05-30-2018: August Ethanol: New Government Mandates Support

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors


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There are those who say ethanol does not burn as efficiently as gasoline. Thus when it is blended with gasoline, it may increase engine-wear. Refiners would prefer not to use it for economic reasons. Consumers are not certain about its "benefits." Therefore, one of the main factors influencing ethanol prices is government action or inaction. Ethanol has air pollution benefits according to some, although until recently it was banned from being blended during summer months when air pollution threats are highest. Go figure? At any rate, American energy independence seems to be a main consideration in requiring ethnaol to be blended with gasoline under the Renewable Fuel Standard (RFS) of the U.S. Recent rumors of U.S. Government action of revised mandates is pushing ethanol prices higher. There is an element of uncertainty however, among all this euphoria.

Intermarket Analysis

We fed Ethanol, Crude Oil, and Gasoline into a neural network to get the following result:

Parabolic Chart

August Ethanol:

Parabolic Chart

Nirvana Chart

August Ethanol:

Initial Chart

News Analysis

President Trump has agreed to make a handful of changes to the federal ethanol mandate sought by oil and ethanol interests, according to senators who met with the President May 8th. Prominent among these senators was Senator Grassley of Iowa, a major corn-producing state. The changes are meant to reduce the prices of credits that oil refiners buy if they can't blend ethanol into their fuels -- a win for refiners -- and toi allow higher concentrations of ethanol to be sold year-round -- a win for the ethanol and corn industries.

The changes to the Renewable Fuel Standard (RFS) program, all of which Trump will reportedly seek to make through regulatory or executive action, will be the most concrete result from months of efforts by oil and corn-state Republican senators to push Trump to act. Allowing sales of higher ethanol concentrations "is a big, big win for corn farmers," according to Senator Cruz of Texas. He estimated it would splur 700 million gallons of new ethanol sales a year.

Senator Toomey of Pennsylvania said there are still important details to be worked out. Pennsylvania is considered an oil-interests state. The details are due to be fleshed out by the EPA and the USDA. The White House confirmed that Trmp would endorse the proposal to allow higher ethanol blends, but didn't confirm other details. White House spokesperson Lindsay Walters said, "A final decision has been made that allows E15 to be sold year-found, while providing relief to refiners. This outcome will protect our hardworking farmers and refinery workers."

Under the deal Cruz described, ethanol produced domestically and sold abroadwould for the first time count toward minimum sales volumes that the EPA sets each year under the RFS. That would reduce pressure for domestic fuel refiners to buy ethanol or blending credits, pushing prices down. But in return, the EPA would allow sales of gasoline with up to 15% ethanol, dubbed E15, year-round. Currently, sales are prohibited furing the summer months, due to air pollution concerns in warm months. Ethanol interests cheered the reported deal.

Starting with Memorial Day weekend, the Renewable Fuel Assocation (RFA) is gearing up for summer by launching a $1 million campaign called "Fuel Your Knowledge" to educate consumers about the proper use of ethanol-blended fuels in boats, motorcycles, lawn and garden equipment and other off-road engines. The effort is intended to correct the record on the use of these blends and educate consumers on what they can legally and safely use, highlighting the benefits of choosing ethanol blends. It is a well-known factd that small engine, marine, and motorcycle advocacy groups have declared opposition to E15 as a top priority and falsely argue that the ethanol industry is not taking proper steps to prevent "mis-fueling." Opponents of E15 say that move would limit consumer choice and increase prices at the pump.

Ethanol is being shipped out of the Port of Milwaukee this spring for the first time in a decade, raising environmental concerns. An ethanol spill could quickly mix with lake water, creating an environmental threat by removing oxygen fromt the water. Ethanol can still be flammable in water. The shipping company had to file a response plan with the U.S. Coast Guard. The idea is to help Wisconsin corn growers, helping them be more competitive by transporting some of the corn crop to Canada. About 16% of the 1.7 billion gallons of ethanol exported last year went through Great Lakes ports.

Industry and government officials from 17 countries in Asia and Oceania are met with members of the U.S. ethanol industry and U.S. officials in Minneapolis last week at the Ethanol Summit of the Asocia Pacific, focused on current and future prospects for expanded ethanol use throughout the region. 2017 was a record year for U.S. ethanol exports. The timing of the event was described as "prescient," as an unprecedented and troubling level of protectionism across the globe biofuel markets threatens to undermine the free flow of ethanol. The U.S. marketed 1.37 billion gallons, equivalent to 488 million bushels of corn, up 17% year over year in 2016-17.

Brazil is a major destination for ethanol exports and it has a "RenovaBio" program that establishes national and annual emissions reduction targets for transportation fuels that will likely receive a significant increase in biofuels consumption. The U.S. RFA wrote to Brazill that their program must accurately reflect the carbon intensity for all ethanol pathways, including imports. Under RenovBio, the average carbon intensity of gasoline must be reduced to 10.1% by 2028.

