Renewable Diesel Margins Tumble on RIN Rout
- US renewable diesel (RD) margins fell to the lowest levels in two months as RIN markets tumbled to the lowest levels in over two and a half years and global distillate fundamentals strengthened.
- The Bean Oil-Heating Oil (BOHO) narrowed to the tightest level in four months at $1.11/gallon as soybean oil losses outpaced the downturn in Nymex ULSD. The spread ended the week at $1.26/gallon, shedding $0.13/gallon, or 9.2%, on average.
- Used Cooking Oil (UCO) remained the highest returning feedstock at $2.14/gallon on average. Margins reached as low as $1.99/gallon by the close of the week, marking the lowest returns since mid-July. UCO imports have tempered US UCO prices despite mounting demand. Soybean oil supplanted tallow as the second strongest returning feedstock at $1.66/gallon on average.
- Oversupply concerns heading into the release of the EPA’s August RIN generation reported on September 21, 2023, pressured D4 RINs to the lowest levels in over two and a half years. Current year vintage credits shed $0.17/RIN, or 13% over the course of the week, to average $1.137/RIN. The 2022 vintage market posted heavier gains despite an approaching compliance deadline, narrowing the inter-vintage spread to just 4.5c/RIN from 12.5c the week prior.
- The California Low Carbon Fuel Standard (LCFS) market posted losses for a fifth consecutive week as the slow pace of regulatory change to the program weighed on credit prices. Prompt credits shed $6.9/t, or 9.4%, on average, last week. Credit prices sank across the forward curve, with contango continuing to narrow heading into 2024. LCFS strength had been driven by trader buying and strength in futures markets this summer as the credits become more attractive options ahead of workshops covering CARB’s more stringent scoping plan.
- A 104,000 Bbl RD vessel is scheduled to land in Rodeo, California on October 5, according to Vortexa data. A single 244,000 Bbl RD vessel made the voyage from Singapore to California in September, according to preliminary shipping data. At least four RD vessels for August delivery were booked from Singapore to California. August deliveries totaled 844,000 Bbl. Just two vessels totaling 406,000 Bbl were booked during July, as June maintenance at Neste’s Singapore facility curbed output. Only two vessels totaling 498,000 Bbl were booked for the month of June. At least six RD vessels were booked for California destinations over the course of May, totaling 991,000 Bbl, according to data from Vortexa. The state took a total of 548,000 during the month of April, 417,000 Bbl in March, and 661,000 Bbl in February.
- A US RD export out of Los Angeles discharged 156,000 Bbl in Vancouver, Canada on September 1, according to Vortexa data.
- The Gulf coast continues to reach wide to find feedstock for imports. The region is sourcing tallow from Australia, Brazil, Germany, the Netherlands, and Uruguay. RBD soybean oil from India and Singapore is making its way to coastal markets in the US.
- The US Gulf coast continues to import five to six cargoes of UCO each month, primarily from China, but also South Korea. Chinese UCO cargos are due to arrive in New Orleans, Louisiana, on October 2 and October 5 totaling 161,5000 BBl of feedstock. At least two UCO cargoes arrived in Houston, Texas in September totaling 198,000 Bbl.
- August total RIN generation came in at 2.04 billion credits, up 2.4% on the previous month and nearly 11% over year-ago levels. D4 generation came in at over 701 million credits, up 13% from the previous month’s levels and 46% from year-ago levels. Total D4 production reached 5.03 billion credits, less than 2% short of satisfying the entire 2023 advanced biofuel mandate. Domestic and foreign renewable diesel production accounted for 57% of total D4 output, domestic and foreign biodiesel made up 42%, while SAF accounted for less than one percentage point.
- D3 RIN generation fell 8% from the previous month and is running just 17% over year-ago levels compared to a 25% growth rate used by the EPA to set the 2023 final mandate. Total D3 RIN generation of just under 65 million credits is running nearly 23% under the final mandate of 84 million RINs.
- EPA officials indicated that the next opportunity for addressing the adoption of the contentious eRIN pathway would be when the agency considers blending targets for 2026, according to EPA Fuel Programs Center director Paul Machiele when speaking at the Argus North American Biofuels, LCFS, & Carbon Markets Summit in mid-September.
