Renewable Diesel Margins Press Lower on Diesel Losses, Weaker Credits
MARKET UPDATE
- US renewable diesel (RD) margins retreated for a second consecutive week as RINs lost ground despite a wider narrower BOHO spread, while fresh diesel losses and lower LCFS credits weighed on returns.
- The Bean Oil-Heating Oil (BOHO) spread widened 4% to $0.79/gallon as losses in the front-month Nymex ULSD contract outpaced CBOT soybean oil losses. The BOHO spread now stands 41% over the year-to-date low of $0.56/gallon.
- Used Cooking Oil (UCO) remained the highest returning feedstock as spot feedstock prices posted modest week-over-week gains. UCO imports have tempered US UCO prices despite mounting demand. Tallow margins remained the second-best performing feedstock at $1.23/gallon. Steady tallow imports have helped preserve US Gulf coast BFT margins.
- RIN prices shed 6% week-over-week even as the BOHO spread ended the week higher. RIN markets peaked two weeks prior at over 59c/RIN as the BOHO spread reached the highest level in over three months. Current year D4 RINs shed 3c/RIN, or 6% week-over-week. The D4 market has shed 12c/RIN, or 22% over the course of April, while year-to-date losses increased to 34c/RIN, or 43%. The 2023-2024 D4 RIN spread held at -1c/RIN.
- California Low Carbon Fuel Standard (LCFS) markets traded lower as traders remained bearish as CARB’s latest rulemaking materials were deemed anemic. CARB modeled 7% and 9% step-downs for 2025 compared to an originally proposed 5% stepdown. Prompt credits shed $3.34/t, or 5.3% to $59.96/t, falling under the $60.00/t mark for the first time since mid-February. Losses were more pronounced throughout the forward curve. The forward structure showed $1.54 of contango heading into December, down from $1.70/t the week prior.
SHIPPING UPDATE
- The April lineup showed two Singaporean RD vessels booked for California delivery, according to preliminary Vortexa data. A 345,000 Bbl vessel arrived in Long Beach, California, on April 9. A 344,000 Bbl split cargo of RD and SAF is set to arrive in Long Beach, California on April 15. Th state also took two cargoes out the US Gulf coast this month totaling 510,000 Bbl.
- California took three Singaporean RD vessels during the month of March totaling 973,000 Bbl. February saw three Singaporean RD vessels booked for California delivery totaling 754,000 Bbl. A 325,000 Bbl vessel out of Louisiana reached Long Beach, California, on February 20.
- At least three RD bookings were reported for January delivery in California totaling 629,000 Bbl. The month of January saw Oregon emerge as an alternative destination for both domestic and foreign RD production as higher Oregon LCFS prices improved RD returns in the state. A 317,000 Bbl vessel arrived in Portland, Oregon, on January 20 after departing the US Gulf Coast. A 320,000 Bbl Singaporean vessel discharged in Portland, Oregon, on January 23.
- The May lineup shows at least two Chinese UCO cargoes bound for Louisiana.
- At least four Chinese UCO cargos reached US Gulf coast destinations during March.
- The pace of Gulf coast feedstock imports slowed during February and the first half of March, with the pace picking up in the second half of the month. The March lineup showed four Chinese UCO cargos set for delivery to US Gulf coast locations. At least two Chinese UCO cargos made the journey during February arrival. The US Gulf coast typically imports five to six cargoes of UCO each month, primarily from China, but also Vietnam and South Korea.
- The US Gulf coast took at least three tallow vessels during the month of March originating from Australia, Brazil, and Uruguay. A Brazilian tallow cargo reached St Charles, Louisiana, on April 2 followed by an Australian cargo for delivery to San Francisco, California, on April 15. A split cargo of tallow and UCO out of Amsterdam is aimed for Louisiana for April 21 delivery, according to preliminary Vortexa data.
- The US Gulf coast took at least one tallow cargo during the month of February, with California taking at least one vessel. The US took at least four tallow cargos in January, evenly split between California and Louisiana.
- Preliminary shipping data shows increasing levels of palm oil imports to the US with at least eight cargoes bound US destinations in March, with the US Gulf coast taking five of the vessels. Three Indian palm oil vessels have been booked for April.
REGULATORY UPDATE
- EPA issued a waiver allowing for the sale of E15 gasoline this summer, marking the third consecutive year for the continuation of the 15% ethanol blend. The agency pointed to supply disruptions related to the conflicts in the Middle East and Ukraine as justification for the waiver and noted that the move would not result in increased smog pollution. E15 sales are typically blocked from June through September due to RVP limitations.
