Renewable Diesel Margins Rise as Feedstocks Decline, Credits Strengthen
US Gulf coast UCO-based margins briefly surpassed four-month highs last week as turnaround activity and the arrival of import barrels weighed on feed prices. UCO margins increased $0.21/gallon, or 8.3%, week-over-week to average $2.71/gallon.
Bleach Fancy Tallow (BFT) remained the second highest returning feedstock at $2.66/gallon.
Distillers’ Corn Oil (DCO) posted the largest week-over-week gain at $0.30/gallon, or 13.8%, to average $2.44/gallon.
Soybean oil-based (SBO) RD margins were just $0.03/gallon, or 1.7%, higher week-over-week, likely driven by credit gains as spot SBO prices were higher week-over-week.
To recap: The week ended February 10 saw losses in feedstocks outpace Nymex ULSD losses to produce a positive margin environment outside of SBO. Credit markets were down marginally, providing negligible headwinds to margins.
Fresh losses in UCO, BFT and DCO last week coupled with marginal gains in the more actively traded April Nymex ULSD contract supported RD margins. DCO prices shed 2.25¢/lb, or 3.6%, over the course of the week bringing Corn Oil more in line with the leading renewable feedstocks.
RIN markets found support as the advanced biofuels industry urged the EPA in comments to boost mandates to reflect available fuel supply throughout the 2023-2025 ‘Set Rule.’
The National Fuels Institute, also urged the Biden administration to not limit biodiesel blends in heating oil and diesel fuel to 20%, a prohibition buried in the new ‘Set Rule.’ A cap on biodiesel blending would prove supportive of D4 biomass-based RINs and would be particularly disruptive to New England heating oil markets.
Gains in RINs were capped by healthy January D4 RIN generation and as the EPA announced two new Small Refinery Exemptions (SRE) petitions, one for 2022 and one for 2023.
Heavy buying in LCFS markets late last week saw prompt prices gain $2.80/t, or 4.6%, to average $63.80/t. The spot, forward structure remains in a slight contango through Q4 2023.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, widened $0.08/gallon, or nearly 5.0%, week-over-week as the front-month CBOT contract gained nearly 1.0¢/lb to, or 1.6%, to average 61.04¢/lb, against a largely unchanged Nymex ULSD contract.
D4 RINs strengthened last week, buttressing ultimate returns for biodiesel producers which earn 1.5 D4 credits per gallon of biodiesel, yet the BOHO spread decoupled from its positive correlation with RINs as the BOHO spread widened more aggressively relative to RIN gains.
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.
RINs turned bullish, particularly for the 2023 vintage, last week as buying returned to the market amid comments from the Advanced Biofuels Association urging the EPA to lift the advanced mandates in the proposed ‘Set Rule’ to reflect the volumes of fuel available to the market. The EPA decided to focus on feedstock availability when originally laying out the 2023-2025 proposal.
This built on comments from the National Fuels Institute, which urged the Biden administration to not limit biodiesel blends in heating oil and diesel fuel to 20%, a prohibition buried in the new ‘Set Rule.’
The market largely shrugged off bearish news of healthy January D4 RIN production and the introduction of two new SREs, one for 2022 and one for 2023.
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 recently halted compliance obligations for two refineries with existing SRE petitions taking issue with the retroactive nature of the SRE denial.
If approved the SRE ruling will prove very bearish for the wider RIN marketplace as participants will view the decision as a shift in the EPA’s approach to granting SREs. 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.”
Heavy buying in LCFS markets late last week saw prompt prices gain $2.80/t, or 4.6%, to average $63.80/t. Prompt and Q1 spot LCFS credits were trading at parity, while the spot, forward structure remained in a slight contango through Q4 2023 as a result of the pending scoping plan.
The scoping plan sets out stricter carbon targets across all products and pathways, soaking up much of the oversupply and drawing the program more in line with the reality of the marketplace. A more consistent structure has crystalized further along the forward curve (see below).
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 will soon follow.
The stark LCFS bear market could lower US RD prices enough to open arbitrages with Europe this year, particularly as the region becomes more diesel starved as Russian product sanctions take effect.
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.