- CARB Releases Proposed 2023 Amendments in SRIA. On September 8, California’s Air Resources Board (CARB) released the Standardized Regulatory Impact Assessment (SRIA) containing ten proposed amendments for 2023. The SRIA proposed a 30% reduction in carbon intensity by 2030, including a 5% step-down in 2025. The SRIA contained an automatic acceleration mechanism (AAM) which would advance stringency for a given year when specific regulatory conditions are satisfied by advancing the carbon reduction target by two years. CARB proposed to eliminate the exemption for intrastate fossil jet fuel and phase out avoided methane crediting for dairy and swine manure pathways and for landfill-diversion pathways by 2040. CARB aims to limit RNG book-and-claim accounting, requiring fuels to be consumed in California. CARB proposed to expand ZEV infrastructure crediting to the medium- and heavy-duty sector. The proposal would allow for book-and-claim for low carbon intensity hydrogen. Project-based crediting for petroleum projects would be phased out by 2040. CARB proposed to decrease credits generated by forklifts less than 12,000-pound lift capacity. According to CARB models, a 5% step down (18.75% by 2025 mandate) would generate nearly 12 million deficits.
- The US Energy Information Administration (EIA) raised its 2023 RD production forecast by 2.4% to 169,000 Bbl/d in its September Short-Term Energy Outlook. RD production for 2024 was forecast at 216,000 Bbl/d, down 0.9% from the previous month’s estimate. The EIA increased its renewable diesel demand forecast by 3.8% to 191,000 Bbl/d for 2023, while trimming its 2024 forecast by 0.4% to 239,000 Bbl/d. The Administration previously cited lower plant utilization rates and more plant cancellations in response to the June 21st release of the Environmental Protection Agency’s (EPA) final Renewable Fuel Standard rule as a reason for trimming forecasts this summer.
- Airlines reported 8-10 million tons of SAF across 59 offtake agreements between January 2022 and June 2023, according to data from International Air Transport Association (Iata). The Hydro-Processed Esters and Fatty Acids (Hefa) pathway accounted for 53% of the reported offtakes and 85% of global renewable capacity. Iata reported a SAF blend ratio of 30-40% since 2022.
- Darling International Inc. confirmed that the Diamond Green Diesel, Norco, Louisiana, facility was running following a 10-day outage. A fire was reported at DGD’s Norco, Louisiana, facility on August 20. Diamond Green Diesel is the world’s second largest RD producer at 1.2 billion gallons per year. The 750 million gallon per year Norco facility primarily uses UCO, tallow and DCO as feed.
- Calumet Specialty Products reported a leak in a steam recovery system at its Montana Renewables Facility. Calumet expects to produce 8,000-8,500 Bbl/d at its Great Falls, Montana, facility during the third quarter, and aims to complete repairs in mid-September. Untreated feedstock makes up 70% of throughput at the Montana Renewables Facility, with reported margins of $1.25-$1.45/gallon for July.
- 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.
- US northeast energy supplier, Sprague Operating Resources LLC, announced August 15 that it is offering renewable diesel for both delivery and transport rack loading at their Bronx terminal, New York City’s largest storage and rack loading facility.
- CVR Energy Inc. aims to startup the pretreatment unit (PTU) at its Wynnewood, Oklahoma, refinery by the end of 2023. The plant has been running soybean oil and treated corn oil until the PTU enters service. A catalyst change during the second quarter saw throughput drop to 17.8 million gallons, down from 22.4 million gallons consumed during the first quarter. CVR estimates Q3 throughput of 17-22 million gallons.
- PBF Energy Inc. announced August 3 that its St. Bernard renewable diesel facility in Chalmette, Louisiana, is operational. This includes a pretreatment unit (PTU) at the 320MM gallon per year facility. St. Bernard Renewables (SBR) is a 50-50 JV with Italian oil giant ENI.
- Vertex Energy Inc. reached 8,000 Bbl/d phase 1 capacity at its Mobile, Alabama, facility during the second quarter. Vertex received federal approval to generate D4 RINs earlier this year. The company announced its first sale of 110,000 Bbl to Idemitsu Apollo in June 2023. Vertex aims to move away from refined, bleached, and deodorized (RBD) soybean as a feedstock citing poor margin conditions. The company will increasingly use DCO, technical tallow, crude de-gummed SBO, and canola oil during the third quarter and is exploring the use of UCO and other fats and greases.
