Renewable Diesel Margins Slip as Diesel Expiry Outpaces Feeds Losses
US Gulf coast RD margins declined between $0.02/gallon and $0.11/gallon last week as lower feedstocks were met by a marginal gain the front-month Nymex ULSD contract, while credit markets provided negligible tailwinds.
Soybean oil reversed the prior week’s gains to return to $1.85/gallon as spot feed prices firmed.
Bleached Fancy Tallow (BFT) margins gained $0.04/gallon, or 1.7%, allowing tallow to overtake UCO as the top returning feedstock at $2.54/gallon on average.
UCO margins slipped $0.02/gallon to $2.53/gallon.
DCO margins shed $0.06/USG to $2.30/gallon, reaching as low as $2.26/gallon late in the week.
To recap: The week ended March 24 saw modest gains in RD margins as feedstocks posted losses against a largely unchanged Nymex ULSD contract. Negligible losses in D4 RINs and more pronounced losses in prompt LCFS credits limited margin performance. Spot soybean oil led losses in the feed market, shedding 2.52¢/lb to 57.36¢/lb, vastly improving the competitiveness of SBO.
The week ended March 31 saw RD margins decline as lower feedstocks met with modest gains in the front-month ULSD contract. Negligible gains in RINs and LCFS credits provided limited support to the margin environment. BFT overtook UCO as the most profitable feedstock, while SBO margins gave up the prior weeks’ gain, remaining the least profitable feedstock when considering for carbon intensity and LCFS pricing.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread widened immaterially amid gains in CBOT SBO alongside a largely stable front-month Nymex ULSD contract. The BOHO spread averaged $1.42/gallon last week, but reached as narrow as $1.32/gallon, at the start of the week.
The 2023 vintage D4 shed was virtually unchanged, pulling the BOHO spread more in line with D4 RIN values (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.
D4 RINs remained in a holding pattern amid thin market participation. A lack of actionable headlines left traders on the sidelines waiting for indications ahead of an expected June 14 finalization of the ‘Set Rule.’
Fresh RIN production data showed D4 RIN generation remained robust at nearly 514 million credits. This, along with 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 month halted compliance obligations for two refineries with existing SRE petitions taking issue with the retroactive nature of the SRE denial.
If approved the SRE ruling will prove very bearish for the wider RIN marketplace as participants will view the decision as 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.”
Prompt LCFS prices posted a modest recovery on thin participation. Prompt credit prices gained $0.6/t on a week-over-week basis. LCFS markets have been supported by trader buying in recent weeks. Gains were more pronounced in the second half of the year.
The forward structure developed a more stratified contango with a wider carry developing in the second half of the year (see below).
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 will soon follow.
The stark LCFS bear market could lower US RD 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.