U.S. fuel ethanol has fallen victim to the expanding trade war between the U.S. and China. U.S. gasoline demand is also in the process of plateauing in response to rising petroleum prices. EThanol's U.S. operating environment could deteriorate given any uncertainty in Washington, D.C. Stocks (equities) of most U.S. ethanol producers in 2-18 such as those of Pacific Ethanol, Green Plains, REX American Resources, and The Andersons have all struggled in recent weeks. Only diversified Archer Daniels Midland stock in the group has risen. A tariff increase timing made it especially difficult for U.S. ethanol producers and exporters. Some of those comanies have made sbustantial recent investments in coastal ethanol terminals. U.S. ethanol producers have become increasingly reliant on export markets to maintain demand.

While there is good and bad news for ethanol, our assessment is that the E15 mandate is the most important factor suggesting that the news is generally positive.

Point & Figure Chart

156.0I                                                                  T  5/25
     I CME - Aug-18 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     I                                XO          X
     I                                XO          X
     I                                XO          X
     I                            X X XO      X   X
     I                            XOXOXO      XOXOX
     I                            XOXOXO      XOXOX
     I                            XOXOXO    X XOXOX
     I                            XO OXO    XOXO O
     I                            X    O  XOXOX
     I                            X    O  XOXO
     I                            X    O  XO
     I                            X    O  X
     I                        X X X    OXOX
     I                        X X X    OXOX
     I              X         X   X    O OX
     I              X         X          OX
     I              X   X X X X          OX
     I              X   X   X XO O       OX
     I              X   X   X X  O       OX
     I              X X X   X X          OX
     I            X X   X   XO           OX
     I            X X   X                OX
     I  X         X X   XO               O
     IX XO        X X   X
     IXOXO        X X   X
     IXOXOX       X X   X
     I OXOXO      X XO  X  O
     I OXOXO      X XO  X
     I O   O      X XO  X
     I     O      X XO  X
     I     O      XOXO  X
     I     O      XO O  X
     I     OX     X    OX
     I     OX     X    OX
     I     OX     X    O
     I     OX     X
     I       OXO  X
     I       OXOX
     I       O OX
     I         OX
     I         OX
     I         OXO
     I         OXO
     I         O O
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Zondr". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Zondr" for Ethanol (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system is working on a long-term buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value when contract value is multiplied by 100 is $290. Initial margin on a single contract is $6,480. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Zenith's former data supplier which went under provided futures data and options on ethanol futures data from the Chicago Mercantile Exchange. That exchange uses the symol "CT" which could be confused with cotton in data supplied by them. It is possible to trade options on ethanol futures on both the Chicago Mercantile and Chicago Board of Trade exchanges. We only were able to find ethanol options data for that traded on the CME and not the CBT. It may be difficult to find a broker that will let you trade ethanol because of thin trade and lack of interest. Zenith's current data supplier provides underlying futures data on ethanol only from the Chicago Board of Trade Exchange. This is the the exchange with the most popular open interest and largest trade volume in ethanol futures. However, our current data source does not provide data on ethanol options from any exchange.

There has been some confusion on our site because we had to make a data supplier switchover last December. Confusion was caused by a switchover from Chicago Mercantile pit (symbol "AC")to Chicago Board of Trade electronically-traded (Globex) data (symbol "ZK"). We did not conclude that these data differences were signficant enough to warrant worrying about them. However, when it comes to options, we would have to manually enter CME options data while using CBOT underlying futures data, using the CME website. Our management has concluded it is simply not worth the expenditure of time and effort to do this for ethanol futures.

Here is a table from the CME showing August Ethanol options data illustrating "the problem." (Note the volumes traded.)

Calendar Spread

What the Aug. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at 0.50 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 4.05 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be headed toward the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is down.
165.0|                                                                  T  5/25
 CBT - Aug-18 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
120.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.875
                         1 1 1 1 1 1 1                                
       5 6 6 7 7 8 8 9 9 0 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5           5
       2 0 2 1 2 0 2 0 1 0 1 3 1 2 1 2 1 2 1 2 1 2 1 2 1 2           2
       6 9 3 0 4 7 1 5 9 3 7 1 4 9 3 8 2 9 3 8 4 8 2 6 0 4           5

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 5/25 ).

Intraday Chart

                 Risk Versus Opportunity Report

                   ZKQ8    August Ethanol

                      High Price:  1.622
                   Current Price:  1.541
                       Low Price:  1.501

                            Risk:  0.051
                     Opportunity:  0.104

                    (O/R) Ratio =  2.025

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 + 1
Third System + 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table - 1
Other Factors + 1
Total + 11
Place 2 August Ethanol on a Buy Watch with stoploss @ -6.36 below the get-in point when recent price is represented as "154.10".