Renewable Diesel Margins Press Higher on Diesel Strength
- US renewable diesel (RD) margins rose for a second consecutive week as diesel strength and stronger LCFS credit prices were only partially offset by weaker D4 RINs.
- The Bean Oil-Heating Oil (BOHO) spread reached the narrowest level in nearly two months as diesel strength lifted biodiesel margins.
- Used cooking oil (UCO) remained the highest returning feedstock for a fourteenth consecutive week at $2.35/gallon on average, followed by BFT at $1.92/gallon. Increased UCO imports have tempered US UCO prices despite mounting demand.
- D4 RINs fell 5.6c/RIN, or 3.6%, week-over-week as a narrower BOHO spread gave the credits room to retreat.
- The California Low Carbon Fuel Standard (LCFS) market continued to firm in thin trade. Prompt credits climbed $1.70/t, on average, last week, returning to the highest levels in over a month. The prompt market had been in a choppy holding pattern since early May yet initiated a material downtrend starting in early June. LCFS strength had been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of the California Air Resource Board’s new, more stringent scoping plan.
- The first RD vessel for August delivery was booked. The Maria Kokako is set to take 214,000 Bbl of HVO to California from Singapore, according to Vortexa data. Two RD vessels were booked out of Singapore for July delivery, totaling 406,000 Bbl. Only two vessels totaling 498,000 Bbl were booked for the month of June. At least six RD vessels were booked for California destinations over the course of May, totaling 991,000 Bbl, according to data from Vortexa. The state took a total of 548,000 during the month of April, 417,000 Bbl in March, and 661,000 Bbl in February.
- A US RD export out of the Gulf coast discharged 272,000 Bbl in Vancouver, Canada on July 4, according to Vortexa data.
- The Gulf coast continues to reach wide to find feedstock for imports. The region is taking Australian tallow, Dutch sunflower oil, and Chinese and Indonesian vegetable oil. The US Gulf coast imported Chinese UCO and Argentinian tallow last month. Indonesian palm oil continues to reach US destinations.
- 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.
- US imports of renewable diesel reached a record high of 48.3MM gallons in the month of May, according to the latest EIA data. This level was nearly three times the amount imported during the month prior. Nearly 85% of US imports originated in Singapore with the remainder coming from Finland.
- Vertex Energy Inc. reached 8,000 Bbl/d phase 1 capacity at its Mobile, Alabama, facility during the second quarter. Vertex received federal approval to generate D4 RINs earlier this year. The company announced its first sale of 110,000 Bbl to Idemitsu Apollo in June 2023.
- Valero’s renewable diesel arm Diamond Green Diesel (DGD), a joint venture with Darling Ingredients Inc., reported $440 million in operating income for Q2, more than doubling the $152 million recorded last year. RD sales came in at 4.4 million gallons per day, doubling last year’s output. Valero expects renewable diesel output to total 1.2 billion gallons for the year. DGD’s 470 million gallon Port Arthur RD/SAF facility is on schedule for 2025 completion. Half of the capacity will be dedicated to SAF production.
- June D4 RIN generation fell to 2.04 billion credits, down by 70MM credits, or 3.3%, from the May all-time high of 2.11 billion RINs. D4 RIN generation slumped 76MM credits from the month prior as renewable diesel and biodiesel margins both deteriorated. Domestic and foreign renewable diesel generation accounted for 56% of total D4 generation, down from last month’s 59%.
- Global Clean Energy secured a $110 million loan to proceed with construction of its Bakersfield, California renewable diesel facility. The project is behind schedule and has run more than $600 million over budget prompting ExxonMobil to nullify its offtake agreement. The 15,000 Bbl/d project is the site of the former Big West refinery and will use camelina as feedstock.
- 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.
- 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.
- The US Energy Information Administration (EIA) trimmed its 2024 RD production forecast by 2.8% to 219,000 Bbl/d. The Administration assumed 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. The rule set biofuel requirements for 2023-2025, with the advanced biofuel requirement falling short of expectations. The EIA increased its 2023 production estimate by 2.2% from its June forecast to 161,000 Bbl/d as the Administration is citing recent production increases.
