| Add RSS Feed

Oil & Gas Journal

Corn factor
In mid-June, Olivier Jakob at Petromatrix, Zug, Switzerland, discerned a possible "corn theme" in crude markets. "The US Midwest is currently suffering from historical flooding, and the corn crops are under threat. The prospect of lower corn supplies is pushing corn prices to record high levels, and expectations are growing for ethanol supplies to come under threat of falling margins (shares of ethanol producers are coming off the cliff)," he reported June 13.

Even before the mid-summer floods and the resulting run-up in corn prices, Jakob said, "Some states such as Texas were asking for a waiver on the ethanol mandate to alleviate the price pressure on corn. Following the floods, the pressure for an ethanol waiver could accelerate, and this could then be supportive for petroleum gasoline as the share of ethanol blending would be reduced."

Furthermore, Jakob said, "Crop damage and delays could be negative for diesel demand." As a result, the gasoline crack "was not only gaining vs. crude oil but was increasing while the heating oil crack was decreasing," he said. "The risk [of] buying gasoline on the flood trade is that an ethanol waiver would not be the only solution to attenuate any production shortage from the Midwest (94% of US ethanol production) as import of sugar-cane ethanol could also be substantially increased" via a waiver of the US import tariff on ethanol supplies from Brazil.

"The floods are also creating a potential risk on the safe operation of petroleum pipelines and refineries in the region, while barge traffic is being disrupted with portions of the Mississippi being closed," Jakob said.

(Online June 16, 2008; author's e-mail: samf@ogjonline.com)