Renewable Diesel Margins Mixed as Feeds Fall at Varied Rates amid Diesel Losses
US Gulf coast RD margins were mixed last week despite heavy losses in the more actively trades May Nymex ULSD contract. Feedstocks fell at varied rates leaving UCO and BFT margins lower week-over-week, while DCO and soybean oil posted gains.
UCO margins shed $0.04/gallon, or 1.7%, to $2.52/gallon on average, as spot UCO fell 1.05¢/lb on average last week.
Bleached Fancy Tallow (BFT) margins tumbled $0.12/gallon, or 6.9%, as spot feedstock prices were nearly flat.
Distillers’ Corn Oil (DCO) recovered the previous week’s losses, gaining $0.08/gallon on average to $2.34/gallon last week.
Pronounced SBO weakness saw SBO margins firm $0.12/gallon to $1.85/gallon on average. Margins reached as high as $1.95/gallon early in the week, marking the highest levels since late January.
To recap: The week ended March 10 saw RD margins decline amid diesel weakness, while lower feed prices staunched further losses. UCO shed only 0.50¢/lb over the course of the week to average 56.50¢/lb. BFT prices shed 1.80¢/lb to 54.20¢/lb, allowing tallow to outperform UCO for the entirety of the week.
The week ended March 17 saw mixed RD margins as feedstocks fell at varied rates alongside heavy diesel losses. UCO overtook BFT as the highest returning feedstock.
Losses in the 2023 vintage D4 RINs dragged on margins yet were partially offset by another week of LCFS strength. Trader buying continued to buttress the LCFS market despite bearish fundamentals.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, were unchanged week-over-week amid weakness in both front-month CBOT SBO and Nymex ULSD. The BOHO spread averaged $1.56/gallon last week, but reached as narrow as $1.39/gallon, the thinnest spread since late January.
D4 RINs shed 4.5¢/RIN, or 2.8%, last week, leaving the BOHO spread at a premium to credits.
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 fell 4.5¢/RIN, or 2.8%, last week on thin activity.
Fresh RIN production data showed D4 RIN generation remained robust at nearly 514 million credits. This, along with the issue of a new Small Refinery Exemption (SRE) petition for 2022 continued to provide a bearish undercurrent to the marketplace.
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.”
The LCFS pressed higher for a second consecutive week amid trader buying. Prompt credit prices gained $3.8/t, or 5.7%, week-over-week. Issues surrounding some pending RD facilities could be spurring buying.
Further gains were limited by the structural oversupply of the LCFS marketplace.
The forward structure formed a slight contango through Q4 (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.