Renewable Diesel Margins Fall on Diesel Losses and Weak Credit Markets
US Gulf coast RD remained anemic as diesel losses and weaker credit markets were only partially offset by weaker feedstock prices. Mounting oversupply drove heavy selling of D4 credits, eroding returns to producers.
UCO remained the highest returning feedstock as the feedstock was the quickest to snap lower, averaging a return of $2.05/gallon.
Spot soybean oil margins shrunk $0.09/gallon mounting on last week’s rout to $1.93/gallon. SBO remained the second highest returning feedstock.
BFT margins shed $0.18/gallon, or 9.5%, to average $1.72/gallon.
Strength in DCO spot prices saw margins fall to $1.69/gallon, reaching as low as $1.62/gallon—a level not seen since early January.
To recap: The week ended May 26 saw RD margins retreat as feedstock prices climbed alongside a stable diesel market. Gains in LCFS credits limited losses, while stable D4 RINs did not enter the mix. Biodiesel margins backed off the highest levels in nearly seven months as soybean oil markets found strength. Bearish fundamentals kicked off heavy selling the week prior that the market deemed overdone by late last week.
The week ended June 2 saw fresh losses in RD returns amid diesel weakness and heavy RIN losses. Marginal LCFS weakness provided headwinds, while losses in feedstock prices failed to offset declines in the margin environment. Biodiesel margins were stable yet closed out the week softer on a spurt of soybean oil strength.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) were stable after falling from the strongest levels in nearly seven months. The BOHO spread gained held at $1.26/gallon, though reached as wide as $1.36/gallon late in the week on a spurt of soybean oil strength.
Weaker biodiesel margins failed to support D4 values which came under heavy selling amid historic oversupply. The BOHO spread stood $0.20 under 2023 D4 RIN values (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.
D4 RIN prices fell more than $0.05/RIN to average $1.46/RIN as oversupply prompted heavy selling. D4 oversupply from mounting RD production got to the point where D6 sellers were seeking out the option to unload D4s instead driving an unsurprising drive toward parity.
Lawmakers have issued fresh letters to the EPA urging an increase in the advanced category as the proposed ‘Set Rule’ sits with the OMB.
The EPA delivered the final RFS ‘Set Rule’ to the White House Office of Management and Budget (OMB) on May 15. The EPA is now required to issue a final RFS for 2023, 2024 and 2025 by June 14.
EPA Administrator Michael Regan issued comments at a House Agriculture Committee hearing indicating the EPA is likely to cave to both industry and lawmaker pressure to increase the advanced biofuel mandate in the final ruling expected in June.
News back in February that United Refining was denied its SRE hardship waiver by the Third Circuit court added bullish undertones to the RIN complex as the move adds 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 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 California Low Carbon Fuel Standard (LCFS) gave back the prior week’s gains. Prompt credits shed $1.43/t, on average, last week. The prompt market has largely been in a choppy holding pattern since early May.
LCFS strength has 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 flat as Q2 2023 rolled off the board.
Last month’s California’s Air Resource Board (CARB) 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.
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.