Renewable Diesel Margins Rise as Feedstocks & Diesel Prices Slide
US Gulf coast renewable diesel UCO-based margins made further strides last week, nearing four-month highs. BFT losses week-over-week proved the largest at 5.70¢/lb, or nearly 9.0%, establishing BFT margins as the second highest returns at $2.44/gallon.
Distillers’ corn oil (DCO) prices shed 3.45¢/lb week-over-week, bringing DCO margins back over the $2.00/gallon mark at $2.14/gallon, up nearly 8.0% over the period.
Soybean oil-based margins held near one-month lows kicking off the week as low as $1.62/gallon as largely stagnant SBO prices were met by front-month Nymex ULSD losses of $0.14/gallon, or 4.6%.
To recap: The week ended February 3 saw a mixed margin environment as many feedstocks were slow to react to a deteriorating credit environment and persistent diesel weakness.
Pronounced losses in UCO and Tallow alongside a continued bearish trend in Nymex ULSD worked last week to create a holistically positive RD margin environment (outside of SBO). DCO margins settled right in the middle of the band at $2.14/gallon on average, closing out the week as high as $2.26/gallon.
Credit markets provided negligible headwinds to margins this week, as D4 credits remained under pressure from a recent court ruling issuing a stay on SREs. If the refiners win their case, which looks likely, their compliance obligation for 2021 will loosen up RIN supply across vintages, weighing on prices.
The ruling holds much more potential in that it could signal a pivot in the EPA’s approach toward SREs. A victory will draw more appeals for existing SREs and new SREs will be filed. This could prove a highly bearish factor for RINs as the year progresses.
A recent attempt by a handful of Republican senators to overturn all existing 69 SREs through a Congressional Review Act was quickly quashed by the Government Accountability Office last week.
LCFS prices fell $0.90, or 1.5%, on average as a structurally oversupplied market continued to weigh on prompt and Q1 pricing.
Biodiesel margins, as measured by the soybean oil-to-heating oil (BOHO) spread, widened $0.07/gallon, or 5.0%, week-over-week as the front-month Nymex ULSD contract fell nearly 14¢/gallon over the same period, or 5.0%, while the March CBOT soybean oil contract was largely sideways on the week.
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. This compresses 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.
RINs remained modestly bearish last week as the potential for SRE approvals hung over the market, yet losses in both feedstocks and Nymex ULSD shored up a positive margin environment for RD.
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.
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.”
A wider effort by Congress to overturn all 69 SREs was annulled by the Government Accountability Office last week.
Prompt LCFS markets continued to trend downward marginally last week as both prompt and Q1 credits remained marred by historic oversupply. With the new scoping rule set to take effect in Q1 2024 with more aggressive CI targets, Q3 and Q4 continued to see stronger bids and offers.
The scoping plan sets out stricter carbon targets across all products and pathways, soaking up much of the oversupply and drawing the program more in line with the reality of the marketplace. A more consistent structure has crystalized further along the forward curve (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.