Renewable Diesel Margins Rebound on Diesel Strength, SBO Losses
US Gulf coast RD margins rebounded on diesel strength, while feedstock pricing was largely sideways. Losses in D4 RINs and spot LCFS credits provided headwinds to the margin complex. The narrowest BOHO spread in three months saw D4 RINs capitulate to the lowest levels since January 2022.
UCO remained the highest returning feedstock, averaging a return of $2.50/gallon, as spot UCO prices in the US Gulf coast rose just 0.10c/lb, or less than one percent, week-over-week.
BFT margins rose $0.11/gallon, or 5.9%, to $1.86/gallon. Margins reached as high as $2.01/gallon by the close of the week. Spot BFT prices climbed 0.30c/lb, or less than one percent, to 69.03c/lb on average. BFT prices held at 69.50c/lb, the highest level since late January 2023.
DCO margins rebounded $0.11/gallon, or 6.9%, to average $1.78/gallon. Margins reached as high as $1.83/gallon by the close of the week, the highest level since late May. Spot DCO prices gained 0.10c/lb, or less than one percent, to an average of 73.00c/lb.
SBO margins posted the largest gains for a third consecutive week, rallying $0.36/gallon, or 24%, to average $1.82/gallon, the highest level since late May. Spot SBO prices at the US Gulf coast tumbled $2.82/lb, or 3.9%, to average just over 69.02/lb.
To recap: The week ended September 1 saw mixed returns for RD as feedstock prices lacked cohesive direction, while modest diesel losses and weaker LCFS credits provided headwinds. D4 RINs spent the bulk of the week nudging higher, before a wider HOBO spread late in the week erased gains.
The week ended September 8 saw RD margins rebound on material diesel strength, while feedstocks were little changed. The BOHO spread reached the tightest level in three months, pressuring D4 credits to the lowest levels since January 2022. LCFS markets posted losses for a third consecutive week, providing headwinds to the margin environment. CARB released a proposal ahead of its rulemaking which adopted a 30% carbon intensity reduction by 2030, curbed biogas contributions, and included an auto-acceleration mechanism. Traders now await the late-September board meeting for the next cues and the release of the final proposal for the state’s scoping plan.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), narrowed to $1.44/gallon, marking the lowest level in three months. The BOHO spread narrowed by $0.20/gallon, or 11%, on average week-over-week.
The tighter BOHO spread, and mounting RIN oversupply fears weighed heavily on 2023 vintage D4 RINs. The BOHO spread stood $0.12/gallon over 2023 D4 RIN values, down sharply from the previous week’s $0.49/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.
Current year vintage D4 RINs tumbled $0.09/RIN on average to $1.326/RIN on average. The market reached as low as $1.305, marking the lowest level since January 2022. The B22/B23 spread continued widened dramatically as B23 losses outpaced B22 losses. Mounting oversupply of 2023 vintage D4 credits, and an approaching 2022 compliance deadline saw the B22/B23 spread return to levels seen in late June.
July total RIN generation fell to 1.98 billion credits, down by more than 80 million credits, or 3.9%, from June. July D4 RIN generation slumped 44 million credits, or 6.4%, from the month prior as renewable diesel and biodiesel margins both deteriorated throughout the month. Domestic and foreign renewable diesel generation accounted for 59% of total D4 generation, up from last month’s 56%. Sustainable Aviation Fuel (SAF) accounted for 0.4% of total D4 generation, down from last month’s 0.6%. Total D4 RIN generation of 4.32 billion credits accounted for 85% of the final advanced obligation and is on pace to exceed the obligation by 2.31 billion credits.
Total D6 generation came in at 1.27 billion credits taking the total for the first seven months of the year to 8.56 billion RINs. D6 generation is on pace to fall approximately 568 million 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.
The California Low Carbon Fuel Standard (LCFS) market fell for a third consecutive week as buying remained anemic following CARB’s August 16 public workshop covering LCFS modeling and scoping. Prompt credits slumped $2.1/t, or 2.7%, to average $75.50/t. The market closed out the week at $74.00/t.
The forward structure remained in contago with the most prominent carry of $1/t heading into the second quarter of 2024.
The prompt market had been in a choppy holding pattern since early May yet initiated a material downtrend starting in early June. LCFS strength has been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of CARB’s more stringent scoping plan.
CARB released a proposal ahead of its rulemaking which adopted a 30% carbon intensity reduction by 2030, curbed biogas contributions, and included an auto-acceleration mechanism. Traders now await the late-September board meeting for the next cues and the release of the final proposal for the state’s scoping plan.
During the August 16 workshop, California’s Air Resources Board (CARB) provided updated guidance on the timeline for its rulemaking process to usher in more stringent carbon intensity targets. The regulator aims to release a proposal after a late-September board meeting during which a non-voting LCFS item will be outlined. The proposal will face a 45-day public comment period allowing the item to be voted on at a board meeting in early 2024.
The new targets could come into effect by mid-to-late 2024, or CARB could wait till January 1, 2025. CARB clarified that it would not retroactively apply the ruling to any part of the 2024 compliance year.
The August 16 public workshop covered extensive modeling updates to its California Transportation Supply Model (CATS). The updated scenarios included material upward revisions in electrification of HDVs and MDVs, added in total out-of-state biomethane supply and built in a credit bank drawdown pathway. CARB did not factor alcohol-to-jet into the model as sufficient data was not available.
Stakeholders raised concerns that the electricity CI used in the model was too high and took issue with using total out-of-state biomethane (RNG) in the model, while not adjusting for out of state competition and restrictions.
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.