Diesel Strength Supports Strongest Renewable Diesel Margins in 3 Weeks
US Gulf coast renewable diesel margins reached the highest levels since late December last week, with used cooking oil returning the highest margin on average $1.93/gallon. Soybean oil was a distance second at $1.88/gallon followed by tallow at $1.85/USG.
Weakness in spot soybean oil prices against the backdrop of a recovering diesel market saw margins reach as high as $2.10/gallon, the highest level since mid-October.
Distillers corn oil margins were sluggish at $1.80/gallon even as ethanol production has climbed in the first two weeks of the year. January is typically the most sluggish month for ethanol production and consumption.
RD feedstock prices dropped to close out 2022, resulting in wider margins for making RD. The chart below displays the evolution of those feedstock prices.
Nymex ULSD gains were the prime driver of RD and BD margins last week. The market recovered over 10% week-over-week as refinery outages, turnaround work and tight supply underpinned the marketplace.
Strong diesel prices can prompt other components in the advanced biofuels arena to decline as stronger D4 RINs and/or firmer LCFS prices are not required to protect margin value. Feedstock producers meanwhile have room to lift prices. Conversely, falling diesel prices can prompt credits to firm and pressure feedstock producers to offer lower if the current supply and demand arena allow so.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, firmed $0.16/gallon, or 10%, week-over-week as the front-month Nymex ULSD contract gained nearly 19¢/gallon over the same period, or 6%, while the March CBOT soybean oil contract was largely sideways on the week.
The narrower the BOHO spread the stronger the margin as the main input cost for biodiesel producers, soybean oil, is more advantageously priced, while the petroleum-based fuel biodiesel is blended with strengthens—allowing for more margin.
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.
Prompt March CBOT soybean oil contracts were little changed week-over-week, edging up just 0.084¢/lb week-over-week. Spot soybean oil lost marginal value over the same period lifted average RD margins to the highest level since mid-October 2022. The actively traded March and May contract effectively reached parity on January 20.
RINs provided headwinds to RD and BD margin this week. Biomass-based diesel D4 RINs slipped around $0.06/credit, or 3.3%, week-over-week after strengthening ahead of the January 10 EPA one-month public comment period. The 2022 vintage D4 reached as high as $1.87/RIN on January 10 as the EPA was flooded with comments from the advanced biofuel industry taking issue with the smaller mandates given the rapid pace of development in the industry.
The 2022-2023 D4 RIN spread was little changed at just over $0.10/RIN as the current proposed RVOs for 2023-2025, also known as the “Set Rule”, makes 2023 compliance easier to achieve thus lowering prices for the current year credits (see below).
D4 RINs are a key component to both RD and BD margins. Each gallon of RD gains 1.7 D4 RINs per gallon, while biomass-based diesel gains 1.5 D4 RINs per gallon. RD produced from more carbon intensive feedstocks like palm oil can generate 1.6 D5 RINs. The ratios are known as equivalence values (EV) as all RINs are all set in ethanol equivalent gallons and then further adjusted to account for the reduction in greenhouse gas emissions using the EV.
Prompt LCFS markets continued to track downward reaching the lowest level since mid-November 2022. A lack of regulatory urgency is weighing not only on prompt prices but also developing structure in the spot curve as the credits for transfer closer to the release of the 2024 scoping plan are carrying premiums to more prompt quarters (see below).
LCFS prices have been bearish for the better part of two years as heavy renewable diesel and biodiesel consumption has led to a record surplus of LCFS RINs. Waning demand for gasoline—the only deficit-generating fuel—compounds the structural oversupply of the market.
California Air Resources Board (CARB) has been at work on a new scoping plan to be implemented in the first quarter of 2024. The scoping plan would set stricter carbon targets, soaking up much of the oversupply and drawing the program more in line with the reality of the marketplace.
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 this is 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. Washington state should soon follow.
The stark LCFS bear market could lower US 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 convention 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 locked into 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.
Renewable diesel and sustainable aviation fuel markets remain in revolutionary growth mode. While returns narrow RD and SAF remain the highest returning products in the renewable space, rapid growth and regulatory changes will drive 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.