NEW YORK/CHICAGO - The rise in U.S. ethanol prices, which hit their highest in 18 months on Thursday, could be about to lose steam as the move draws more production back into the market and potentially puts off buyers, traders and experts said.
Cash prices have been following futures prices for ethanol, corn and gasoline higher. Midwest prices of the biofuel are at their highest in just over a year, helping to lift margins for producers like Archer Daniels Midland Co and Green Plains Inc after one of their toughest quarters in years.
But some said the higher prices could curb demand, particularly in export markets, or draw in imports of the fuel from other countries.
New export "business isn't getting booked at these prices," said a U.S. ethanol trader who requested anonymity.
Exports in the first three months of the year were up 5 percent from the same period in 2015. The U.S. Department of Agriculture is due to release April data on Friday.
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The most-active Chicago Board of Trade ethanol contract for July delivery rose as high as $1.677 per gallon before settling up 0.7 percent at $1.66 per gallon.
The second-month is up nearly 20 percent year-to-date, largely riding the coattails of rising corn and crude oil prices.
Ethanol inventories declined to their lowest levels this year, U.S. government data showed on Thursday, helping to fuel gains.
Stocks declined by 44,000 barrels to a 2016 low of 20.77 million barrels in the week ending May 27, according to the U.S. Energy Information Administration. Production averaged 960,000 barrels per day, up 1.5 percent from the prior week.
"People were surprised the EIA production numbers aren't higher. Most people were looking for gains of 2 to 3 percent," said Jerrod Kitt, an analyst at brokerage The Linn Group.
Many plants typically shut during April or May for regular maintenance and come online ahead of the Memorial Day weekend, the kick-off of the summer driving season, which fell on May 28-30 this year.
While plants are ramping up more slowly this year, domestic demand will be higher than last year, thanks to higher government mandates. That has helped improve profit margins and will continue to tempt producers to bring idle plants back on line.
"Margins were too thin a while back for the plants to keep running," said Bruce Babcock, an economics professor at Iowa State University. "Those production rates will continue to climb."