- CARB is considering steeper 2025 step-downs of 7% or 9%, compared to an originally proposed 5% stepdown. The more stringent targets are aimed to manage a record supply of unused credits, which will continue to grow well into 2025. CARB maintained a 30% reduction target for 2030 and 90% target for 2045 at its April 10 public workshop, unchanged from the board’s December 2023 proposal. CARB also modeled a scenario in which the auto-acceleration mechanism was triggered twice, resulting in a drawdown of 170MM credits. CARB is considering sustainability guardrails as well as requiring an independent feedstock certification process. Stakeholders urged CARB to pursue the most aggressive 9% stepdown and displayed a preference for the program to be managed through more precise targets, relying less on the AAM for ease of planning and to drive investment.
- Colonial Oil must purchase and retire more than 9MM RINs at an estimated $12.2MM following a settlement with the US EPA and DOJ for failure to account for certain marine fuel volumes in the company’s RVO between 2013-2019. Colonial Oil has two years to purchase nearly 96,000 D3 RINs, 1.63 MM D4 credits, 343,000 D5 RINs and 6.94 MM D6 credits.
- 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.
- A group of 26 agricultural and renewable fuel trade associations called on the Biden administration to issue updated GREET guidance on how the Treasury Department will calculate SAF tax credits. The administration missed its March 1 deadline and Agriculture Secretary Tom Vilsack has said the model will not be completed until April. The delays center on the inclusion of climate smart agriculture practices like no-till farming and cover crops to lower carbon intensity scores for feedstocks.
- 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.
- California postponed a hearing on proposed LCFS amendments originally scheduled for March 21. CARB aims to hold a workshop in April. The 45-day public comment period is still scheduled to conclude on February 20. 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.
- 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.”
- On December 19, California’s Air Resources Board (CARB) released a preliminary LCFS proposal laying out amendments which nearly mirrored those in the Standardized Regulatory Impact Assessment released in September. CARB proposed a 30% reduction in carbon intensity by 2030, including a 5% step-down in 2025. This marks a 50% increase in carbon targets over the original 20% reduction target for 2030. Reductions increase to 90% by 2045 compared to a 2010 baseline. The proposal contained an automatic acceleration mechanism (AAM) which would advance stringency for a given year when unused credits more than triple average deficit generation by advancing the carbon reduction target by two years. Amendments included eliminating the exemption for intrastate jet fuel beginning in 2028 and new tracking requirements for crop-based and forestry-based feedstocks to their point of origin. CARB expects to kick off the required 45-day public comment period in January, with a public hearing set for March 21, 2024.
- 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.
- EPA Fuel Program Center Director, Paul Machiele, said the oversupply of D4 credits is not currently a concern at the EPA as the agency’s primary driver in setting the 2023-2025 mandates was feedstock availability, according to Carbon Pulse. Machiele noted that the surge in imported feedstock was not taken into account when considering the final Set Rule, speaking at the OPIS RFS, RINs and Biofuels Forum in Chicago. Changes to exiting mandates are unlikely to be taken up during an election year. President of Advanced Biofuels Association, Michael McAdams, cited an unnamed source that the earliest the EPA would take action is 2026.
- EPA officials indicated that the next opportunity for addressing the adoption of the contentious eRIN pathway would be when the agency considers blending targets for 2026, according to EPA Fuel Programs Center director Paul Machiele when speaking at the Argus North American Biofuels, LCFS, & Carbon Markets Summit in mid-September.
- A California judge ruled that P66’s 67,000 Bbl/d RD Rodeo facility may not operate until permitting issues are resolved. The largest RD refinery conversion in the country is allowed to continue construction. The original permitting work for the plant took nearly a year to complete in May 2022. P66 aims to begin RD production at Rodeo by Q1 2024.
INDUSTRY UPDATE
- EIA trimmed its 2024 and 2025 forecasts for domestic RD output and demand. US RD production for 2024 was cut by 1% to 2016 Bbl/d, according to the latest Short-Term Energy Outlook. Production for 2025 was trimmed by 0.3% to 289,000 Bbl/d. EIA cut its 2024 RD consumption forecast by 1.2% to 239,000 Bbl/d, while the 2025 outlook was trimmed 0.3% to 305,000 Bbl/d. EIA expects 2024 net exports of 25,000 Bbl/d, up 1.2% from the previous month’s STEO. Net exports for 2025 were raised 6.3% to 17,000 Bbl/d. Biodiesel production is set to average 99,000 Bbl/d in 2024 and 88,000 Bbl/d in 2025 against consumption forecasts of 106,000 Bbl/d and 83,000 Bbl/d, respectively.
