OPEC, ethanol and falling rig counts
Crude oil prices are retreating a bit after mixed economic news in China and amid concerns over the upcoming OPEC meeting. Yet, the new rules by the Environmental Protection Agency (EPA) on the ethanol mandate, as well as a larger than expected drop in U.S. oil rig counts, should provide support.
Gas prices spiked after Friday after the eagerly-awaited and delayed-for-over-a-year EPA Ethanol and bio-diesel mandate decision was announced, and it caused larger market moves after falling short of what the Congress had recommended. The EPA had to lower the mandate because the projections for demand growth fell short of expectations, making the old mandates impossible to meet. Still, the market was caught by surprise at the size of the cutback in quota.
The EPA set the mandate for corn at 13.4 billion gallons this year and 14 billion gallons for next year. The biodiesel quota showed a smaller than anticipated 1.7 billion gallons this year and 1.8 billion gallons next year. The news sent RBOB gasoline futures soaring because if we are using less ethanol we will be using more gas and oil or at least that is what the market is thinking.
The announcement was seen as a victory for oil companies that complained that they would hit the blend wall as it would be impossible to add ethanol to gasoline that could not be produced or sold. It also affected corn futures, sending them lower. Originally the legislation called for refiners to use 20.5 billion gallons of renewable fuels this year and 22.25 billion in 2016, based on 2007 fuel consumption forecasts, which have been way off due to the economic crisis as well as the inroads made on fuel efficiency.