RIN prices tumbled to the lowest levels in nearly four years as stronger producer margins and a mounting oversupply of available D4 RINs spurred heavy selling. D4 prices fell 26% over the course of January, with the D6 market posting identical losses.
Diesel strength coupled with losses in soybean oil saw the soybean oil-heating oil (BOHO) spread narrow to $0.58/gallon in late January, a level not seen since March 2020. A narrower BOHO spread implies stronger biodiesel margins, which is bearish the D4 RIN all else equal.
The January 18 release of December RIN generation showed a record 2.17 billion credits generated, up 9% from the previous month. D4 RIN generation surged 24% from the previous month to a record 840 million credits. D4 generation accounted for nearly 39% of all credits generated during the month of December.
The D3 market saw the pace of selling increase, building on a downward trend started in early November as producer selling saw prices reach as low as $2.74/RIN. Mounting expectations that the EPA may need to apply its waiver authority for the cellulosic obligation and/or issues a Cellulosic Waiver Credit (CWC) weighed on the marketplace.
Insufficient RIN generation and the lack of a Cellulosic Waiver Credit (CWC) had been supporting the 2023 market, yet the market began to price in the increased likelihood of deferred 2023 compliance. Total 2023 D3 RIN generation fell 16% short of the cellulosic mandate, yet final 2023 D3 availability will not be known until February 2024 data is available.
- December total RIN generation came in at a record 2.17 billion credits, up 9% from the previous month when total RIN generation reached just over 2.00 billion credits.
- D4 generation reached a record 840 million credits, up 24% from the previous month and surpassing the previous record of 751 million credits set in May 2023 by 12%. Domestic renewable diesel production accounted for 54% of total D4 output, up from 49.5% the month prior and 47% in October. Foreign renewable diesel made up 9.7% of total D4 generation, down from 11% the month prior. Domestic and imported biodiesel accounted for 35% of the month’s share, down from 39% the month prior and 41% in October. Just 3.8 million D4 credits were generated across domestic and foreign SAF production, accounting for less than one percent of the month’s share.
- D3 RIN generation fell 13% from an upward-revised November production level or 69.8 million credits. Total D3 RIN generation of 704 million credits fell 16% short of the cellulosic mandate, yet final 2023 D3 availability will not be known until February 2024 data is available. The EPA used a 25% growth rate to set the 2023 final cellulosic mandate.
- December RIN generation data housed minor upward revision to 2022 and 2023 D6 totaling 198,203 credits from November 2022 and January 2023. The prior month saw numerous upward revisions to 2021-2023 D6 credits totaling 23,017,855 credits spanning from January 2021 to August 2023.
- D4 RIN generation for the month of November was revised 42,204 higher. The month prior saw an additional 1,206,061 credits added from April to October 2023. November D5 generation was revised 4,439,893 higher, building on the prior month’s upward revision of 5,086,213 for the month of October 2023.
- December data showed an upward revision of 24,571 credits for 2022 and an upward revision of 6,852,689 credits for the month of November.
- The EIA trimmed its forecasts for US renewable diesel production and demand. Domestic production was projected at 229,000 Bbl/d, down 3% from the December Short-Term Energy Outlook. US RD demand was estimated at 252,000 Bbl/d, down 3% from the prior months’ outlook. RD imports for 2024 were cut by 4% to 23,000 Bbl/d. Fresh 2025 forecasts came in at 294,000 Bbl/d for production, 309,000 Bbl/d for demand and 14,000 Bbl/d for imports.
- EPA Fuel Program Center Director, Paul Machiele, said the oversupply of D4 credits is not currently a concern at the EPA as the agency’s primary driver in setting the 2023-2025 mandates was feedstock availability, according to Carbon Pulse. Machiele noted that the surge in imported feedstock was not taken into account when considering the final Set Rule, speaking at the OPIS RFS, RINs and Biofuels Forum in Chicago. Changes to exiting mandates are unlikely to be taken up during an election year. President of Advanced Biofuels Association, Michael McAdams, cited an unnamed source that the earliest the EPA would take action is 2026.
- 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.
