EU biofuels blending economics turn towards ethanol from biodiesel

Increasing outright FAME 0 prices over the course of April and ethanol prices holding below Eur500/cu m have resulted in European blending interest turning from biodiesel to ethanol.

At the beginning of the year, biodiesel was highly favored over ethanol. Over the first quarter, the price of T2 ethanol averaged $288.24/cu m over Eurobob gasoline. By Thursday 28^th April evening, though, this premium had fallen to $172.98/cu m as Eurobob gasoline (The Argus Eurobob oxy assessment is used as a benchmark price in gasoline transactions throughout northwest Europe. Eurobob is an unfinished gasoline and the European swaps market shifted to price against this ethanol-ready blendstock in January 2010) increased substantially more than ethanol day-on-day.

In January and February, blenders were reducing their incorporation rates of ethanol as much as possible, in an attempt to wait out the higher premiums in the hope that ethanol prices would fall and gasoline would increase.

RED FAME 0 outright prices had been generally on a firming trajectory for the most of April, on the back bullishness in vegoils complex, which kept feedstock prices at strong levels.

Outright prices on RED FAME 0 averaged at around $766/mt during Q1 and $857/mt for April, whereas the comparable T2 ethanol prices were at $718/mt and $668/mt respectively. RED FAME 0 was last assessed at $863/mt Thursday, whilst T2 ethanol stood at around $688/mt.

Eurobob gasoline barges were assessed at $489.75/mt on Thursday at a discount of $10/mt to the front-month swap, up from $479.75/mt Wednesday, when the discount to the front-month swap was $5.75/mt.

Although the energy content of biodiesel is relatively higher than that of ethanol, the divergent price movements between the two biofuels has shifted blending economics in favor of ethanol.

"The logic is that people start using more cars as of now, and blenders should blend more ethanol given better blending economics," one source said, adding that the sustained premium of ethanol over Eurobob was "not good, but better. It would make sense to blend more now."

European gasoline demand is expected to strengthen on the back of the US summer driving season, which typically represents a seasonal peak of demand for the road fuel, and absorbs European arbitrage barrels.

The May USAC-UKC arbitrage swap -- which tracks the differential between US RBOB and Northwest European Eurobob forward values -- widened on Thursday leading to more support for the arbitrage from the Northwest Europe to the US Atlantic Coast. The swap rallied to break the 16 cents/gal mark, as a function of the more rapid fall in European cracks at a time of global oversupply, and an overall rebalancing of European values to open arbitrage outlets.

"It is getting heated as arb goes wider," said a trading source.

Improved price differentials between the two regions may be a catalyst for the opening of the spot market arbitrage.