Renewable Diesel Margins Fall as Diesel Weakens Faster than Feedstocks
US Gulf coast RD margins pulled back from four-month highs last week as diesel weakness compressed the margin environment, while marginally lower feedstock costs and credit strength staunched further losses. UCO margins fell by $0.02/gallon, or less than one percent, to average $2.69/gallon.
Bleached Fancy Tallow (BFT) remained the second highest returning feedstock at $2.64/USG.
Distillers’ Corn Oil (DCO) posted losses over $0.09/gallon on average to $2.35/gallon last week following heavy strength the previous week.
Soybean oil based (SBO) RD margins tumbled $0.16/gallon to average $1.60/gallon, reaching as low as $1.57/gallon.
US RD margins now stand at start-of-month levels except for soybean oil returns which reached the weakest in a month-and-a-half.
To recap: The week ended February 17 saw feedstock losses combine with marginal diesel strength to see RD margins return to four-month highs. Credit markets were down lending minor headwinds to the margin environment.
The week ended February 24 saw RD margins fall to the lowest levels since the start of the month as Nymex ULSD weakness outpaced feedstock losses.
RIN markets continued to trend upward following comments from the advanced biofuel industry strongly urging higher mandates for RD and BD given the availability of production capacity. Strong D4 RIN generation data for January tempered gains.
The LCFS market rallied last week as the California Air Resource Board held a workshop on its intent for the program in 2024. The bullish headline proved short lived as prompt credits reached as high as $74/t on February 22 before retreating to $69/t in the following session.
We anticipate LCFS credits to return to the $60s/t as a structurally oversupplied marketplace will revert to a rangebound spot market.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, widened $0.18/gallon, or nearly 10.3%, week-over-week as the more actively traded May CBOT contract gained nearly 1.3¢/lb to, or 1.8%, to average 61.04¢/lb, against Nymex ULSD losses of $0.085/gallon, or 3.03%.
The BOHO spread reached as wide as $2.00/gallon for the first time since late November 2022.
D4 RINs strengthened last week, buttressing ultimate returns for biodiesel producers which earn 1.5 D4 credits per gallon of biodiesel. The BOHO spread recoupled with its positive correlation to RINs as the BOHO spread narrowed toward the end of the week.
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.
D4 RINs posted modest gains on average amid carry-through buying following comments from the advanced biofuels industry strongly urging the EPA to lift mandates in the proposed ‘Set Rule.’ The rule outlines renewable fuel obligations from 2023 through 2025. The Advanced Biofuels Association and others urged 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.’
Robust January D4 RIN production and the introduction of two new SREs, one for 2022 and one for 2023, limited gains.
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 month 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.”
The LCFS market rallied last week as the California Air Resource Board held a workshop on its intent for the program in 2024. The bullish headline proved short lived as prompt credits reached as high as $74/t on February 22 before retreating to $69/t in the following session. On average, prompt LCFS prices gained $6.70/t, or 10.5%, week-over-week.
We anticipate LCFS credits to return to the $60s/t as a structurally oversupplied marketplace will see spot pricing return to rangebound markets.
The forward structure developed a more defined, yet narrower contango through Q4 (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.