- P66 on April 1 announced it is processing 30,000 Bbl/d of renewable diesel at its Rodeo, California facility. The Rodeo Renewable Energy Complex is slated to produce 50,000 Bbl/d of renewable fuels including SAF by the end of the second quarter, totaling 800MM gallons per year. The main feedstock is used vegetable oil. The company expects its pre-treatment unit (PTU) to be operational in late Q2-Q3, which will allow the facility to run a variety of fats, oils and greases (FOGs).
- Tidewater Renewables on March 14 announced its 3,000 Bbl/d RD facility in Prince George, British Columbia is operating near nameplate capacity. Tidewater Renewables and Tidewater Midstream & Infrastructure Ltd. entered into a joint development agreement for a SAF project utilizing the Prince George facility and renewable hydrogen complex. The SAF project is aimed to achieve 6,500 Bbl/d of production.
- Bunge and Chevron broke ground on an oilseed processing plant in Destrehan, Louisiana. The joint venture aims to process soybeans as well as softseeds like winter canola and pennycress once operational in 2026.
- 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.
- Braya began commercial renewable diesel production on February 22 at its Come by Chance, Newfoundland and Labrador, facility. The Canadian refiner expects production of 18,000 Bbl/d of RD, with an expansion to 35,000 Bbl/d including SAF production in the works.
- 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.
- 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.
- January total RIN generation came in at 1.89 billion credits, down 16% from the previous month’s record 2.17 billion credits, but up nearly 8% on year-ago levels. D4 generation retreated to 675 million credits, down nearly 20% from the previous month’s record 840 million credits, yet up 29% on year-ago levels. Domestic renewable diesel production accounted for 56% of total D4 output, up from 54% the month prior. Domestic renewable diesel production accounted for 49.5% of total D4 output in November and 47% in October. Foreign renewable diesel production made up 6% of total D4 generation down from 9.7% from the previous month and 11% in November. Domestic and imported biodiesel accounted for 36% of the January total, up from 35% the month prior, but down from 39% in November and 41% in October. A record 15 million D4 credits were generated across domestic and foreign SAF production, accounting for 2.2% of the January total. Foreign SAF accounted for 91% of total SAF credits.
- Bakersfield Renewable Fuels (BKRF) is aiming for a first quarter start-up of its 15,000 Bbl/d RD facility. Commercial operations are due to begin in the second quarter. BKRF is a subsidiary of Global Clean Energy Holdings.
- Oregon released second quarter Clean Fuel Program (OCFP) showed renewable diesel as the top-credit generating fuel at 35 percent of total OCFP credit generation, taking quarterly generation to a fresh record. Renewable diesel and biodiesel combined made up 25 percent of the state’s diesel pool, demonstrating the increasing penetration of RD into Oregon. OCFP credits shed nearly $60/t ahead of the release of the report yet continue to trade at hefty premiums to California LCFS credits, making Oregon an economically advantaged destination depending on freight and logistics costs.
- Montana Renewables aims to add 3,000 Bbl/d of capacity in 2025. The Great Falls plant is currently undergoing repairs to a steam recovery system and moved forward a turnaround originally planned for 2024 to November. Calumet is mulling plans to ultimately maximize SAF production at the Great Falls facility.
- Louis Dreyfus aims to build a 1.5 t/year soybean processing plant in Upper Sandusky, Ohio with construction to begin in early 2024. The plant is expected to be completed by 2026 and will have a capacity to produce 320,000 t/yr of RBD soybean oil. Earlier this year, Louis Dreyfus said it will double the capacity of its canola crushing plant in Yorkton, Saskatchewan.
Renewable Diesel
US Gulf coast RD margins retreated as RINs lost ground despite a wider BOHO spread, while diesel weakness and lower LCFS credit prices provided further headwinds. Feedstock pricing was mixed, though SBO pricing continued to press lower. The BOHO spread widened off the lowest level in over a month. D4 RINs declined 6% over the course of the week even amid the release of bullish March RIN generation data. The LCFS market continued to press lower as CARB’s less stringent stance on reforms to the program prompted further selling.
UCO remained the highest returning feedstock at $1.79/gallon, falling 13% week-over-week. Spot UCO prices at the US Gulf coast rose 0.50c/lb to 37.50c/lb.
BFT margins slumped 15% week-over-week to $1.23/gallon. BFT prices remained stable at 43.50c/lb. An Australian tallow cargo arrived in San Francisco, California, on April 15.