- Valero’s renewable diesel arm Diamond Green Diesel (DGD), a joint venture with Darling Ingredients Inc., reported $440 million in operating income for Q2, more than doubling the $152 million recorded last year. RD sales came in at 4.4 million gallons per day, doubling last year’s output. Valero expects renewable diesel output to total 1.2 billion gallons for the year. DGD’s 470 million gallon Port Arthur RD/SAF facility is on schedule for 2025 completion. Half of the capacity will be dedicated to SAF production.
- Global Clean Energy secured a $110 million loan to proceed with construction of its Bakersfield, California renewable diesel facility. The project is behind schedule and has run more than $600 million over budget prompting ExxonMobil to nullify its offtake agreement. The 15,000 Bbl/d project is the site of the former Big West refinery and will use camelina as feedstock.
- 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.
- HF Sinclair lost a lawsuit seeking the return of RINs used to cover 2018 compliance for its 75,000 Bbl/d Sinclair, Wyoming, refinery, according to Argus Media Inc. The refiner had sought a small refinery waiver from the EPA which was denied in 2019 and upheld in 2022. The Renewable Fuel Standard identifies small refineries as facilities producing no more than 75,000 Bbl/d. A refiner can also apply for a waiver by demonstrating disproportionate economic harm.
- Twelve broke ground on a commercial scale power-to-liquid eSAF facility on July 11. The facility is expected to produce 5 Bbl/d, or approximately 40,000 gallons per year, by mid-2024, with plans to rapidly increase capacity. Alaska Airlines, Microsoft, and Shopify already have offtake arrangements with the Moses Lake facility.
- ExxonMobil exited its renewable diesel offtake agreement with Global Clean Energy Holdings as the 210mn USG/yr is running behind schedule and overbudget. The energy giant originally stated it would take such action if no product was received by July 2022. The Bakersfield, California facility is slated to run on camelina oil. Global Clean Energy Holdings rejected the notice and stated it has until 30 November to complete the project, according to the Bakersfield Californian.
- Cargill announced it has put its Missouri soy crush facility on hold, citing market dynamics. The 62mn bushels per year facility was originally slated for completion in 2026.
- California’s Air Resource Board’s (CARB) last 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.
- Marathon announced that it is on pace to complete Phase II of its Martinez Project with Neste by year end bringing total production capacity to 730 million gallons/yr. Phase I was completed during 1Q23 ramping up 260 million gallons/yr of renewable diesel capacity.
- Oleo-X launched a 300 million gallons/yr feedstock pretreatment facility in Pascagoula, Mississippi. The company aims to process low-carbon inedible oils and poultry fat.
- Par Pacific announced a $90 million investment to build a RD/SAF facility at its existing refinery in Kapolei, Hawaii. The facility is expected to produce 4,000 Bbl/d of RD and SAF as well as renewable naphtha and LPG by 2025.
- Parkland Corp. announced its decision to halt its renewable diesel project in British Columbia, Canada. The company had been coprocessing at its Burnaby Refinery with plans to build a 273,000 gallons/yr RD facility, set to come online in 2026. The company cited rising feedstock costs and advantages to US producers afforded by new credits carved out in the Inflation Reduction Act (IRA). The move could be a harbinger of slowing momentum for the RD industry which has increasingly worried about rising feedstock costs, while the numerous advantages of the US market are likely to open export markets soon.
- The Washington State Senate passed a Sustainable Aviation Fuel (SAF) tax credit, following actions from the state of Illinois which issued its own SAF credit with additional tax advantages for the fuel. Washington aims to establish a $1/gallon credit with a $2/gallon cap as additional value can be earned for fuels with lower carbon emissions. The Illinois SAF credit is set at $1.50/gallon and will run from June 1, 2023, through June 1, 2033, making the state the highest returning market for SAF.
- The UK received its first renewable diesel import on March 30 to Valero Cardiff following a decision to lift import tariffs on US RD. The move presages growing export opportunities for competitive US RD product.
- Shell scrapped plans for a 550,000 t/yr RD and SAF facility in Singapore. While no rationale was put forth, feedstock supply and the lack of mandates throughout the Asia Pacific region are likely culprits. While feedstock prices have been falling, recession fears have also been weighing on diesel values, limiting margin growth.
