Renewable Diesel Margins Press Lower on Feedstock Strength
US Gulf coast RD margins pressed lower as feedstock strength offset diesel gains. Modest RINs weakness and a sideways LCFS market provided headwinds.
UCO remained the highest returning feedstock, averaging a return of $1.90/gallon, as spot UCO prices in the US Gulf coast rose just 0.10c/lb week-over-week.
BFT margins fell $0.03/gallon, or 2.2%, week-over-week to average $1.52/gallon. Spot BFT prices climbed 0.75c/lb, or 1.1%, to 66.20c/lb on average. BFT prices ended the week at 67c/lb, the highest level since late January 2023.
DCO margins tumbled $0.11/gallon, or 9.4%, to average $1.21/gallon. Margins reached as low as $1.04/gallon, the lowest level since March 2022. Spot DCO prices rose 1.75c/lb, or 2.5%, to an average of 72.65c/lb.
The SBO market continued to firm on bullish soybean acreage data. Spot SBO reached as high as 78.40c/lb, gaining 1.52c/lb, or 2.1%, on average. Margins reached as low as $0.48/gallon, presenting uneconomic returns for some producers should levels sustain.
To recap: The week ended July 14 saw RD margins resume their decline after a brief consolidation. Feedstock strength offset diesel gains, while flat RINs and weaker LCFS credits provided headwinds. DCO returns posted the sharpest decline of the week. Sustained SBO strength saw SBO RD margins plunge to fresh record lows, while biodiesel margins hovered near the weakest levels in over 14 months.
The week ended July 21 saw RD margins decline for a second week as persistent feedstock strength continued to offset diesel gains. Modest losses in D4 RINs and a flat LCFS market provided headwinds to the margin environment. DCO margins posted heavy losses for a second consecutive as strong producer buying drove spot prices to the highest levels since December 2022. SBO RD margins plunged to fresh record lows as spot SBO prices reached the highest levels since November 2022. D4 RINs were trading at $1.94.75/RIN at the time.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), narrowed on average yet rebounded late in the week to $2.46/gallon on fresh CBOT SBO strength. The BOHO spread narrowed by $0.24/gallon, or 9.2%, on average, reaching a low of $2.20/gallon early in the week.
D4 values failed to rise materially in response to a deteriorating margin environment as the SBO gained. The BOHO spread stood $0.90 over 2023 D4 RIN values, indicating persistent dislocation between the D4 market and biodiesel margins, even as RIN markets take directional cues from the BOHO spread (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.
Current year vintage D4 RINs fell by $0.01/RIN, or less than one percent, on average last week. The market started the week at just over $1.53/RIN as the BOHO spread fell sharply, before ending the week at $1.56/RIN as fresh SBO strength saw the BOHO spread widen out.
June RIN generation fell to 2.04 billion credits, down by 70MM credits, or 3.3%, from the May all-time high of 2.11 billion RINs. D4 RIN generation slumped 76MM credits from the month prior as renewable diesel and biodiesel margins both deteriorated. Domestic and foreign renewable diesel generation accounted for 56% of total D4 generation, down from last month’s 59%.
Total RIN generation for the first six months of 2023 came in at 11.39 billion accounting for 54% of the total 2023 final obligation. D6 generation is on pace to fall approximately 690 MM RINs short of the 15.25 billion gallon mandate for 2023.
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 any 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.
The California Low Carbon Fuel Standard (LCFS) credit market shifted sideways halting four consecutive weeks of decline. Prompt credits rose just $0.20/t, or less than one percent to average $72.50/t, last week holding just over lowest levels since early April. The prompt market had been in a choppy holding pattern since early May before entering a downward trend in early June. Gains were more pronounced down the forward curve.
LCFS strength had been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of the California Air Resource Board’s new, more stringent scoping plan.
The forward structure remained in contago with the most prominent carry heading into the first quarter of 2024.
The 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.
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.
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.