10-24-2018: December Ethanol: E-15 Blend Price Support Overrated

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

1     01
3     4     
6          5


Introduction

Because market predictability is what we seek, this appears to be a bad time to enter any U.S. markets. The fine and unpredictable hand of the President in exerting an enormous amount of control over markets with tweets and leaks to benefit his Wall Street buddies has polluted virtually every stock and commodities market. Ethanol is no exception. Here he expands the use of E-15 Ethanol year round (15% ethanol mixture in gasoline) to help part of his "base", namely Iowa corn farmers find a market for their grains used to produce ethanol, allowing greater use of it in the Renewable Fuel Standards. One problem with all of this is that some automobile manufacturers will not honor warranties regarding engine wear and damage caused by the use of E-15 grade fuels. If your car is older than 2001, for sure if you "accidentally" pour into it E-15 fuel, your engine 'WILL be damaged. Senator Chuck Grassley might be pleased with all of this, but we all know what kind of a cockroach he turned out to be during the Kanavaugh hearings.

The President blurts out promises one day, does the opposite the next, lies with impunity about facts and figures he makes up as he goes along. Would want to enter a market subject to such vagueries. Republicans apparently think so, but market participants have great skepticism now about what the EPA will do with mandates which are more aimed at politics than any sort of environmental considerations. At any rate, news suggests that whatever government blurts out regarding use or non-use of E-15 ethanol blend standards will jolt the ethnaol markets up and down to the extent that insider advantages leave us somewhat at a loss as to how to react. Acting on the principle that markets abhor uncertainty, which is what our President gives us, we think ethanol prices are indeed entering a blood bath. Would you want to take a chance on E-15 in your car?


Intermarket Analysis

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




Parabolic Chart

December Ethanol:

Parabolic Chart


Nirvana Chart

December Ethanol:

Initial Chart


News Analysis

"Seeking Alpha" released an article on October 22nd entitled "Ethanol's BloodBath." It summarizes the situation as China imposing a 70% import duty in July hurting export demand among other things. It also states that ehanol's production capacity has already been overbuilt. There are record high inventories. Industry complains of Archer Daniels Midland saturating the Chicago market. ADM is better equipped financially to deal with a sustained period of losses than its smaller competitors. It concludes there is no recovery in sight until some production disappears. There are virtually now no exports to China. Green Plains, Inc. is one of the largest ethanol producers and recently announced that it is selling a substantial fraction of its production capacity. Ethanol prices are at the lowest in over a decade.

Despite the fact that gasoline prices have been strong as of late, ethanol prices continue to sink.

Marathon Petroleum is now considered the largest U.S. oil refiner after recent acquisitions. It is weighing a plan to start sales of high-ethanol gasoline at its stations in Minnesota. The Findlay, Ohio company is considering selling its E-15 blend (15% ethanol). Marathon uses a lot of corn in its ethanol production process which is a popular idea in Minnesota. President Trump announced he is allowing year-round selling of E-15, not previously allowed. The EPA is planning to make a formal proposal allowing the change in February. Minnesota is subsidizing installing blending apparatus at filling stations to accommodate this.

There was a brief rally in ethanol producer stocks, like those of Green Plains, REX American Resources, and Pacific Ethanol, but this quickly gave way to skepticism that it would do much to increase ethanol demand in the U.S.

CropEnergies AG, a European ethanol producer, announced plans to idle production at its Wilton, U.K. plant at the end of November due to difficult market conditions and falling ethanol prices. During the second quarter, the company produced 404,000 cubic meters of ethanol, down from 567,000 during the same period last year. The company currently operates four plants, the others in France, Germany, and Belgium.

UNICA, the Brazilian sugarcane industry association, announced that the volume of sugarcane processed by mills in the south-central region of Brazil was down in late September, Sales of anhydrous ethanol, however, remained high.

A new report from the USDA found that the animal feed produced by U.S. ethanol plants, known as dried distillers' grains or "DDGS", is replacing even more corn and soybean meal in livestock and poultry feed rations than previously thought. This could be supportive for ethanol prices by drawing off some of the production otherwise glutting the ethanol market.