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Calendar:
- January 31, 2024: Three-year Registration Update
- March 31, 2024: EPA Expected Deadline for 2023 Compliance
- June 1, 2024: Attest Engagement Reporting Deadline for 2022
- March 31, 2025: EPA Expected Deadline for 2024 Compliance
Relevant News:
- The 5th US Circuit Court of Appeals turned down a request to reconsider its November 22, 2023, decision to block SRE denials for six small refineries. Biofuel industry groups Growth Energy and Renewable Fuel Association sought a rehearing on the grounds that the denials should be brought before the DC Circuit Court. The EPA has received 12 SRE petitions since the 5th Circuit’s November ruling.
- The US Court of Appeals for the 11th Circuit dismissed a SRE challenge by Hunt Refining on January 11, saying the case should be heard by the US Court of Appeals for the DC Circuit. Biofuel industry group Growth Energy welcomed the decision as CEO Emily Skor responded “EPA’s denials of these SRE petitions were ‘nationally applicable’ and have nationwide effect, and challenges to the denials should only have been brought in the DC Circuit.”
- The 5th US Circuit Court of Appeals ruled to block denials of SREs for six refineries on November 22, 2023. The SREs cover Calumet’s 57,000 Bbl/d Shreveport, Louisiana refinery, Placid Refining’s 75,000 Bbl/d Port Allen, Louisiana refinery, Ergon Refining’s 26,500 Bbl/d Vicksburg, Mississippi refinery, Ergon’s 23,000 Bb/d West Virginia refinery, CVR’s 74,500 Bbl/d Wynnewood, Oklahoma refinery, and Allegiance Refining’s 21,000 Bbl/d San Antonio refinery. The court’s decision said the EPA’s blanket SRE rejection was “impermissibly retroactive; contrary to law; and counter to the record evidence.” The decision will add a bearish undertone to an already oversupplied marketplace, save for D3 credits.
- The US Treasury Department issued guidance on December 15, 2023, clarifying how SAF will be eligible for tax credits worth as much as $1.75/gallon under the Inflation Reduction Act. The SAF tax credit is only issued to fuels which reduce lifecycle GHG emissions 50% below petroleum-derived jet fuel. The Treasury Department plans to calculate emissions intensity using a modified version of the GREEET model planned for March 1, 2024. The adjusted GREET model could open the door for corn-based ethanol to contribute to SAF supply.
- On December 19, California’s Air Resources Board (CARB) released a preliminary LCFS proposal laying out amendments which nearly mirrored those in the Standardized Regulatory Impact Assessment released in September. CARB proposed a 30% reduction in carbon intensity by 2030, including a 5% step-down in 2025. This marks a 50% increase in carbon targets over the original 20% reduction target for 2030. Reductions increase to 90% by 2045 compared to a 2010 baseline. The proposal contained an automatic acceleration mechanism (AAM) which would advance stringency for a given year when unused credits more than triple average deficit generation by advancing the carbon reduction target by two years. Amendments included eliminating the exemption for intrastate jet fuel beginning in 2028 and new tracking requirements for crop-based and forestry-based feedstocks to their point of origin. The regulator proposed phasing out biogas used in transportation fuel by 2041 and by 2045 for biomethane used to produce renewable hydrogen. CARB expects to kick off the required 45-day public comment period in January, with a public hearing set for March 21, 2024.
- Recent fires at Marathon’s Martinez refinery triggered a federal investigation by the Chemical Safety and Hazard Investigation Board (CSB). Fires on November 11 and November 19 at a hydrodeoxygenation (HDO) unit led to spills of RD. Marathon aims to achieve 48,000 Bbl/d of production at its Martinez, California facility by year-end.
- Federal judges defended the EPA’s approach to setting the 2020-2022 blending mandates. US refiners have complained blend requirements were too high based on how the EPA adjusted blending targets to account for projected Small Refinery Exemptions (SREs). The EPA is also facing a separate lawsuit for its 2022 cellulosic biofuel requirement, with biofuel groups arguing that targets were set too low based on projections of actual production and not accounting for the availability of carryover credits for compliance. Refiners have also filed a series of lawsuits in the DC Circuit court challenging the EPA’s move to reject all outstanding SREs this year.
- Calumet plans to add 3,000 Bbl/d of capacity to its 15,000 Bbl/d, Great Falls, Montana Renewables refinery by 2025. The Great Falls plant is currently undergoing repairs to a steam recovery system and moved forward a turnaround originally planned for 2024 to November. Calumet is mulling plans to ultimately maximize SAF production at the Great Falls facility.
