RIN prices recovered off the lowest levels in over four and a half years as the BOHO spread rose more than 75% month-over-month to $1.00/gallon. D4 prices recovered a quarter of their value over the course of the first three weeks of March as the BOHO spread reached the highest level in nearly three months, while the D6 market narrowed its discount to concurrent D4 credits. The D4 market trimmed its year-to-date losses to 26% from 46% the month prior.
D4 strength supported renewable diesel margins between 6-18%, except for soybean oil returns which retreated 8% to near breakeven territory. Diesel prices peaked at nearly $2.79/gallon March 18 before slumping under the $2.68/gallon mark on weak seasonal US domestic consumption and anemic export demand. The BOHO spread widened to $1.00/gallon as strength in the front-month CBOT soybean oil contract met with renewed weakness in Nymex ULSD. A wider BOHO spread implies weaker biodiesel margins, which is bullish the D4 RIN all else equal.
The March 21 release of February 2024 RIN generation showed 2.02 billion credits, up 7% from the January total, and 4% off the record 2.17 billion credits from December 2023. February RIN generation was up 21% on year-ago levels.
D4 generation was up 42% year-over-year, accounting for the bulk of the increase. D4 generation accounted for 36% of all credits generated during the month of February, stable from February’s share.
The D3 market rose 30c/RIN over the course of March following the EPA’s rejection of AFPM’s petition for a partial waiver of the 2023 cellulosic biofuel obligation. Obligated parties will need to resort to carrying over deficits to achieve compliance, increasing demand for 2024 vintage D3 credits.
- February total RIN generation came in at just under 2.02 billion credits, up 7% from the January total of 1.89 billion credits, and just 4% off the December 2023 record of 217 billion credits. February RIN generation was up 21% on year-ago levels.
- D4 generation rose to 732 million credits, up 8% on January levels, and up 42% on year-ago levels. February D4 production marked the fourth highest level on record.
- Domestic renewable diesel production accounted for 51% of total D4 output, down from 56% the month prior. Domestic renewable diesel production accounted for 54% of total D4 out in December. Foreign renewable diesel production made up 13% of total D4 generation, up from 6% the month prior and 9.7% in December 2023. Domestic and imported biodiesel accounted for 36% of the February total, steady from the month prior and up from 35% from December 2023. Just over 2 million D4 credits were generated from domestic SAF production, accounting for less than one percent of the February total. No foreign SAF production was reported for February. January saw a record 15 million D4 credits were generated across domestic and foreign SAF production, accounting for 2.2% of the January total.
- D3 RIN generation came in at 62 million credits, up 2% on year-ago levels and in line with market expectations. Total 2023 cellulosic RIN production came in at 774.9 million credits, 65 million credits, or 7.7% short of the final cellulosic mandate. The EPA used an aggressive 25% growth rate to set the 2023 final cellulosic mandate.
- February RIN generation data housed a minor upward revision to 2022 D6 generation for the month of December totaling 124,855 credits. Upward revisions to 2023 production totaled 6,464,459. The prior month saw a minor upward revision to 2022 D6 generation for the month of December totaling 255,368 credits.
- Upward revisions to D4 generational totaled 77,466 spanning from November 2022 through January 2024. The month prior was D4 RIN upward revisions totaled 1,321,353 spanning from May 2022 through December 2023. Upward revisions for 2023 totaled 29,089 credits.
- January 2024 D5 production was revised higher by 2,751,635 credits, while March 2023 production was lifted by 3,545 credits. The month prior saw D5 upward revisions of 3,622,169 spanning from September 2022 to December 2023.
- January 2024 D3 generation was revised up to 5,919,722 credits. The month prior saw D3 upward revisions of 70,498,439 credits ranging from December 2022 through December 2023. December 2023 was revised 70,478,217 higher, accounting for preponderance of the gain.
