Oil prices keep ethanol margins at 8-month high despite corn price increases

March 10, 2008

Citigroup Global Markets analyst David Driscoll said that, despite an 11-cent increase in corn prices last week, ethanol margins were holding steady at 18 cents per gallon, an eight-month high. Oil price increases has caused ethanol prices to increase to $2.37 per gallon in spot markets, which allowed producers to maintain their margins. Gasoline futures increased to $2.64 after OPEC said it would not increase production despite record prices and a shortfall in US stockpiles.

Last week, the chief analyst for the Oil Price Information Service said that gasoline prices would rise to $3.50 to $3.75 a gallon by summer, but decline in the second half of the year. Tom Kloza said that he did not expect gas to reach $4 per gallon, in part because of the reduced cost of ethanol that is blended into the fuel.

The April contract for Texas light, sweet crude closed at $105.47 a barrel on the New York Mercantile Exchange yesterday. Kloza said that oil trading had decoupled from supply and production. Until 2001, he said, trading matched production at 85 million barrels a day, but today there are 800 million barrels of West Texas sweet crude traded yesterday, compared to production of 200,000 barrels per day. Gas prices reached an average of $3.185 yesterday, according to OPIS, although higher in many local markets.

Seeking Alpha recently projected that oil will reach $125 per barrel in 2008.

Commentator Byron Wien said “China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumers 13 to 15 barrels, Japan, Korea the same amount. As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there’s no way the world can meet that demand. So I think the price of oil is going a lot higher.”

By contrast, the Money and Markets newsletter predicts $150 oil by the end of 2008, in comparison to a price prediction of $105 per barrel from Goldman Sachs and $85 from the Energy Information Administration.

The International Energy Agency released a report projecting a severe energy supply shortage by no later than 2015. The report warned that increasing energy demand in India and China would result in an oil shortage of up to 7 million barrels of oil per day.

Global annual consumption of 85 billion barrels, is expected to reach 118 billion barrels by 2030. Matthew Simmons, a Houston oil and gas investment banker, told the Associated Press that the price of crude oil is likely to reach $300 a barrel.

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Written by Jim Lane · Filed Under Research