Renewable Diesel
US Gulf coast RD margins fell sharply as a heavy rout in D4 RIN pricing pressured returns, while modest losses in feedstock prices failed to keep pace. Severe oversupply concerns dominated the week and saw D4 credit prices capitulated to the lowest levels since February 2021. Continued losses in LCFS credits and modest diesel weakness added further headwinds to the margin environment and saw the BOHO spread reach the narrowest level in four months.
UCO remained the highest returning feedstock, averaging a return of $2.14/gallon, shedding $0.50/gallon, or 19%, over the course of the week to reach as low as $1.99/gallon. Spot UCO prices at the US Gulf coast were negligibly lower at 64.80c/lb.
SBO margins overtook BFT as the second highest returning feedstock at $1.66/gallon. SBO margins fell $0.39/gallon, or 19%, on average as spot SBO shed 1.28c/lb, or 1.9%, to 66.94c/lb.
BFT margins tumbled $0.57/gallon, or 27%, to $1.54/gallon. Margins retreated to $1.35/gallon by the close of the week, marking the lowest level in over a year and a half. Spot BFT prices climbed 0.65c/lb, or less than one percent, to 70.40/lb on average. BFT prices reached 70.50c/lb by the close of the week, the highest level since early January 2023. BFT was the only feedstock to post gains last week even as at least two tallow import vessels are poised to reach the US Gulf coast between October 9 and 19.
DCO margins sank $0.48/gallon, or 26%, to average $1.38/gallon. Margins reached as low as $1.19/gallon to close the week, the lowest level in two months. Spot DCO prices shed 0.50/lb, or less than one percent, to an average of 73.50c/lb.
To recap: The week ended September 15 saw RD margins continue to find support on diesel gains, while marginal gains in feedstock prices limited gains. The BOHO spread reached the tightest level in nearly three and a half years, pressuring D4 credits to the lowest levels since September 2021. LCFS markets posted losses for a fourth consecutive week, providing further headwinds to the margin environment. Market participants are unhappy with the slow pace of rulemaking to adopt more stringent carbon intensity targets under the LCFS program as a record bank of surplus credits mount. 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.
The week ended September 22 saw RD margins fall to the lowest levels in two months on pronounced RIN losses. Oversupply concerns ahead of the release of EPA’s August RIN generation report saw current-year vintage D4 credits tumble to the lowest levels since February 2021. Weaker LCFS credits and marginal Nymex weakness added further pressure on margins. Feedstock prices were negligibly lower except for BFT values which reached the highest level since January 2023. AEGIS modeling show D4 RINs have additional room to decline, particularly should diesel continue to strengthen and/or renewable feedstock pricing soften.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), narrowed to $1.11/gallon, marking the lowest level in four months. The BOHO spread narrowed by $0.13/gallon, or 9.2%, on average week-over-week.
The tighter BOHO spread, and acute RIN oversupply fears weighed heavily on 2023 vintage D4 RINs driving prices to the lowest levels in since February 2021. The BOHO spread stood just 3.5c over 2023 D4 RIN values on September 21 before rebounding to 17.5c the following session.
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.
Environmental Credit Markets
Current year vintage D4 RINs tumbled $0.17/RIN, or 12.6%, to average $1.137/RIN. The market reached as low as $1.085, marking the lowest level since February 2021. The B22/B23 spread narrowed sharply as B22 losses outpaced B23s despite an approaching December compliance deadline.
Oversupply concerns heading into the release of the EPA’s August RIN generation reported on September 21, 2023, weighed heavily on RINs last week, while recent diesel strength and tightening global distillate fundamentals are poised to add additional pressure.
August total RIN generation came in at 2.04 billion credits, up 2.4% on the previous month and nearly 11% over year-ago levels.
D4 generation came in at over 701 million credits, up 13% from the previous month’s levels and 46% from year-ago levels. Total D4 production reached 5.03 billion credits, less than 2% short of satisfying the entire 2023 advanced biofuel mandate.
Domestic and foreign renewable diesel production accounted for 57% of total D4 output, domestic and foreign biodiesel made up 42%, while SAF accounted for less than one percentage point.
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.
LCFS Pricing
The California Low Carbon Fuel Standard (LCFS) market fell for a fifth consecutive week as the slow pace of regulatory reform to the program curbed buying. Prompt credits slumped $6.9/t, or 9.4%, to average $66.20/t. The market closed out the week at $70.00/t after reaching as low as $63.00/t, the lowest level since February 2023.
The forward structure saw contango continuing to narrow heading into 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.
Final Notes
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.