Calendar:
- March 31, 2024: EPA Deadline for 2023 Compliance
- April 4, 2024: EPA Biogas Regulatory Reform Rule Webinar
- April 10, 2024: CARB Public Workship on LCFS Rulemaking
- June 1, 2024: Attest Engagement Reporting Deadline for 2022
- March 31, 2025: EPA Expected Deadline for 2024 Compliance
Relevant News:
- EPA denied the American Petrochemical & Fuel Manufacturers’ (AFPM) petition for a partial waver of the 2023 cellulosic compliance year. The agency cited sufficient D3 RIN supply using carryover RINs and carrying deficits to comply with the 2023 obligation and dismissed AFPM’s claim of severe economic harm. EPA estimated 2023 D3 generation of 775MM credits and 75MM 2022 carryover RINs against an obligation of 850MM. EPA did not account for greater RIN demand resulting from SRE approvals in its March 15 response.
- GREET guidance has been delayed by a few weeks as the new greenhouse gas model awaits approval from the Treasury Department, USDA head Tom Vilsack said on March 1, according to Argus Media. The Biden administration was supposed to announce new guidance by March 1, with industry hopes pinned on a viable pathway for corn-based ethanol-to-SAF. Vilsack confirmed the model would be used to determine emissions for ethanol-to-SAF, according to Argus Media. The adjustment to the Department of Energy’s GREET model aims to ensure crediting for farming practices which reduce environmental impact like cover crops and no-till farming.
- The EIA trimmed is 2024 renewable diesel production and consumption forecasts in its latest Short-Term Energy Outlook. The agency forecast renewable diesel production of 218,000 Bbl/d in 2024, down 3.5% from the previous month’s estimate of 226,000 Bbl/d. The outlook for 2025 production was unchanged at 290,000 Bbl/d. The EIA trimmed 2024 demand to 242,000 Bbl/d from its February estimate of 249,000 Bbl/d, marking a month-over-month decline of 2.8%. The demand forecast for 2025 was lifted by 2,000 Bbl/d to 306,000 Bbl/d. Renewable diesel imports in 2024 were stable at 24,700 Bbl/d, while the 2025 outlook dropped to 16,000 Bbl/d.
- California postponed a hearing on proposed LCFS amendments originally scheduled for March 21. CARB aims to hold a public workshop on April 10, 2024. The move comes after the state’s Environmental Justice Advisory Committee (EJAC) urged the Board to delay its LCFS vote until July 2024 as the current plan relies too heavily on biofuels, out-of-state biogas, and biogas from dairy digesters. California LCFS credit markets tracked higher on expectations CARB is pursuing very stringent CI targets and considering possible limitations to renewable fuels and biogas.
- The 5th US Circuit Court of Appeals turned down a request to reconsider its November 22, 2023, decision to block SRE denials for six small refineries. Biofuel industry groups Growth Energy and Renewable Fuel Association sought a rehearing on the grounds that the denials should be brought before the DC Circuit Court. The EPA has received 12 SRE petitions since the 5th Circuit’s November ruling.
- PBF reported 12,000 BBl/d of RD production during the fourth quarter 2023, down from 17,000 Bbl/d in the third quarter due to a catalyst change. St. Bernard Renewables (SBR) is a 50:50 joint venture with Italian major ENI located at PBF’s Chalmette, Louisiana, refinery. The facility has a nameplate capacity of 20,000 Bbl/d, meaning SBR was running at just 60% of capacity during the fourth quarter.
- Chevron REG is closing two biodiesel facilities indefinitely citing poor market conditions. The 2,000 Bbl/d Madison, Wisconsin, facility and 3,000 Bbl/d Ralton, Iowa, plant come as renewable diesel and biodiesel production has outpaced mandate volumes established by the EPA’s 2023-2026 ‘Set Rule.’ The resulting deterioration in the margin environment was bound to lead to closures of less economic biodiesel producers. RD producers earn 1.7 D4 RINs per gallon compared to 1.5 D4 RINs per gallon for BD. The Madison, Wisconsin, facility is scheduled for mid-April 2024 closure.
- Diamond Green Diesel’s Q4 operating income fell by 68% amid lower RD margins. RD sales averaged 3.8MM gal/d in Q4 2023, up 52% from the same period last year. Valero said its 470MM gal/y Port Arthur SAF expansion is on schedule for completion by Q1 2025.
- The 5th US Circuit Court of Appeals turned down a request to reconsider its November 22, 2023, decision to block SRE denials for six small refineries. Biofuel industry groups Growth Energy and Renewable Fuel Association sought a rehearing on the grounds that the denials should be brought before the DC Circuit Court. The EPA has received 12 SRE petitions since the 5th Circuit’s November ruling.