Also supportive to ethanol prices was an EPA decision to reject an Ichan proposal to let oil refiners off the hook for complying with the federal ethanol mandate. This was one time Trump kept a promise to leave the ethnanol mandate intact and support farmers in Iowa and America's heartland. Public Citizen filed a lobbying complaint with both houses of Congress, and eight Senate Democrats led by Elizabeth Warren sent letters to the SEC, EPA, and CFTC calling for an investigation into Ichan's dealings and insider trading.

U.S. oil and natural gas producers are shattering records, recently overtaking Saudi Arabia and Russia to lead the world in crude oil production. This resulted in shielding U.S. consumers from instability overseas. But because federal regulations keep forcing more ethanol into the fuel supply, drivers may haveto spend more on auto repairs and mechanics because higher-ethanol fuels like E-15 can damage engines and fuel systems. E-15 is also not compatible with lawnmowers, motorcycles, ATV's, power equipment and boats, and a number of auto makers are not honoring warranties covering damage when it is caused by E-15. Most retailers that sell E-15 have seen minimal sales of these products. Ethanol has less energy than gasoline, forcing drivers to fill up more often. On top of that, the Congressional Budget Office projects that prices could jump substantially unless the Renewable Fuel Standard mandates for market-distorting impacts are reigned in. Environmental activiists do not favor increased ethanol usage when it causes higher prices for competing uses for grains such as foods. RFS reform is one of the rare issues that enjoys support from both Republicans and Democrats in Congress.

The price of ethanol has historically traded at a premium of between 20% and 100% over that of gasoline on an energy-equivlaent basis, with the highest premiums prevailing during times of low gasoline prices, as in 2015-17.

The AAA, EPA, and oil companies declare that any cars made before 2001 should not use E-15 ethanol blends, and if they accidentally fill their tanks with that blend, engines will be damaged. 90% of all cars still on the road could safely use E-15 it is declared. E-15 is typically 5 cents to 10 cents cheaper per gallon than E-10, meaning drivers could save $1 to $2 when filling up their tanks at the pump. E-15 could reduce fossil fuel production and thus greenhouse gas emissions. It would be produced locally leading to fewer fossil fuel imports. But fertilizers used in corn production could make up for the savings in greenhouse gasses. The EPA has long banned sale of E-15 during the summer due to concerns that it contributes to smog.


Point & Figure Chart


Enter the Telemet Symbol: ACZ8

Printer or Console Output (P/C)? C
187.0I                                                                  T 10/22
     I CME - Dec-18 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     I                                    X
     I                        X           XO
     I                        XO          XO
177.0I__________X_____________XO__________XO________X__________________________
     I          XO            XO          XO        XO
     I      X X XO  X         XO        X XO        XO
     I      XOXOXO  XO        XOX       X XOX       XO
     I      XOXOXO  XOX X     XOXOX     X XOXO      XO      X
167.0I______XOXO_O__XOXOXO____XOXOXO____X_XOXO__X___XO____X_XOX________________
     I      XOX  O  XOXOXO  X XO OXO  X XOXOXO  XOX XO  X XOXOXO
     I      XO   OX XOXOXO  XOX  O O  XOXOXOXO  XOXOXO  XOXOXOXO
     I      X    OXOXOXO O  XOX    O  XOXOXO OX XOXOXO  XOXOXOXO
     I    X X    OXOXOX  OX XO     O  XO O   OXOXO OXOX XOXO OXO      X X
157.0I____XOX____O_OXOX__OXOX______O__X______OXOX__O_OXOXOX__O_O______XOXO_____
     I  X XOX      O OX  OXOX      OX X      O OX    OXOXO     OX     XOXO
     I  XOXOX        OX  O OX      OXOX        OX    O O       OXO    XOXOX
     IX XOXO         OX    OX      OXOX        O               OXO    XOXOXO
     IXOXOX          O     OX      OXO                         OXOX   XOXOXO
147.0IXOXOX________________OX______OX__________________________O_OXOX__O_OXO___
     IXOXOX                OX      O                             OXOX    O O
     I OXO                 OX                                    OXOX      O
     I O                   OX                                    OXO       O
     I                     O                                     OX  O     O
137.0I___________________________________________________________OX________O___
     I                                                           OX        OX
     I                                                           O         OXO
     I                                                                     OXO
     I                                                                     O O
127.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
                       11111           111111                   111
       12223344555666790012215566777889001122111123334555677889911211113466899
       20221101002012100200120112011130010212011310011112201011201200012102002
       82373977160413599621523768639619341149379151359586239463134235926167840
The above chart is giving a conventional sell signal.


