This Week in Petroleum

Notice:Changes to August 31, 2023 Release of Petroleum Supply Monthly and Petroleum Supply Annual
We added new data labeled Transfers to crude oil supply to national and regional volumetric balance tables for petroleum and biofuels beginning with data released on August 31, 2023. Transfers to crude oil supply include barrels of unfinished oils (refinery feedstocks) and natural gas liquids that we identified as being added to crude oil supply by blending. We will make changes to account for these transfers in the Weekly Petroleum Status Report before the end of the year.

The prices for credits used to comply with the Renewable Fuel Standard (RFS) program are at their lowest point in about three years because of both lower costs for agricultural feedstocks and a record-high number of credits being generated from renewable diesel. The prices of biomass-based diesel (D4) and ethanol (D6) renewable identification number (RIN) credits - the compliance mechanism used for the RFS program administered by the US Environmental Protection Agency (EPA) - have decreased to about 50% of their summer highs in July.

Under the RFS, EPA sets annual renewable volume obligations (RVOs) for the volume of biofuels that must enter the U.S. fuel supply. Obligated parties-petroleum refiners and motor gasoline and diesel importers-comply either by blending biofuels into petroleum-based fuels or by purchasing RIN credits.

Ethanol production and imports generate D6 RINs that satisfy the total biofuel obligation. Renewable diesel and biodiesel production and imports generate D4 RINs that satisfy the biomass-based diesel, the advanced biofuel, and the total biofuel obligations. The value of a RIN credit is the price that biofuel plants and fuel blenders need as incentive to produce and blend at levels suitable for RFS compliance. A gallon of ethanol generates 1.0 RINs, a gallon of biodiesel generates 1.5 RINs, and a gallon of renewable diesel typically generates 1.7 RINs.

As of November 7, D6 and D4 RINs both traded at $0.79, a more than 75-cent decline from their summer highs on July 24 (Figure 1). The D4 RIN price has not been this low since November 2020, and the D6 RIN price has not been this low since January 2021, when the EPA last grantedsmall refinery exemptions that reduced fuel blending requirements and RIN prices. Prior to 2023, D4 RINs traded at a premium to D6 RINs because the biomass-based diesel and advanced biofuel blending requirements had been set at levels that required higher D4 RIN prices to encourage enough renewable diesel and biodiesel production. The price of a D6 RIN sets the price floor for D4 RINs because excess biomass-based diesel blending can substitute for D6 RINs to comply with the total biofuel requirement. In 2023, D4 RINs have mostly been trading at the price floor set by D6 RINs because D4 RIN generation has far exceeded the rates necessary to meet the biomass-based diesel and advanced biofuel blending obligations for 2023.

The primary reason RIN prices have fallen since July 24 is a decrease in agricultural feedstock prices relative to the price of petroleum distillate. The price for soybean oil, the most-used agricultural feedstock for both biodiesel and renewable diesel, peaked at $5.51 per gallon (gal) on July 25 and declined to $3.76/gal as of November 7 (Figure 2). Two factors that have reduced the soybean oil price are expected record soybean production during Brazil's 2023-2024 harvest season and increased inventories of palm oil, a common substitute for soybean oil. Brazil is the world's largest soybean producer. Prices for other feedstocks, such as used cooking oil and tallow, have also been decreasing.

In addition to the soybean oil price decreasing since July, the petroleum distillate price has generally increased, which has also reduced RIN prices. When the soybean oil price increases relative to the heating oil price, RIN prices typically increase to offset the lower margins of blending biofuels. When the soybean oil price decreases relative to the heating oil price, RIN prices typically decrease because blenders do not need as much incentive to blend. Biofuel analysts commonly look at the difference between the soybean oil and heating oil prices (called the BOHO spread) as an indication of the profit margins of blending biofuels without a RIN credit. As of November 7, the BOHO spread was $0.81/gal, a decrease of nearly $2.00/gal from July 24, when RIN prices peaked. This decrease in the BOHO spread is reflected in the recent decreases in RIN prices.

RIN prices are also affected by RFS targets and biofuel consumption trends. Since the EPA set biofuel blending targets below current blending levels in the final RFS rule (published June 21), RIN prices have trended lower.

Renewable credit generation has consistently exceeded RFS blending targets in 2023. EPA set the total biofuel blending obligation at 21.19 billion RINs and the advanced biofuel blending target, a subset of the total blending obligation that is met almost entirely by renewable diesel and biodiesel blending, at 5.94 billion RINs for 2023. In the first nine months of 2023, advanced biofuel RIN generation surpassed the year's advanced biofuel RVO, and total RIN generation reached 82% of the total RVO, putting it on track to exceed annual required volumes by 10%, according to EPA RIN generation data (Figure 3). RIN generation has not exceeded required annual rates by this much in the last 10 years.

The primary reason RIN credit generation has been so high in 2023 is record-high renewable diesel production. Renewable diesel is a transportation and heating fuel that is chemically equivalent to petroleum-based distillate fuel but is produced using fats, oils, or greases rather than petroleum. Renewable diesel consumption has grown in the United States because federal government programs and the California Low-Carbon Fuel Standard (LCFS) program have created incentives to boost demand for the fuel.

In response to those incentives, major oil companies such as Chevron, Marathon, and Valero have constructed renewable diesel production facilities, sometimes by converting former petroleum refining units. With new production capacity and increasing imports, nearly 70% more renewable diesel was consumed in the United States during the first eight months of 2023 than in the same months of 2022, and three times more than the five-year (2018-2022) average for those months (Figure 4). We forecast renewable diesel consumption to continue rising in 2024 as new production facilities open.

Although less significant, more RINs also have been generated from biodiesel production and imports in 2023 than average. Biodiesel is produced with the same feedstocks as renewable diesel but is typically blended with petroleum diesel at concentrations of 20% or less for vehicle consumption. Biodiesel has not received the same level of private investment as renewable diesel because biodiesel differs chemically from petroleum diesel and is not as suitable for petroleum refinery plant conversions. Nevertheless, in the first eight months of the year, more biodiesel was consumed in 2023 than in any of the previous five years, contributing to the high supply of RINs. The increase in biodiesel consumption was the result of both increased production and increased imports in response to lower biodiesel prices in Europe.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.

Tags: biofuels, ethanol, oil/petroleum, prices, RFS (renewable fuel standards), RIN

Public link

Please use the above public link if you want to share this noodl on another website.