- The US Court of Appeals for the 11th Circuit dismissed a SRE challenge by Hunt Refining on January 11, saying the case should be heard by the US Court of Appeals for the DC Circuit. Biofuel industry group Growth Energy welcomed the decision as CEO Emily Skor responded “EPA’s denials of these SRE petitions were ‘nationally applicable’ and have nationwide effect, and challenges to the denials should only have been brought in the DC Circuit.”
- The 5th US Circuit Court of Appeals ruled to block denials of SREs for six refineries on November 22, 2023. The SREs cover Calumet’s 57,000 Bbl/d Shreveport, Louisiana refinery, Placid Refining’s 75,000 Bbl/d Port Allen, Louisiana refinery, Ergon Refining’s 26,500 Bbl/d Vicksburg, Mississippi refinery, Ergon’s 23,000 Bb/d West Virginia refinery, CVR’s 74,500 Bbl/d Wynnewood, Oklahoma refinery, and Allegiance Refining’s 21,000 Bbl/d San Antonio refinery. The court’s decision said the EPA’s blanket SRE rejection was “impermissibly retroactive; contrary to law; and counter to the record evidence.” The decision will add a bearish undertone to an already oversupplied marketplace, save for D3 credits.
- The US Treasury Department issued guidance on December 15, 2023, clarifying how SAF will be eligible for tax credits worth as much as $1.75/gallon under the Inflation Reduction Act. The SAF tax credit is only issued to fuels which reduce lifecycle GHG emissions 50% below petroleum-derived jet fuel. The Treasury Department plans to calculate emissions intensity using a modified version of the GREEET model planned for March 1, 2024. The adjusted GREET model could open the door for corn-based ethanol to contribute to SAF supply.
- Federal judges defended the EPA’s approach to setting the 2020-2022 blending mandates. US refiners have complained blend requirements were too high based on how the EPA adjusted blending targets to account for projected Small Refinery Exemptions (SREs). The EPA is also facing a separate lawsuit for its 2022 cellulosic biofuel requirement, with biofuel groups arguing that targets were set too low based on projections of actual production and not accounting for the availability of carryover credits for compliance. Refiners have also filed a series of lawsuits in the DC Circuit court challenging the EPA’s move to reject all outstanding SREs this year.
RIN markets rebounded off the lowest levels in over four and a half years as the BOHO spread surged more than 75% to $1.00/gallon. D4 credits recovered nearly 12c/RIN, or 25% over the course of March. D6 credits rose 12c/RIN, or 26% over the course of the month, narrowing their spread to concurrent D4 credits. D4 RINs have shed 20c/RIN, or 26% since the start of the year.
Renewable diesel margins firmed between 6-18% on RIN strength, except for soybean oil margins which slipped 8% on feedstock strength. Diesel prices peaked at nearly $2.79/gallon March 18 before slumping under the $2.68/gallon mark on weak seasonal US domestic consumption and anemic export demand. UCO remained the strongest returning feedstock at $2.00/gallon by March 26, followed by BFT at $1.52/gallon. SBO margins reached as low as $0.70/gallon on March 12 before recovering to $0.97/gallon by March 26, down 8% over the course of the month.
The BOHO spread reached the $1.00/gallon mark for the first time in nearly four months as gains in the front-month soybean oil contract built on renewed weakness in Nymex ULSD. The BOHO spread reached a four-year low of $0.56/gallon during the month of February. RIN markets proved responsive to the widening BOHO spread with the spread between RINs generated by renewable diesel averaging just 1.7c over the BOHO spread during the month of March. A wider BOHO spread implies weaker biodiesel margins, which is bullish the D4 RIN all else equal.
The D6 market took its cues from a strengthening D4 market, with the D4/D6 spread narrowing to just 0.5c/RIN for the bulk of the month from 1c/RIN the month prior. We believe D4 RINs were holding a more substantial premium to D6 despite relative oversupply of D4 credits was reflected of the added value for the D4 RIN to fulfill multiple obligations relative to the D6 RIN which can only meet the renewable fuel requirement. The lack of a supplemental standard for 2024 and 2025 compliance is also bearish the D6 relative to the D4.
