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AEGIS Hedging August RIN Report

August 18, 2023 | Zander Capozzola

RIN prices trended lower over the course of August as the market reacted to a narrowing soybean oil-to-heating oil (BOHO) spread. The mounting oversupply of D4 credits weighed on RIN values, while D3 losses were less pronounced.

The BOHO spread narrowed off the widest level in over a year at $2.66/gallon on July 25, down to just $1.80/gallon in the second week of August. D4 RINs led losses driving renewable D6 and advanced D5 credits lower across all vintages. A stronger renewable diesel margin environment also weighed on D4 markets as conventional diesel strength and rising LCFS credit values boosted returns.

D3 losses were less pronounced as insufficient RIN generation, and the lack of a Cellulosic Waiver Credit (CWC) underpinned the market. A move by Democratic members of congress to press the EPA to implement the controversial eRIN program added bearish undertones to the marketplace. The EPA will hold a webinar on RFS Set Rule implementation on September 7.

The US Energy Information Administration (EIA) raised its 2023 RD production forecast by 2.5% to 165,000 Bbl/d from 161,000 Bbl/d in July. RD production for 2024 was forecast at 218,000 Bbl/d, down from July’s estimate of 219,000 Bbl/d. The Administration cited lower plant utilization rates and more plant cancellations in response to the June 21st release of the Environmental Protection Agency’s (EPA) final Renewable Fuel Standard rule as a reason for trimming forecasts this summer.
The EPA denied 26 small refinery exemptions covering the 2016-2018 and 2021-2023 compliance years on July 14. The move was consistent with the EPA’s blanket SRE denials under the Biden Administration. The two remaining SREs are for the 2018 compliance year.
July total RIN generation fell to 1.98 billion credits, down by more than 80MM credits, or 3.9%, from June.
D4 RIN generation slumped 44MM credits, or 6.4%, from the month prior as renewable diesel and biodiesel margins both deteriorated throughout the month. Domestic and foreign renewable diesel generation accounted for 59% of total D4 generation, up from last month’s 56%. Sustainable Aviation Fuel (SAF) accounted for 0.4% of total D4 generation, down from last month’s 0.6%. Total D4 RIN generation of 4.32 billion credits accounted for 85% of the final advanced obligation and is on pace to exceed the obligation by 2.31 billion credits.
Total D6 generation came in at 1.27 billion credits taking the total for the first seven months of the year to 8.56 billion RINs. D6 generation is on pace to fall approximately 568 million RINs short of the 15.25 billion gallon mandate for 2023.
Total RIN generation for the first seven months of 2023 came in at 13.39 billion accounting for 63% of the total 2023 final obligation.
D3 RIN generation fell by 10.8 million RINs, or 15%, from the month prior to just under 60 million RINs. D3 generation totaled 375MM for the first seven months of the year, accounting for only 45% of the final 2023 cellulosic obligation. D3 RIN generation is on pace to fall short of the 840 million gallon mandate for 2023 by roughly 200 million credits, or 24%.
July RIN generation data housed numerous revisions to 2022-2023 production levels. D6 downward revisions totaled 748,500 spanning 2022-2023. D4 upward revisions totaled 538,789 with the majority in 2022. D3 upward revisions totaled 133,914,267 credits with the bulk in December 2022, while D5 upward revisions came in at 4,782,890 with most taking place in February 2023.
Premiums for 2022 vintage RINs over 2023 credits have narrowed materially, making carryover compliance a more attractive option for meeting 2023 compliance.

Calendar:

September 7, 2023: RFS Set Rule Implementation Webinar
December 1, 2023: Compliance Reporting Deadline for 2022
January 31, 2024: Three-year Registration Update
March 31, 2024: EPA Expected Deadline for 2023 Compliance
June 1, 2024: Attest Engagement Reporting Deadline for 2022
March 31, 2025: EPA Expected Deadline for 2024 Compliance

Relevant News:

PBF Energy Inc. announced August 3 that its St. Bernard renewable diesel facility in Chalmette, Louisiana, is operational. This includes a pretreatment unit (PTU) at the 320MM gallon per year facility. St. Bernard Renewables (SBR) is a 50-50 JV with Italian oil giant ENI.
A group of refiners plan to file a lawsuit challenging the EPA’s rejection of SREs to 15 refiners. Under the RFS, a small refinery is defined as a refinery with a capacity of 75,000 Bbl/d or less that can prove disproportionate economic harm.
The US Energy Information Administration (EIA) raised its 2023 RD production forecast by 2.5% to 165,000 Bbl/d from 161,000 Bbl/d in July. RD production for 2024 was forecast at 218,000 Bbl/d, down from July’s estimate of 219,000 Bbl/d. The Administration cited lower plant utilization rates and more plant cancellations in response to the June 21st release of the Environmental Protection Agency’s (EPA) final Renewable Fuel Standard rule as a reason for trimming forecasts this summer.
Twelve broke ground on a commercial scale power-to-liquid eSAF facility on July 11. The facility is expected to produce 5 Bbl/d, or approximately 40,000 gallons per year, by mid-2024, with plans to rapidly increase capacity. Alaska Airlines, Microsoft, and Shopify already have offtake arrangements with the Moses Lake facility.
HF Sinclair lost a lawsuit seeking the return of RINs used to cover 2018 compliance for its 75,000 Bbl/d Sinclair, Wyoming, refinery, according to Argus Media Inc. The refiner had sought a small refinery waiver from the EPA which was denied in 2019 and upheld in 2022. The Renewable Fuel Standard identifies small refineries as facilities producing no more than 75,000 Bbl/d. A refiner can also apply for a waiver by demonstrating disproportionate economic harm.
Tidewater Renewables announced it is just weeks away from starting production at its 45 million gallon per year Prince George renewable diesel facility in British Columbia, Canada. The facility will earn credits under the federal Clean Fuel Regulation as well as British Columbia’s LCFS. The facility will become the first standalone RD facility in Canada.
Cargill announced it has put its Missouri soy crush facility on hold, citing market dynamics. The 62mn bushels per year facility was originally slated for completion in 2026.
The Biden Administration granted a waiver for the sale of E15 throughout the summer driving season. The blend requires a 1.0 RVP waiver to be used during the summer months as ethanol has a high RVP around 17 to 18 psi making it more likely to evaporate. The move opens the door for additional D6 RIN generation throughout the summer months. The EPA issued a summer waiver for E15 last year in response to market disruptions stemming from the Ukraine conflict.