DCO margins retreated 14% week-over-week as spot DCO price held at elevated levels.
SBO margins fell 15% to $0.96/gallon, reaching as high as $1.12/gallon intra-week. Spot SBO prices fell 3.3% to 44.38c/lb week-over-week as spot differentials held stable alongside modest gains in the underlying May CBOT SBO contract.
To recap: The week ended April 12 saw RD margins retreat amid a rout in D4 pricing, weaker diesel values, and LCFS losses. Feedstock pricing was mostly stable except for SBO which posted losses. The BOHO spread tumbled 13% week-over-week to the lowest level in over a month. D4 credits sank 11% as the credits held on to some strength relative to losses in the BOHO spread. California Low Carbon Fuel Standard (LCFS) markets traded lower as traders reacted bearishly to a public workshop held by CARB on April 10 which was short on details and differed little from the original December 2023 proposal. CARB modeled 7% and 9% step-downs for 2025 compared to an originally proposed 5% stepdown. Prompt credits shed $3.11/t, or 4.7% to $63.30/t.
The week ended April 19 saw RD margins fall sharply for a second consecutive week as RINs lost ground despite a wider BOHO spread. Losses in diesel and LCFS prices provided headwinds. Feedstock pricing was mixed, while SBO pricing continued to post losses. The BOHO spread recovered off the lowest level in over a month. D4 credits shed 6% as credits succumbed to mounting selling pressure despite a wider BOHO spread. California Low Carbon Fuel Standard (LCFS) markets traded lower as traders remained bearish as CARB’s latest rulemaking materials were deemed anemic. CARB modeled 7% and 9% step-downs for 2025 compared to an originally proposed 5% stepdown, maintained a 30% reduction target for 2030. Prompt credits shed $3.34/t, or 5.3% to $59.96/t.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), recovered off the lowest level in over a month. The BOHO spread firmed $0.03/gallon, or 4% week-over-week.
RIN markets lost ground relative to the BOHO spread, shedding 6% over the course of the week. Vintage 2024 D4 credits fell 3c/RIN, or 6% to 44.25c/RIN.
The premium for RD-generated RINs to the BOHO spread inverted, with RD-generated RINs reaching a -2.2c/gallon discount, down from +1c/gallon the week prior. The spread reached as low as -5c on March 12, 2024.
The premium for BD-generated RINs to the BOHO spread slipped to -11c from -8c the week prior. The spread reached as low as -22c on March 11, 2024.
Deteriorating biodiesel margins led to the decision to permanently close two Midwest biodiesel facilities as expanding US renewable diesel capacity outcompetes biodiesel producers.
The wider the BOHO spread, the weaker the margin as the main input cost for biodiesel producers, soybean oil, is more costly than the petroleum-based diesel fuel it competes with, compressing margin though the D4 RIN can contribute significantly toward making up for BOHO weakness.
The BOHO spread is a simplistic breakdown of the pulse of the biodiesel industry and is in widespread use by the industry. The BOHO spread does not account for operational costs which can vary drastically from plant to plant, nor the additional margin value afforded by credits and/or the sale of byproducts such as glycerin.
Environmental Credit Markets
RIN markets slumped 6% despite a wider BOHO spread, which saw renewable diesel-generated RINs invert to a -2.2c discount to the BOHO. The 2024 vintage D4 credit ended the week at 44.25/RIN as the BOHO spread rose $0.03/gallon to $0.79/gallon. D4 credits have lost 43% of their value since the start of the year and have recovered just 8% since bottoming out at 41c/RIN on February 22, 2024.
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.
The EPA showed 36 pending SRE petitions spanning 2017-2024, as 20 previously denied exemptions are being reconsidered and a new petition for 2023 was received.
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.
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 5th US Circuit Court of Appeals ruled on November 22, 2023, to block denials of SREs for six refineries. 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 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.
In February, United Refining was denied its SRE hardship waiver by the Third Circuit court, a move which would lead to additional demand to the marketplace. Trade organization Growth Energy entered comments in support of enforcing SREs in its case against the EPA. A full denial of all SREs would represent more than 1.6 billion RINs.
Prior to this, the approval by a federal court of a SRE for Calumet Special Products 30,000 b/d refinery in Montana provided bearish undertones to RIN markets.
SREs were carved out in the Renewable Fuel Standard (RFS) for refiners producing 75,000 b/d or less which could prove compliance with the RFS—i.e., purchasing RINs—resulted “undue economic hardship.”