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. The recent narrowing of the D4/D6 spread indicates a modest tightening of the D4, D5, and D6 marketplace.
In last months’ issue we indicated that a shortfall in 2023 D6 RINs should drive the 2023 D4/D6 spread to trend toward parity. Total 2023 D6 RIN generation was revised to 14.831 billion credits from 14.825 billion credits, 429 million credits, or 2.75% short of mandated volumes. We see this dynamic carrying over into the 2024 vintage marketplace.
The D3 market traded higher following the March 15 EPA denial of AFPM’s partial waiver request for the 2023 cellulosic biofuel requirement. The 2024 market traded as high as $3.40/RIN following the denial, up 15c/RIN, or 5% following the announcement. A partial waiver of the 2023 cellulosic requirement may have required the agency to issue a Cellulosic Waiver Credit (CWC) which could be purchased alongside an advanced credit to satisfy compliance obligations.
The C23/C24 spread narrowed to -2c/RIN on March 25 after starting the month at +7c/RIN as the EPA’s partial waiver denial will see larger 2023 deficits carried over into the 2024 compliance period.
Total D3 and D7 RIN generation was revised up to 774.9 million credits from 774.8 million credits, or 7.75% short of the 840-million-gallon mandate. D3 generation had been running 16% short of the mandate prior to a material upward revision in December generation and strong January levels which largely represent 2023 production.
With no Cellulosic Waiver Credit in place and a record low RIN bank, we expect 2024 D3 RINs to remain at elevated levels—above the $3.00/RIN mark.
The 2023-2024 D4 RIN spread remained inverted as the deadline for 2023 compliance drew near. The spread spent the bulk of the month at -1c/RIN, narrowing from -1.5c/RIN the month prior.
AEGIS noted in earlier reports that diesel would be the main driver of credit markets as RINs are the most responsive component of the credit stack for buttressing renewable diesel margins.
Recent diesel weakness, coupled with soybean oil strength to pressure biodiesel margins to the lowest levels in nearly four months, with SBO RD margins reaching the lowest levels since June 2023 at just $0.70/gallon. Chevron REG recently announced the April 2024 closure of two of its biodiesel facilities citing poor market conditions.
We anticipate heavy production from both the RD and BD industry throughout 2024 despite worsening margins as producers strive to take advantage of the final year of the blenders tax credit (BTC). AEGIS remains constructively bullish on diesel given persistent tight supply conditions even as US consumption and export demand underwhelms.
We expect RIN generation to remain at elevated levels as long as feedstock pricing remains under pressure from imports and diesel markets remain tight. First half 2024 startups are planned to run at half capacity and should start to pressure RIN markets more materially in the second half of the year.
Recent diesel weakness and an underperforming D4 market led producers to trim runs, conduct maintenance, and even saw the permanent closure of two biodiesel facilities. Renewable feedstock imports notably slowed during late February and early March.
On the renewable diesel side, the RIN spread to BOHO collapsed to 1.75c on average from 18c the month prior indicating the bulk of the decline in D4 credit prices have materialized. Though elevated UCO and BFT margins will continue to pressure D4 credits as producers continue to seek to take advantage of the final year of the BTC. SBO RD production is just over break even at current RIN prices of 58c/RIN.
The biodiesel side is bleaker, with the RIN spread to BOHO inverting to -15c this month 8c the month prior. At these levels, returns for non-integrated producers have reached below $0.33/gallon, according to AEGIS estimates. D4 credits would have to tumble more than 40c/RIN to put UCO RD production at breakeven. Under prevailing conditions, we see D4 RINs as accurately priced to reflect the margin environment with less than 4c to the downside. Resurgent diesel strength would carve out more room for losses.
The 2023-2024 D6 spread spent the bulk of the month at near parity, narrowing from -1c/RIN the month prior as the 2023 compliance deadline neared. The 2023-2024 D6 spread has averaged just under flat since the start of the year after averaging flat during the fourth quarter of 2023.
EPA RIN Generation Data as of March 21:
EPA Small Refinery Exemption (SRE) Data as of March 21:
Green indicates change
Some of the price and regulatory risk in the development of the renewable fuels markets is controllable through hedging or pre-selling. Other risks require constant monitoring of pending changes to regulations and programs. AEGIS can help with both.
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