Renewable Diesel & Biodiesel Margins Mixed as Feedstocks Correct Lower Amid Diesel Losses
US Gulf coast renewable diesel UCO-based margins held near the highest levels in just over three months, while retreating tallow prices staunched losses for bleached fancy tallow (BFT).
Soybean oil-based margins reached one-month lows to as weak as $1.66/gallon as seed oil prices failed to retreat in the face of a rapidly narrowing margin environment. Distillers’ corn oil (DCO) prices also failed to retreat enough to halt margin erosion last week. DCO margins fell under the $2.00/gallon mark, shedding $0.07/gallon, or 3.6%, on average to as low as $1.89/gallon.
UCO and BFT both shed over 5.0¢/lb, or around 7.4%, last week. Prompt DCO values shed nearly 4.0¢/lb, or 5.6%, to average 66.10¢/lb, yet these losses failed to support margins. Spot SBO was little changed week-over-week at 65.89¢/lb, driving a week-over-week margin decline of $0.38/gallon, or 17.5% (see below).
While the week ended January 27 saw all factors contributing to modest margin gains, renewed diesel weakness and declining credit markets had feedstock markets correcting downward as the only variable with room for movement. The result was a mixed margin environment underscoring the need for weekly if not daily analysis of contributing factors.
Nymex ULSD losses served as the largest factor this week, with the front-month, benchmark futures price for diesel shedding nearly $0.36/gallon, or 10.6%, week-over-week.
With the active CBOT SBO contract little changed, the BOHO spread widened to the highest levels in just over a month—indicating weaker margins. BOHO strength saw the spread re-couple to the spread’s positive correlation with D4 credits (see chart below).
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.
Credit markets provided headwinds to this background, with D4 RINs under pressure as the market reacted bearishly to a court ruling issuing a stay on two SREs for 2021 compliance obligation. If the refiners win their case, which looks likely, their compliance obligation for 2021 will loosen up RIN supply across vintages, weighing on prices.
The ruling holds much more potential in that it could signal a pivot in the EPA’s approach toward SREs. A victory will draw more appeals for existing SREs and new SREs will be filed. This could prove a highly bearish factor for RINs as the year progresses.
LCFS prices shed $0.80/t, or 1.3%, as the bank of credits reached a fresh record high, modestly weakening margins for lower carbon intensity (CI) feedstocks.
RINs dragged on RD and BD margins last week as the potential for SRE approvals was priced in by 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.
If approved the SRE ruling will prove very bearish for the wider RIN marketplace as participants will view it 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.”
Both 2022 and 2023 biomass-based diesel D4 RINs shed around 6.5¢/RIN from the week prior, or around 4%. The 2022-2023 D4 RIN spread was unchanged at 10.7¢/RIN on average week-over-week but widened to 11.5¢/RIN at the close of the week as losses in 2023 D4 RINs outpaced the 2022 vintage.
D4 RINs are a key component to both RD and BD margins. Each gallon of RD gains 1.7 D4 RINs per gallon, while biomass-based diesel earns 1.5 D4 RINs per gallon. RD produced from more carbon intensive feedstocks, or co-processed with petroleum crude can generate 1.6 D5 or D4 RINs. The ratios are known as equivalence values (EV) as all RINs are set in ethanol equivalent gallons and then further adjusted to account for the reduction in greenhouse gas emissions using the EV.
Prompt LCFS markets fell back as the market reacted the second consecutive record build in credits (see below). With the market structurally oversupplied until the new scoping rule takes effect in Q1 2024 LCFS demand is particularly anemic. The scoping plan would set stricter carbon targets, soaking up much of the oversupply and drawing the program more in line with the reality of the marketplace. Only Q4 transfer credits have developed a consistent premium given the likelihood of some buying ahead of the implementation of the scoping plan.
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 this is 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 should soon follow.
The stark LCFS bear market could lower US prices enough to open arbitrages with Europe this year, particularly as the region becomes more diesel starved as Russian product sanctions take effect.
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.