- 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.
- The EPA released the final ‘Set Rule’ on June 21 with final 2023-2025 blending obligations for the advanced biofuel industry falling well short of existing capacity and out of line with scheduled expansions.
- Canada’s first renewable diesel facility completed construction and will soon begin production. Tidewater Renewables’ 46MM gallons/yr Prince George Refinery located in British Columbia was scheduled to come online during the second quarter and aims to achieve 80% of nameplate capacity during the second half of 2023. Total capacity now sits at 47.55MM gallons/yr.
- ExxonMobil exited its renewable diesel offtake agreement with Global Clean Energy Holdings as the 210mn USG/yr is running behind schedule and overbudget. The energy giant originally stated it would take such action if no product was received by July 2022. The Bakersfield, California facility is slated to run on camelina oil. Global Clean Energy Holdings rejected the notice and stated it has until 30 November to complete the project, according to the Bakersfield Californian.
- 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.
- Mining giant Rio Tinted announced it transitioned its heavy machinery to renewable diesel at its Boron, California open pit mine. This move follows a trial period with Neste and Rolls-Royce.
- California’s Air Resource Board’s (CARB) last workshop discussed an “auto-acceleration mechanism” as unused LCFS credits rose to record highs. During the workshop California regulators indicated that the final scoping plan may not take effect at the start of the new year much to the disappointment of stakeholders. The regulatory body indicated that the acceleration mechanism would likely not take effect until 2H 2025.
- The ASTM has approved a new low-metal content biodiesel specification called D6751. The new specification will ensure more reliable engine performance and add durability.
- Marathon announced that it is on pace to complete Phase II of its Martinez Project with Neste by year end bringing total production capacity to 730 million gallons/yr. Phase I was completed during 1Q23 ramping up 260 million gallons/yr of renewable diesel capacity.
- Oleo-X launched a 300 million gallons/yr feedstock pretreatment facility in Pascagoula, Mississippi. The company aims to process low-carbon inedible oils and poultry fat.
- Par Pacific announced a $90 million investment to build a RD/SAF facility at its existing refinery in Kapolei, Hawaii. The facility is expected to produce 4,000 Bbl/d of RD and SAF as well as renewable naphtha and LPG by 2025.
- Parkland Corp. announced its decision to halt its renewable diesel project in British Columbia, Canada. The company had been coprocessing at its Burnaby Refinery with plans to build a 273,000 gallons/yr RD facility, set to come online in 2026. The company cited rising feedstock costs and advantages to US producers afforded by new credits carved out in the Inflation Reduction Act (IRA). The move could be a harbinger of slowing momentum for the RD industry which has increasingly worried about rising feedstock costs, while the numerous advantages of the US market are likely to open export markets soon.
- The Washington State Senate passed a Sustainable Aviation Fuel (SAF) tax credit, following actions from the state of Illinois which issued its own SAF credit with additional tax advantages for the fuel. Washington aims to establish a $1/gallon credit with a $2/gallon cap as additional value can be earned for fuels with lower carbon emissions. The Illinois SAF credit is set at $1.50/gallon and will run from June 1, 2023, through June 1, 2033, making the state the highest returning market for SAF.
- FutureFuel Corp. is considering halting biodiesel production citing rising feedstock prices, uncertainty on the permanency of certain federal tax credits and heavy competition from the renewable diesel industry. The company owns a multifeed, 59mn gallons/yr biodiesel plant in Batesville, Arkansas.
- The UK received its first renewable diesel import on March 30 to Valero Cardiff following a decision to lift import tariffs on US RD. The move presages growing export opportunities for competitive US RD product.
- Shell scrapped plans for a 550,000 t/yr RD and SAF facility in Singapore. While no rationale was put forth, feedstock supply and the lack of mandates throughout the Asia Pacific region are likely culprits. While feedstock prices have been falling, recession fears have also been weighing on diesel values, limiting margin growth.
Renewable Diesel
US Gulf coast RD margins posted stout gains for a second straight week as diesel strength and rising LCFS credits supported margins. Feedstock prices were mixed week-on-week, while rising margins gave D4 RINs room to weaken.
