in the U.S. carry-over estimate to a 5-year low of 1.090 billion bushels.  The ethanol market is hoping for near-perfect growing conditions this summer to ensure that corn supply conditions do not get any tighter, which would of course push corn prices higher.

Ethanol Calendar
Jun 17:  Weekly DOE Gasoline Inventories
Jun 29 week: EIA Monthly Ethanol Report
Jul 10: USDA WASDE Crop Supply-Demand

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