Cyclical and Seasonal Factors

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

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Commodit". It is giving a sell signal. It comes bundled in with a Winters Time Forecast which is also giving a sell signal.

Internal Printout 1 Internal Printout 2

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

Results


Third System Confirmation

Our third system has just triggered a 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


Margin

Our point value is $290. Initial margin on a single contract is $1,925. Use of options is not advised due to lack of availability of suitable choices.


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-short.

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 a change in major trend to up is imminent at a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

The only ethanol options we could find were CBT "CVR - Chi Ethanol Avg Options" which were so thinly-traded with minimum available strikes as to be unadvisable to be used.


Calendar Spread

What the Dec. - Jun. 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 -8.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -12.50 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is down.
166.0|                                                                  T 10/22
 CME - Dec-18 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     |
     |
     |
161.0|PP_______________________________________________________________________
     |KKPP
     |KKKKKKPPP
     |HJJKKOOPPP
     |BHJJJJKKOOOPPQ
156.0|BHJJJJJKLNNNOOOOOOPPQQQ__________________________________________________
     |BBJJKLLLMMNNNNOPPU
     |BBHLLLLMMNNNNNOOOQQQU
     |ABBBBHLLLMMNQQSUU
     |AABBBBHHHLLLMQQQRSUUUU
151.0|AABBEFGGHHLLLLMQQQSUUU___________________________________________________
     |AAAABGGHHLLLMQRRSSSUUUUUU
     |AAAAABCCGHHLMMRRRRSSSSSSSTTUUUU
     |AABBCCCEFGGHHHMMRRRRRSSSSSSSTTTTTUUU
     |AAAABBCCCCFGGMMRRRRRRSSSTTTTTTTU
146.0|ABCCCFFMMRRSSTTTTTU______________________________________________________
     |CCCDRSSTTU
     |CCCDRVVV
     |CCCCCDDFGGVVVV
     |CCCDDEFVVVVVVVV
141.0|DEFFVVVVVVV______________________________________________________________
     |DEEEFFFVVVV
     |DDDEEFFVV
     |DDDDEFV
     |DDDEVWWWW
136.0|DDDWWWWWWW_______________________________________________________________
     |DDWWWWWW
     |DWWWWYYZZZ
     |DDEEWWWWWWXXYYYYYYZZZZZZZ
     |DDWWWWXXXXXYYYYZZZ
131.0|WWXXXXXYYZZ______________________________________________________________
     |WWXXXXYZ
     |WWXXXXXYYZZZ
     |WWXYYZ[[
     |W[   <<<
126.0|_________________________________________________________________________
     |
     |
     |
     |
121.0|-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=-0.056
       1 1 1 1 1                                       1 1           1
       0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 5 6 6 7 7 8 8 9 9 0 0           0
       2 0 1 0 1 0 1 0 1 0 1 0 1 0 1 3 1 2 1 2 0 2 0 2 0 1           2
       3 3 7 4 8 3 8 1 6 5 9 3 7 1 5 0 3 7 2 6 9 3 7 1 5 9           2


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 10/22 ).

Intraday Chart





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 - 5
Place 7 December Ethanol on a Sell Watch with stoploss @ +6.36 above the get-in point when recent price is represented as "128.50".
____________________________________________________________________________________________________________________________________________R.S.