The EPA retroactively overturned 69 Trump-Era SREs starting in April of last year by denying 31 SRE waivers for 2018 and then denying all SRE petitions for 2016 through 2020. Denying SREs is bullish for RINs markets as refiners must enter the marketplace to purchase RINs to cover compliance obligations which were originally waived.
A court ruling earlier this year halted compliance obligations for two refineries with existing SRE petitions taking issue with the retroactive nature of the SRE denial.
Notes from the court were strongly in favor of granting the SREs, as the court made it clear it intends to handle SREs as originally intended by the RFS—i.e., waive RFS compliance if undue hardship can be demonstrated—and to allow waivers which were issued in an “unlawful retroactive application.”
On June 21, 2023, the EPA issued a historic ruling establishing the demand curve for renewable fuel use for 2023-2025. This marks the crucial expansion years for the rapidly growing renewable diesel (RD) and sustainable aviation fuel (SAF) industry and fell well short of current and future production, dealing a blow to RD, SAF and BD industries.
The ‘Set Rule’ greatly underestimated the impact of surging renewable diesel growth, with the decision driven primarily by concerns over feedstock supply. In a glimmer of hope for the renewable diesel industry, the EPA left the door open for adjustments to the final ruling by taking into consideration a wide-ranging list of indicators.
LCFS Pricing
California Low Carbon Fuel Standard (LCFS) markets traded lower as traders remained bearish as CARB’s latest rulemaking materials were deemed anemic.
CARB modeled 7% and 9% step-downs for 2025 compared to an originally proposed 5% stepdown and maintained a 30% reduction target for 2030.
Prompt credits shed $3.34/t, or 5.3% to $59.96/t. Losses were more pronounced throughout the forward curve.
The forward structure showed $1.54 of contango heading into December, down from $1.70/t the week prior.
California postponed an April hearing on proposed LCFS amendments originally scheduled for March 21. The 45-day public comment period concluded on February 20.
The move came 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 and out-of-state biogas. Environmentalists took particular issue with biogas from diary digesters.
On December 19, California’s Air Resources Board (CARB) released a preliminary LCFS proposal laying out amendments which nearly mirrored those in the Standardized Regulatory Impact Assessment released in September.
CARB proposed a 30% reduction in carbon intensity by 2030, including a 5% step-down in 2025. This marks a 50% increase in carbon targets over the original 20% reduction target for 2030.
Reductions increase to 90% by 2045 compared to a 2010 baseline.
The proposal contained an automatic acceleration mechanism (AAM) which would advance stringency for a given year when unused credits more than triple average deficit generation by advancing the carbon reduction target by two years.
Amendments included eliminating the exemption for intrastate jet fuel beginning in 2028 and new tracking requirements for crop-based and forestry-based feedstocks to their point of origin. CARB expects to kick off the required 45-day public comment period in January, with a public hearing set for March 21, 2024.
LCFS strength had been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of CARB’s more stringent scoping plan.
Buying quickly turned to selling once the workshops concluded as traders became disillusioned with the timeline for the rulemaking and deemed current measures as not stringent enough to deal with supply overhang.
LCFS prices add to margin value for product intended for California, which sets the clearing price for RD fuel in the US and Canada as California RD represents the maximum achievable price for the fuel. California consumes roughly +70% of RD produced in the US for this reason, while additional barrels are sent to Oregon which also has a LCFS program in place. Washington state credits have begun trading, with back-half 2024 WCFS credits valued around $105/t.
Final Notes
Renewable diesel and biodiesel margins reflect a complex interplay between conventional fuels, renewable feedstocks, logistics, environmental credits, and regulatory momentum. With at least 1.8 billion gallons of additional RD capacity slated to come online this year, the need for protection from margin erosion is paramount.
Hedging provides this insurance.
At the same time, established facilities conducting turnaround maintenance can benefit from locking in margins and feedstock costs. Less sophisticated facilities—for example, producers equipped to run only one or two high-cost feedstocks and lacking prime market access—stand to benefit most from AEGIS hedging and advisory functions by achieving the best price possible for their product alongside feedstock optimization strategies.
Renewable diesel and sustainable aviation fuel markets remain in revolutionary growth mode. The US Energy Information Agency projected RD capacity could more than double through 2025.
While returns narrow RD and SAF remain the highest returning products in the renewable space, rapid growth and regulatory changes will drive perpetual volatility.
AEGIS is here to help harness volatility to lock in predictable gains and prevent losses through innovative hedging strategies.
Important Disclosure: Indicative prices are provided for information purposes only and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee of the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as "edge," "advantage," "opportunity," "believe," or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.