RIN prices traded higher over the course of July as the market corrected for persistent selling in the lead up to the June 21 release of the EPA ‘Set Rule’ and declining renewable diesel and biodiesel margins supported D4 credits. The ruling greatly underestimated the impact of surging renewable diesel growth, with the decision driven primarily by concerns over feedstock supply.
D4 RINs led advanced D5 and Renewable D6 RINs lower in the wake of the release before the weakest soybean oil-to-heating oil (BOHO) spread in 14 months supported D4 credits. A deteriorating renewable diesel margin environment also underpinned D4 markets despite concerns of mounting oversupply from the stellar pace of renewable diesel growth.
The D3 market rallied sharply reaching the highest levels in over a year as the final ‘Set Rule’ established robust mandates for the cellulosic category based on a 25% per year growth target for the Renewable Natural Gas (RNG) industry. The EPA also made clear it would not issue a Cellulosic Waiver Credit (CWC). The controversial eRIN program was scrapped from the final ruling but left open for an additional comment period.
RIN markets strengthened over the course of the first half of July as selling in the immediate wake of the set ruling stalled out and the weakest biodiesel margins in over a year spurred buying. The D6 market tracked D4 credits upward with the D4/D6 spread narrowing as a sign of 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.
The D4/D6 spread stood just a few points over flat, narrowing from 2.3c/gallon averaged during the month of June. We expect this spread to continue to trend and revert toward flat as the D4 RIN will play an increasing role in compliance with the total renewable fuel mandate.
The 2023 vintage D4 market peaked at $1.575/RIN as the Bean Oil-Heating Oil (BOHO) spread reached as wide as $2.65/gallon, the weakest margin in nearly 14 months. RIN markets were soft in the lead up to the release of the final ‘Set Rule’ and the one-week delay prompted heavy selling. D4 credits tumbled $0.13/RIN on June 21 following the release which showed advanced biofuel mandates falling short of expectations. Feedstock availability and food inflation concerns were the driving factors behind the EPA’s decision. The D4 market clawed back $0.22/RIN by July 5 as traders eyed a deteriorating margin environment for renewable diesel and biodiesel producers alike.
With the LCFS program trading sideways as participants await the implementation of more stringent targets, the D4 RIN is the only credit which can protect margins. The D4 market is stuck between the bullish pull of an anemic margin environment and the bearish pressure of widespread concerns of oversupply. On average, D4 RINs firmed $0.12/RIN, or 8.1%, during the first half of July from the month prior.
The D6 market posted identical gains while the D4/D6 spread narrowed 1.6c/RIN to average just under 1c/RIN during the first half of July. D6 RIN generation came in at over 1.28 billion credits yet remains on pace to fall well short of mandated volumes. The federal granting of a summer waiver for E15 sales opens the market to additional D6 RIN generation over the summer months.
The D3 market rallied across vintages as the EPA carved out aggressive cellulosic mandates after excluding the eRIN program from the final ruling. The 2023 vintage D3 RINs rallied $0.20/RIN on the day of the announcement and climbed as high as $3.15/RIN by early July, an all-time high for the vintage and the highest level for current year D3 RINs in over a year. The market backed off to $3.04/RIN on profit-taking. The 2024 vintage surged as high as $2.85/RIN before tracking down to $2.65/RIN.
D3 RIN generation has surpassed the upper limit of the five-year average for five of the first six months of 2023. Total D3 RIN generation for the first half of the year only meets 37% of the final 2023 mandate. With no Cellulosic Waiver Credit in place and a record low RIN bank, we expect D3 RINs to remain at elevated levels and test new highs.
The 2022 vintage market posted less pronounced gains, making for outsized moves in inter-vintage RIN spreads.
The 2023 D4-D6 spread narrowed to just 0.2c/RIN on July 10 before widening out to 1.3c/RIN. D4s firmed sharply in response to faltering biodiesel and renewable diesel margins earlier in the month before diesel strength and soybean oil weakness saw D4 prices retreat 3.5c/RIN.
A wider D4-D6 spread implies a looser D6 supply as the D4 credit is the next vehicle of compliance in the absence of sufficient D6 RINs or the ability to use carryover credits. Conversely, a narrow D4-D6 spread implies a tight supply of D6 RINs. The theoretical cap on the spread is parity though D6s have traded at modest premiums to D4 credits in extreme circumstances.
The inter-vintage D4 RIN spread narrowed to 9.8c/RIN on average as gains in the 2023 vintage D4 credits outpaced 2022 D4s.
D4 RIN generation slumped 10% from record June production to 674MM credits as weaker renewable diesel and biodiesel margins curbed production. Widespread expectations that the final ‘Set Rule’ would fall short of actual production for advanced biofuels pressured D4 RINs throughout the month of June, weighing on margins.
The 2022-2023 D6 spread widened to 4.8/RIN as the 2022 D6s posted marginally higher gains than the 2023 market. The spread briefly reached as wide as 6c/RIN several times over the course of the first half of the month of July.
The 2022 D4-D6 spread narrowed by 3.9c/RIN to 5.8c/RIN over the course of July. The spread reached as narrow as 2.7c/RIN on July 11 as the BOHO spread compressed sharply, driving D4 credits lower. The spread averaged 9.6c/RIN during the month of June and 9.8c/RIN during the month of May.
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