Ethanol to hit refining profitability

Surging ethanol blending will undermine wholesale gasoline prices in the Atlantic Basin, starting in 2012, according to ESAI’s newly updated two-year outlook.  The outlook says that ethanol will add supply to the gasoline market, especially in the US. As this additional volume meets organic demand growth, it will weaken gasoline and widen the disparity between gasoline and diesel prices on both sides of the Atlantic.

ESAI believes a new Atlantic Basin transport fuels market is emerging. Along with more refining capacity, ethanol blending in the US will increasingly expand domestic gasoline supply and reduce the region’s fuel import requirement. An import requirement that was above 1 million b/d in 2008 will collapse to below 400,000 b/d by 2012.  At that point, gasoline will decline relative to diesel and stay that way. ESAI expects that New York Harbor diesel spreads to WTI will average $9.00/barrel in 2012, whereas gasoline’s relationship to crude will decline to $7.70/barrel. 

While diesel-centered production will benefit, “gasoline-heavy producers will take a hit,” notes ESAI Principal Sander Cohan, “Europe will have a substantial gasoline surplus, but won’t be able to send it to usual markets.”  This will likely encourage refiners there to trim back runs and reduce product output overall, making that region even more reliant on imports from Russia and elsewhere to meet demand.

The influence of biofuels in Atlantic Basin fuel market dynamics is a relatively recent phenomenon, but is expected to accelerate and deepen in the coming years across the region. Consequently, refiners will come under continued pressure to adapt to this new market dynamic, especially as gasoline and diesel diverge.

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