The ethanol market this week will focus on:

• this Thursday's EIA November ethanol report, which could show another record high in production after October's 5.5% increase to 964 million gallons,
• gasoline prices, which remain on the defensive due to higher inventories and the weak economic data and stock market, and
• corn prices, which remain weak following the highly bearish January 12 USDA report.

February CBOT Ethanol futures prices last Wednesday posted a 3-month low but then recovered late in the week to close +0.3 cents (+0.2%) at $1.783 per gallon.  The main bullish factor was some technical short-covering after the sharp 20-cent sell-off seen in the past 3 weeks.  Ethanol prices held up last week in the face of bearish factors such as the 3.9% sell-off in gasoline and the 1.8% sell-off in corn prices.  Commodity prices in general were under pressure last week from the 1.2% rally in the dollar index and from concerns about weaker Chinese commodity demand with the Chinese central bank initiating moves to curb bank lending.

In a continued turn of fortune, the U.S. gasoline refining industry has taken a sharp hit while the U.S. ethanol industry is currently enjoying solid profit margins that should continue with this past summer's record corn crop.  Chevron, the second biggest U.S. oil company, announced last week that it would cut jobs and restructure its global gasoline refining business to try to revive profits (see news clip on page 3).  Gasoline refiner profit margins have been hit hard by weak fuel demand, an increase in biofuels, and overcapacity of gasoline refining facilities.  Ethanol accounted for about 7% of U.S. fuel consumption in 2008.  Exxon's CEO said last October that he believes that U.S. gasoline demand permanently peaked in 2007 and will move lower due to biofuels, efficiency and hybrids.  The major oil companies have been slow to move into biofuels.  Valero, however, which is the second largest U.S. gasoline refiner, became the second largest ethanol producer last year when it purchased 1.1 billion gallons per year of ethanol production capacity.  Ethanol in fact helped Valero's profitability in the latter part of 2009.

Ethanol/Gasoline - February gasoline futures prices last week posted a new 1-month low and closed 7.97 cents lower (-3.9%) at $1.9857 per gallon.  Bearish factors included (1) the larger-than-expected 1.8% increase in weekly gasoline inventories to the highest level in 1¾ years, and (2) forecasts for a 1% rise in OPEC production in the four weeks to February 6 by tanker-tracker Oil Movements.  The relative strength of ethanol prices versus gasoline prices last week caused the spread of February ethanol prices minus gasoline prices to rise by 8.3 cents to -18.3 cents, which was only mildly above the recent 5-month low of -$28.5 cents.

Ethanol/Corn - March corn futures prices last week remained on the defensive, posting a new 3-month low and closing the week down 6.75 cents (-1.8%) at $3.6475 per bushel. Corn prices last week continued to suffer from the January 12 USDA report showing an unexpected 1.8% upward revision in U.S. corn production to a record 13.151 billion bushels and a 5.3% upward revision in the U.S. carry-over to 1.764 billion bushels.  The March ethanol-corn crush margin last week improved by 2.7  cents to 48.0 cents per gallon, but remained well below the recent 2-year high of 73.6 cents.

Ethanol Calendar

• Jan 27:  Weekly DOE Gasoline Inventories
• Jan 28: EIA Monthly Ethanol Report
• Feb 9: USDA WASDE Crop Supply-Demand
• Mar 17: OPEC's quarterly meeting

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