UCO remained the highest returning feedstock, averaging a return of $2.35/gallon, as spot UCO prices in the US Gulf coast rose 0.15c/lb, or less than one percent, week-over-week.
BFT margins rose $0.17/gallon, or 9.7%, week-over-week to average $1.92/gallon. Spot BFT prices climbed 0.10c/lb, or less than one percent, to 67.50c/lb on average. BFT prices ended the week at 67.50c/lb, the highest level since late January 2023.
DCO margins rallied $0.23/gallon, or 17%, to average $1.58/gallon. Margins reached as high as $1.66/gallon to close the week, the highest level in two months. Spot DCO prices rose fell 0.60c/lb, or just under one percent, to an average of 72.90c/lb.
SBO margins rebounded off the lowest levels since 2021 at just $0.37/gallon, rising to as high as $1.41/gallon. On average, SBO margins increased $0.66/gallon, or 100%, on average to $1.32/gallon.
To recap: The week ended July 28 saw RD margins rise sharply as diesel strength returned to the market, outpacing persistent feedstock strength. Modest gains in D4 RINs and LCFS credits provided tailwinds to the margin environment. UCO imports are preventing larger gains in UCO prices despite sustained demand allowing for healthy margins. BFT continued to perform well as heavy DCO buying has materially eroded corn oil margins in recent weeks. SBO RD margins reached the lowest levels since 2021 before recovering late in the week on diesel strength.
The week ended August 4 saw RD margins rally for a second consecutive week on continued diesel strength and rising LCFS credit returns. Feedstock prices were mixed with spot DCO and SBO posting heft losses, while BFT and UCO saw marginal gains on the week. A narrower BOHO spread saw D4 RINs lose ground providing headwinds to the margin environment. SBO RD margins recovered off the lowest levels in two years, more than doubling over the course of the week, while the BOHO spread narrowed to the tightest level in nearly two months.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), narrowed to $1.93/gallon marking the lowest level in nearly two months. The BOHO spread narrowed by $0.42/gallon, or 17%, on average to $1.99/gallon.
D4 values fell over the course of the week in response to diesel strength. The BOHO spread stood $0.48 over 2023 D4 RIN values, narrowing from the previous week’s $0.85/gallon (see below).
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
Current year vintage D4 RINs shed 5.6/RIN, or 3.6%, on average last week. The market started the week at just over $1.505/RIN as the BOHO spread narrowed, before ending the week at $1.52/RIN as the BOHO spread widened out $0.11/gallon over the course of the week.
June RIN generation fell to 2.04 billion credits, down by 70MM credits, or 3.3%, from the May all-time high of 2.11 billion RINs. D4 RIN generation slumped 76MM credits from the month prior as renewable diesel and biodiesel margins both deteriorated. Domestic and foreign renewable diesel generation accounted for 56% of total D4 generation, down from last month’s 59%.
Total RIN generation for the first six months of 2023 came in at 11.39 billion accounting for 54% of the total 2023 final obligation. D6 generation is on pace to fall approximately 690 MM RINs short of the 15.25 billion gallon mandate for 2023.
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.
We have been advising since last year that the Biden Administration was unlikely to approve SREs.
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
The California Low Carbon Fuel Standard (LCFS) market rose for a third consecutive week. Prompt credits rose $1.70/t, or 2.3%, to average $75.40/t, last week returning to the highest levels in over a month. The prompt market had been in a choppy holding pattern since early May before entering a downward trend in early June. Gains were less pronounced down the forward curve with the exception of Q2 2024 which rose by $1.90/t on average last week.
LCFS strength had been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of the California Air Resource Board’s new, more stringent scoping plan.
The forward structure remained in contago with the most prominent carry heading into the first quarter of 2024.
The California’s Air Resource Board’s (CARB) last workshop discussed an “auto-acceleration mechanism” as unused LCFS credits rose to record highs. During the workshop California regulators indicated that the final scoping plan may not take effect at the start of the new year much to the disappointment of stakeholders. The regulatory body indicated that the acceleration mechanism would likely not take effect until 2H 2025.
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.