RIN markets fell to the lowest levels in nearly four years, with 2024 vintage D4 and D6 RINs tumbling 26% over the course of the month of January. D4 RINs developed a modestly wider premium to D6 credits despite a mounting supply of D4 credits.
Renewable diesel margins proved volatile, with losses in UCO margins standing out against sustained diesel strength throughout the bulk of the month. UCO remained the strongest returning feedstock at $2.06/gallon by the month’s close, followed by BFT margins at $1.42/gallon.
Diesel strength saw the soybean oil-heating oil (BOHO) spread narrow to just $0.58/gallon, the lowest level in nearly four years. The spread started the month at $1.06/gallon. Sustained BOHO strength weighed heavily on RIN markets, with 2024 vintage D4 RINs shedding 26% of their value over the course of the month of January. A narrower BOHO spread implies stronger biodiesel margins, which is bearish the D4 RIN all else equal.
The D6 market posted identical losses over the same period with the D4/D6 spread maintaining a slightly wider premium at just over 1c/gallon on average. We believe the wider 2024 D4/D6 spread is reflective of the added value for the D4 RIN to fulfill multiple obligations relative to the D6 RIN which can only meet the renewable fuel requirement. The lack of a supplemental standard for 2024 and 2025 compliance is also bearish the D6 relative to the D4.
A narrower D4/D6 spread indicates tightness in D6 supply. In the absence of a sufficient supply of D6 credits, D4 and D5 credits from the advanced category can be used to satisfy compliance obligations.
Total 2023 D6 RIN generation 430 million credit, or 2.8%, short of mandated volumes, through ample D4 RINs are available to cover the D6 compliance shortfall which will lead the 2023 D4/D6 RIN spread to trend toward parity.
The D3 market saw the pace of selling increase, building on a downward trend started in early November as producer selling saw prices reach as low as $2.74/RIN. Mounting expectations that the EPA may need to apply its waiver authority for the cellulosic obligation and/or issues a Cellulosic Waiver Credit (CWC) weighed on the marketplace. A petition by the American Fuel and Petrochemical Manufacturers (AFPM) for a partial 2023 waiver heightened bearish sentiment.
The C23/C24 spread reached as wide as 3c/RIN on January 30, after the spread briefly inverted. We expect bullish 2023 D3 RIN generation to balance against bearish waiver expectations at least until February RIN generation data is available.
Total D3 RIN generation fell 16% short of the final 840-million-gallon 2023 mandate. With no Cellulosic Waiver Credit in place and a record low RIN bank, we expect D3 RINs to remain at elevated levels barring an early implementation of eRINs and/or the issuance of a CWC under the EPA’s waiver authority.
The 2022 vintage D3 market shed 15c, or 5%, over the course of January with credits closing out the month at $2.86/RIN.
The 2023-2024 D4 RIN spread spent the bulk of the month inverted as surplus 2023 vintage D4 pressured the spread. The spread started the month of January at -5pt before reaching as wide as -1.5c/RIN during the second half of the month.
AEGIS noted in earlier reports that diesel would be the main driver of credit markets as RINs are the most responsive component of the credit stack for buttressing renewable diesel margins.
We expect RIN generation to remain at elevated levels should diesel strength persist and as long as feedstock pricing remained under pressure from imports. D4 RIN prices have not fallen to sufficient levels to curb biodiesel or renewable diesel production, particularly given strength in the BOHO spread. Diesel strength and favorable weather conditions in South America underpin BOHO dynamics.
First half 2024 startups are planned to run at half capacity and should start to pressure RIN markets more materially in the second half of the year.
Given prevailing diesel prices, there is ample room for D4 credit prices to fall before producers trim runs, conduct maintenance, or shutdown.
The 2023-2024 D6 spread fluctuated between flat and +1c, though briefly inverted to -5pt on January 30. The inter-vintage D6 spread spent the bulk of December at +1c.
The 2023 D4-D6 spread inverted to -5pt from flat over the course of January as ample D4 supply spurred selling, while the final year of the 250-million-gallon supplemental standard prompted D6 buying. The spread spent the bulk of the fourth quarter at flat after starting the year at +4c.
EPA RIN Generation Data as of January 18:
EPA Small Refinery Exemption (SRE) Data as of January 18:
Green indicates change
Some of the price and regulatory risk in the development of the renewable fuels markets is controllable through hedging or pre-selling. Other risks require constant monitoring of pending changes to regulations and programs. AEGIS can help with both.
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