Renewable Diesel Margins Rebound on D4 Recovery, Lower Feedstocks
MARKET UPDATE
SHIPPING UPDATE
REGULATORY UPDATE
INDUSTRY UPDATE
US Gulf coast RD margins rebounded after shedding a third of their value since mid-January as feedstock prices softened alongside a material recovery in RIN markets. Lower feedstock prices supported margins, particularly for DCO returns which rallied on Friday. Diesel failed to hold on to strength earlier in the week, yet still posted modest week-over-week gains.
UCO remained the highest returning feedstock, at $1.96/gallon, rallying $0.29/gallon, or 16% over the course of the week. Spot UCO prices at the US Gulf coast shed 1.5c, or 3.9% to 36.50c/lb.
BFT margins rose $0.16/gallon, or nearly 13% week-over-week to $1.35/gallon. BFT prices remained stable at 43.50c/lb. At least two tallow import vessels reached US destinations last week.
DCO margins rallied nearly $0.29/gallon, or 24%, to $1.32/gallon. DCO margins ended the week as high as $1.48/gallon. Spot DCO prices shed 1.5c, or 3.4% to 43c/lb.
SBO margins rose $0.19/gallon, or 19% to close the week as high as $1.16/gallon. Spot SBO prices ticked up 0.6c, or 1.3%, to 44.62c/lb as spot values tracked gains in the underlying CBOT soybean oil contract.
To recap: The week ended February 23 saw RD margins post heavy losses for a second consecutive week as diesel fell nearly 12% week-over-week. RIN markets saw persistent selling despite diesel weakness, further eroding margins. D4 prices have lost 37c, or 47% of their value since the start of the year with room for further losses. Oversupply in RIN markets and expanding US renewable diesel capacity pressured D4 credits even as margins tightened. The BOHO spread briefly narrowed to $0.56/gallon, the lowest level in over four years, before ending the week little changed at $0.61/gallon. The BOHO spread has tumbled $0.45/gallon, or 42% since the start of the year, shoring up biodiesel margins and weighing on RIN markets. LCFS markets gained in active trade amid hopes of more stringent adjustments to the LCFS program.
The week ended March 1 saw RD margins rebound after shedding a third of their value since mid-January as feedstock prices softened alongside a material recovery in RIN markets. Lower feedstock prices supported margins, particularly for DCO returns which rallied on Friday. Modest week-over-week diesel gains and firmer LCFS prices further supported the margin environment. D4 prices recovered 12% of their value last week, yet have lost 32c, or 41% of their value since the start of the year. The BOHO spread reached as wide as $0.69/gallon as diesel pared gains on Thursday. The BOHO spread has tumbled nearly $0.42/gallon, or 39% since the start of the year. Deteriorating biodiesel margins led to the permanent closure of two Midwest biodiesel facilities as expanding US renewable diesel capacity outcompetes biodiesel producers.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO), rebounded off the lowest level in over four years at $0.56/gallon. The BOHO spread reached as wide as $0.69/gallon before ending the week at $0.64/gallon.
The wider BOHO spread drove RIN strength late in the week. D4 RINs rebounded 5c, or 12%, week-over-week. Credits started the week at 41.25c/RIN rising to 46.25/RIN even as diesel gained strength. The premium for renewable diesel RINs to the BOHO spread widened to 14c from 9c/gallon the week prior. The RD RIN premium reached as low as 5c/gallon on February 28 as the BOHO spread widened faster than RIN prices.
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.
RIN markets rebounded, halting a two-month rout that saw credit prices reach the lowest levels in four and a half years. D4 RINs firmed as the BOHO spread pressed wider for the bulk of the week, with 2024 vintage credits gaining 12% over the course of the week to 46.25c/RIN. D4 credits have lost 41% of their value since the start of the year.
The 5th US Circuit Court of Appeals turned down a request to reconsider its November 22, 2023, decision to block SRE denials for six small refineries. Biofuel industry groups Growth Energy and Renewable Fuel Association sought a rehearing on the grounds that the denials should be brought before the DC Circuit Court. The EPA has received 12 SRE petitions since the 5th Circuit’s November ruling.
The 5th US Circuit Court of Appeals ruled on November 22, 2023, to block denials of SREs for six refineries. The court’s decision said the EPA’s blanket SRE rejection was “impermissibly retroactive; contrary to law; and counter to the record evidence.” The decision will add a bearish undertone to an already oversupplied marketplace, save for D3 credits.
January total RIN generation came in at 1.89 billion credits, down 16% from the previous month’s record 2.17 billion credits, but up nearly 8% on year-ago levels.
D4 generation retreated to 675 million credits, down nearly 20% from the previous month’s record 840 million credits, yet up 29% on year-ago levels.
Domestic renewable diesel production accounted for 56% of total D4 output, up from 54% the month prior. Domestic renewable diesel production accounted for 49.5% of total D4 output in November and 47% in October.
Foreign renewable diesel production made up 6% of total D4 generation down from 9.7% from the previous month and 11% in November.
Domestic and imported biodiesel accounted for 36% of the January total, up from 35% the month prior, but down from 39% in November and 41% in October.
A record 15 million D4 credits were generated across domestic and foreign SAF production, accounting for 2.2% of the January total. Foreign SAF accounted for 91% of total SAF credits.
The EPA showed 35 pending SRE petitions spanning 2017-2024, as 20 previously denied exemptions are being reconsidered.
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.
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.
California Low Carbon Fuel Standard (LCFS) credit markets continued to track higher as CARB pursues more stringent CI targets and considers possible limitations to renewable fuels and biogas.
Prompt credits gained $0.47/t, or less than one percent to $62.82/t week-over-week. Gains were more pronounced along the forward curve.
The forward structure showed $8.73/t of contango heading into December 2024, up from $8.06/t the week prior and $6.60/t the week ended February 16.
California postponed an April hearing on proposed LCFS amendments originally scheduled for March 21. The 45-day public comment period concluded on February 20.
The move comes after the state’s Environmental Justice Advisory Committee (EJAC) urged the Board to delay its LCFS vote until July 2024 as the current plan relies too heavily on biofuels and out-of-state biogas. Environmentalists took particular issue with biogas from diary digesters.
On December 19, California’s Air Resources Board (CARB) released a preliminary LCFS proposal laying out amendments which nearly mirrored those in the Standardized Regulatory Impact Assessment released in September.
CARB proposed a 30% reduction in carbon intensity by 2030, including a 5% step-down in 2025. This marks a 50% increase in carbon targets over the original 20% reduction target for 2030.
Reductions increase to 90% by 2045 compared to a 2010 baseline.
The proposal contained an automatic acceleration mechanism (AAM) which would advance stringency for a given year when unused credits more than triple average deficit generation by advancing the carbon reduction target by two years.
Amendments included eliminating the exemption for intrastate jet fuel beginning in 2028 and new tracking requirements for crop-based and forestry-based feedstocks to their point of origin. CARB expects to kick off the required 45-day public comment period in January, with a public hearing set for March 21, 2024.
Prior to this proposal the prompt market had been in a choppy holding pattern since early May yet initiated a material downtrend starting in early June.
LCFS strength had been driven by trader buying and strength in futures markets as the credits become more attractive options ahead of CARB’s more stringent scoping plan.
Buying quickly turned to selling once the workshops concluded as traders became disillusioned with the timeline for the rulemaking and deemed current measures as not stringent enough to deal with supply overhang.
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.