FYI | Jun 23 2006
By Greg Peel
Methyl tertiary butyl ether (MTBE) is a petroleum-based product that used to be added to gasoline in the US to increase the octane level and reduce hydrocarbon emissions, but by law its use has been phased out as an additive and replaced with more environmentally friendly ethanol.
The ethanol price in the US has gone quite berserk in the past twelve months, no doubt driven by the MTBE phase-out, and the fact that ethanol is an alternative fuel source to gasoline alone, but also due to bottlenecks and other supply problems, reports Barclays Capital.
Ethanol futures traded at the Chicago Board of Trade closed at an all-time high of US423c/gallon on Tuesday, getting close to a 200% rise over twelve months. The price spread of ethanol over the benchmark New York Mercantile Exchange gasoline contract blew out to more than US220c/gallon, nearly six times higher than it was at the beginning of the year.
There is clearly a bit of a frenzy going on in ethanol, and Barclays Capital is not of the opinion it will really contribute that much to solving US energy problems or combating high prices. From a price perspective, it’s all a bit of a waste if ethanol is going to trade at ridiculous premiums to gasoline. On the assumption of a 90:10 gasoline to ethanol ratio for the stuff that actually goes in a car, Barclays notes that the ethanol-added gasoline is trading at almost a US35c/gallon premium to the ethanol-free NYMEX gasoline contract.
Cementing the view that the current price is somewhat of an aberration is the fact the backwardation from the August futures contract to the September futures contract is a whopping US70c/gallon. In other words the September contract is not trading at anything like the same premium. Barclays believes respite will come when consumers move away from the summer grades of gasoline currently available.
The two key sources of ethanol are sugar and corn, and although well-supported the same frenzy has not been experienced in these two agricultural contracts. Rather they have traded on the basis of their own traditional fundamentals.