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U.S. ethanol nears rare premium to gasoline, threatening margins

NEW YORK -- Benchmark U.S. ethanol prices are about to return to a rare premium versus gasoline for the first time since January, threatening to end a period of relatively healthy margins that was bolstered by unexpectedly strong summer fuel demand.

NEW YORK -- Benchmark U.S. ethanol prices are about to return to a rare premium versus gasoline for the first time since January, threatening to end a period of relatively healthy margins that was bolstered by unexpectedly strong summer fuel demand.

With crude oil prices crashing a second time to hit 6-1/2-year lows this week and corn costs that have remained relatively stable this year, the discount for front-month Chicago Board of Trade ethanol futures versus New York gasoline has narrowed from about 65 cents to just 4 cents in two months. It has traded at a premium only a handful of times since 2010.

Second-month ethanol is already trading higher than RBOB futures. The premium steepens further along the forward curve, reflecting both the seasonal slow-down in gasoline use and tighter new crop conditions for corn.

To be sure, the U.S. government requires biofuels use and fuel blenders like Phillips 66 and Chevron Corp will not necessarily make changes to buying patterns during a short-term blip. But a protracted period of a steep ethanol premium could hurt demand above the mandate and from other countries.

Ethanol typically trades at a discount to RBOB because of lower feedstock costs. The inverting spread does not bode well for producers like Archer Daniels Midland Co (ADM) and Pacific Ethanol Inc.

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This summer, they were aided by two factors: U.S. drivers driving record miles and boosting demand for ethanol-infused fuel, and a shortage of other octane-enhancing additives that are required for summertime varieties.

Now, the collapsing crude market and the end of the driving season are shifting their fortunes. Shares of Green Plains Inc and Pacific Ethanol both slid to their lowest in more than a year and half this week.

Additionally, prices of corn, the main feedstock for U.S. ethanol, have recovered 6 percent from last week's two-month lows as supplies from last year dwindled and excessive rains have raised concerns about a smaller corn crop in some regions.

A facility in eastern Indiana was bidding 40 cents per bushel above corn futures, the highest basis in about two years.

Margins could be at greater risk if corn price gains do not begin to falter.

"Oil is only one factor. Until we harvest the U.S. corn crop, no one can make the call on margins," said Todd Becker, head of Green Plains.

Ethanol "needs to compete for a share of the fuel tank. The margin will have to adjust," he said.

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