Gasoline may be about to lose its premium over ethanol, as US authorities relax blending restrictions and its drivers take to the roads, Societe Generale has said.

Ethanol prices are being held back by strong production, which has taken output to the so-called "blending wall" - the 10% limit that US authorities allow in mixtures of the biofuel with conventional petrol.

"Production has risen so strongly… that the demand has been unable to absorb part of the incremental output, as shown by rising stocks," SocGen analyst Emmanuel Jayet said.

On the move 

However, the blending wall was set to shift.

The summer driving season would, by raising gasoline consumption to some 9.3m barrels a day in high summer from 8.6m barrels a day in February, enable blenders to dig into ethanol inventories.

"This will mechanically allow ethanol consumption to grow by approximately 60,000 barrels per day, enough to absorb the recent stock build-up," Mr Jayet said.

Furthermore, the US government is widely expected to lift the 10% ceiling on ethanol blends to at least 12%, and potentially 15%.

"An increase to 12% would allow [ethanol] consumption to grow by approximately 150,000 barrels per day."

'Normal relationship'

Such a move would be "more than enough to restore a normal relationship between gasoline and ethanol, with the gasoline/ethanol spread going back to around breakeven", Mr Jayet said.

The analysis suggests that the narrowing in the premium to about $0.40 a gallon, from more than $0.80 a gallon last month, is only half way through.

Indeed, in theory, gasoline should trade at a discount of about $0.20 a gallon to ethanol, as it did early last year, given the tax incentives of $0.45 a gallon which apply to the biofuel.

Corn-gasoline spread 

An alternative way for investors to play the closing premium would be to bet on the spread between gasoline and corn, the major feedstock for ethanol plants, he added.

This spread could narrow to $0.50 a gallon, from current levels of $0.65 a gallon, even factoring in some likely improvement for ethanol refiners' margins as demand for the biofuel improves.