Renewable Diesel Margins Mixed amid Diesel Strength & Credit Losses
US Gulf coast RD margins were mixed last week as a late-week rebound in the newly prompt April Nymex ULSD contract was met by a weaker credit environment. Feedstocks were lower across the board, yet largely failed to offset the impact of weaker credits.
UCO margins were largely flat at $2.68/gallon on average, with tallow the second highest returning feedstock sideways on the week at $2.63/gallon.
Long overdue soybean oil weakness saw SBO margins firm $0.05/gallon to $1.65/gallon on average.
Distillers’ Corn Oil (DCO) posted losses of $0.03/gallon on average to $2.33/gallon last week amid profit taking following a mid-February spike.
US RD margins have largely been rangebound for the last week and a half.
To recap: The week ended February 24 saw RD margins fall to the lowest levels since the start of the month as Nymex ULSD weakness outpaced feedstock losses.
The week ended 3 March saw late-week strength in the newly prompt April Nymex ULSD contract run up against losses in both D4 RINs and LCFS credits to leave margins mixed on the week and largely sideways for UCO and BFT.
D4 RINs corrected downward following bullish comments from the advanced biofuel industry strongly urging higher mandates for RD and BD given the availability of production capacity, which proved particularly supportive February 17-23. Refiners exited the market on the buy side as the headlines faded and traders eyed strong D4 RIN generation for January.
The LCFS market shed value as the market corrected downward following a hawkish workshop by the California Air Resource Board (CARB) the week prior.
We anticipate LCFS credits to return to the $60s/t as a structurally oversupplied marketplace will revert to a rangebound spot market.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, narrowed $0.24/gallon, or more than 12%, week-over-week as the more actively traded May CBOT contract shed 1.5¢/lb to, or 2.4%, to average 60.86¢/lb. The April Nymex contract gained strength in the second half of the week limiting further gains in the BOHO spread.
The BOHO spread reached as narrow as $1.63/gallon for the first time since in 12 sessions.
D4 RINs lost ground last week, eroding ultimate returns for biodiesel producers which earn 1.5 D4 credits per gallon of biodiesel. The BOHO spread further recoupled with its positive correlation to 2023 RINs as the BOHO spread narrowed.
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 corrected downward as comments from the advanced biofuels industry to the EPA to lift advanced mandates no longer dominated headlines, prompting a lack of refiner buying.
Robust January D4 RIN production and the introduction of two new SREs, one for 2022 and one for 2023, also proved bearish to the overall 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 market retreated as the market reaction to the California Air Resource Board workshop was deemed overdone to the upside as the market remained marred by structural oversupply and record credit inventories.
Prompt LCFS prices shed $4.7/t to average $65.80/t week-over-week, while the market is likely to trade downward in small steps toward the low $60s/t.
The forward structure flattened for the first half the year, with a narrower contango emerging for Q3 and 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.