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Interesting question.

Right now the market is very nervous about supply security.  Clearly there is no front end shortage which is easily proven by looking at the shape of the curve.
Aug futures closed at $74 while Jan 2007 are $77.  In a tight market the premium is at the front.

The crude price is being held up in fear that one wrong move in the AG or a Nigerian revolt or Venz political problem or Mexican political problem and we will have a real shortage.  I don't see the price retracing too far until we see crude backing up such that production is trimmed back somewhere other than in Saudi.  I believe it would take a demand drop of 5-10% worldwide to seriously crimp Saudi production enough that they use the price weapon to enforce shared sacrifice on the other OPECers.

Gasoline prices are a little different.  Right now the gas crack is wide -- approaching $20/bbl compared to $6 this time of year in the 90's.  That premium would evaporate with as little as 1-2 MMBD of alternatives hitting the market (about 10%-20% of US mogas demand).   At that level you'd be backing out almost all our imports of gasoline and blending components.  Those export refiners would sell down the US market to their marginal cost of production.  

About 1 MMBD of MTBE has been backed out of the mogas pool in the last couple of years.  That's part of the supply problem.

Most of the ethanol plants are pretty small.  That industry talks in terms of 50 million gallons/year plant size.  Or 1.2 MM bbls/year which is just 3300 bbls/day.  Small potatos in the US gasoline mkt.

by HiD on Sat Jul 8th, 2006 at 08:49:28 PM EST
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