RIN markets fell over the course of the first half of August as a narrowing BOHO spread and D4 oversupply spurred selling. Rebounding renewable diesel margins weighed further on RIN markets. The D6 market tracked D4 credits lower with the D4/D6 spread narrowing to 0.4c/RIN on average. A narrower D4/D6 spread indicates tightness in D6 supply. In the absence of a sufficient supply of D6 credits, D4 and D5 credits from the advanced category can be used to satisfy compliance obligations.

We expect this spread to continue to trend lower and revert toward flat as the D4 RIN will play an increasing role in compliance with the total renewable fuel mandate. Current D4 RIN generation is on pace to exceed the advanced mandate by 2.31 billion credits, while D6 generation is on pace to fall 586 million credits short of the mandate. Barring an upward adjustment to the advanced category, D4 RINs will make up an increasing proportion of the RIN bank moving forward.

The 2023 vintage D4 market reached as low as $1.4280/RIN as oversupply weighed on markets. The BOHO bottomed out at $1.80/gallon on August 9 before widening out to $1.99/gallon by midmonth. The BOHO spread reached $2.66/gallon on July 25, the widest spread in 14 months.

California’s Low Carbon Fuel Standard (LCFS) credits firmed ahead of an August 16 workshop covering updates to the California Transportation Supply Model (CATS). Prompt credits reached as high as $82/t on August 8 and traded around $81.50/t following the public workshop. LCFS credits, along with D4 RINs are the main compliance vehicles to protect renewable diesel and biodiesel margins. D4 RINs fell more than 8c/RIN, or 5.23%, on average in the first half of August from the month prior.

The D6 market shed 7.8c/RIN, or 5.0%, while the D4/D6 spread narrowed to just 0.4c/RIN D6 RIN generation remains on pace to fall well short of mandated volumes. The federal granting of a summer waiver for E15 sales opens the market to additional D6 RIN generation over the summer months. Ample D4 RINs are available to cover the D6 compliance shortfall which will keep the D4/D6 spread near parity.

Losses were less pronounced in the D3 market as tight supply and the lack of a CWC buttressed prices. An effort by Democratic members of Congress to spur the EPA to implement eRINs added bearish undertones to the 2023 D3 market. The 2024 vintage D3 RINs maintained value, with the C23/C24 spread narrowing from 38c/RIN in early July to just 19c/RIN on August 16, a 50% decline.

D3 RIN generation held over the upper limit of the five-year average in July, yet total generation to date only meets 45% of the final 2023 mandate. With no Cellulosic Waiver Credit in place and a record low RIN bank, we expect D3 RINs to remain at elevated levels barring implementation of eRINs.

The 2022 vintage market posted more pronounced losses, narrowing inter-vintage RIN spreads, and making carryover compliance a more attractive option.

The 2023 D4/D6 spread spent the bulk of the first half of August at 0.2c/RIN through reached as wide as 0.75c/RIN. D4 markets faltered as biodiesel and renewable diesel margins gained ground.

A wider D4-D6 spread implies a looser D6 supply as the D4 credit is the next vehicle of compliance in the absence of sufficient D6 RINs or the ability to use carryover credits. Conversely, a narrow D4-D6 spread implies a tight supply of D6 RINs. The theoretical cap on the spread is parity though D6s have traded at modest premiums to D4 credits in extreme circumstances.

The inter-vintage D4 RIN spread narrowed 2.3c to 3.2c/RIN on average as losses in the 2022 vintage D4 credits outpaced 2023 D4s. The spread narrowed from 4.5c/RIN at the start of the month to just 1c/RIN by August 17.

D4 RIN generation slumped 6% from record June production to 635 million credits as weaker renewable diesel and biodiesel margins curbed production. Downtime at renewable diesel facilities for planned catalyst changes and maintenance further reduced D4 generation.

The 2022-2023 D6 spread narrowed by 0.5c, or 10%, to 4.2c/RIN from 4.7c/RIN the month prior. The spread reached a low of 3.3c/RIN during the second week of August.

The 2022 D4-D6 spread narrowed sharply, shedding 3.2c, or 42%, to 3.2c/RIN on average during the first half of August. The spread reached as narrow as 0.1c/RIN on August 17. The spread averaged 5.5c/RIN in July, 9.6c/RIN during the month of June, and 9.8c/RIN during the month of May.