What do the latest developments from the Renewable Fuels Standard (RFS) mean for obligated parties?
Listen in as Jason Metko, Argus Spot Ticker reporter, and Zander Capozzola, lead deputy editor Argus US Products, provide an overview of what the developments mean for the market.
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Transcript
Jason: From Argus Media, this is "Driving Discussions", a podcast series focusing on the forces that affect road fuels globally. Greetings and salutations. Once again, I'm Jason Metko, Spot Ticker Reporter here at Argus. And on this episode, we're covering the latest developments under the Renewable Fuel Standard and the effects going forward. Our guest, Zander Capozzola, Lead Deputy Editor of the US Refined Products here at Argus. Zander, great to have you on the presentation. Can you first give us a run through the broad overview of the latest changes, and what it means for obligated parties, biofuel producers, and the market overall?Zander: Sure. So, on 7th December, the latest EPA proposal came out. The initial read is lower mandates for 2020 and 2021 to adjust for lower fuel demand from COVID-19. The industry was largely expecting this, but for the most part, was not entirely priced in, particularly the second component of the proposal, which was a blanket denial of all outstanding SREs from 2016 through 2021.
This is extremely bullish for... particularly the D6 RIN and the markets reacted accordingly. Beyond this, we have a pretty aggressive, I'd say a very aggressive, 2022 mandate to meet. These are at pre-pandemic levels for a lot of the fuels involved. And I think that given the SRE, the tough SRE ruling, combined with the 2022 mandate, I think we'll find a very tight market in the new year. So for obligated parties, I think this ruling leaves as many questions unanswered as existed just before it came out since a lot of this will ultimately go to court. For biofuel producers, I think the signals to chug on as long as you have a positive margin. So, that's...yeah, the initial read on that.
Jason: We know it's early here, but what are some of your immediate takeaways? How have the markets responded and what are you hearing amongst those in the industry?
Zander: Yeah, still early days. A lot of people trying to digest the meaning of some of the more obscure points like the additional obligations that are required for 2022 and 2023, where they have to split half a billion RINs between the two years, as well as the proposal itself, gave a low and high-end range for possible obligations for both the volumetric and the percentage standards. But it's important to remember that a lot of people get this wrong, even the experts.
It's important to remember that the obligated parties are ultimately required to comply with the percentage standards and not the volumetric mandates. But yeah, initial read, I mean, the market itself was off to the races, very, very bullish on the news. D6 RINs earned. The whole complex moved up. Oddly, though, we are seeing a very wide D4/D6 spread. On one side, all else being equal, normally with a blanket SRE rejection like this, you would see something like that happen. You would normally see...sorry, a D4/D6 spread collapse as the D6s would be disproportionately affected by that. But oddly, we're seeing as wide as more than 60 cents. It's kind of come into 50 cents this week. But that's still a very wide margin. I believe that folks understand that 2022 is going to be a very tight year and the only area for over-compliance stems from renewable diesel SAF and to a lesser extent, biodiesel. So, the D4 RIN is really becoming the new currency of compliance...the new main currency of compliance for the RFS.
But yeah, I just think overall takeaway is folks understand that mainly obligated parties are and everyone involved, they understand that as soon as this hits the Federal Register, we're going to see a lot of litigation. This is going to go straight to the courtroom. Just two days ago, we had...United is disputing their SRE rejections. I think we'll see a lot more of those come out. I also think we'll see a lot more 2021 SREs enter the market. All of this is gonna keep a bit under the marketplace. It's also gonna make for a lot of volatility because we didn't see the markets kind of bounce around last week a little bit. But for the most part, moving toward the upside.
But like I said, it's gonna be a long and confusing road that's going to be lawyered very heavily. So, the obligated parties are facing just as a nebulous environment as existed before this rule came out.
Jason: He is Zander Capozzola. He's the Lead Deputy Editor of US Refined Products at Argus. This is "Driving Discussions." We're talking RINs today. Zander, you mentioned that the road to 2022, is fast approaching. What do you see, and how do you see 2022 plan out at this point?
Zander: Like I said, I mean, we're looking...I mean, especially if you consider the additional obligation of about 225 million RINs or...I'm sorry, 250 million RINs. We're looking at a very high obligation, particularly on the D6 side, and it simply can't be met without A, drawing heavily on the bank, on the existing RIN Bank. So, we see as much as...possibility for as much as 2 billion RINs to come out of the RIN Bank over the next couple of compliance years. The EPA themselves said that the RIN Bank would be standing at 1.85 billion following 2019 compliance. So, this could literally get the RIN Bank.
The proposal itself says...they mentioned several times that liquidity can become a serious issue as a result of this while offering really nothing in the terms of solutions to that or any kind of guidance. So, I would absolutely take a risk on position and carry extra credit value and extra cushion into the New Year as much as possible and then stack heavily, and keep some extra powder for the new year and any surprises.
The only kind of outlet that they opened up is some new pathways that might...They proposed some new pathways and might get approval for...It looks like a D3 RIN, probably be cellulosic. I think it's some biomass pathways. But yeah, for the most part, I think it's really...We could see some credit liquidity tighten up quite a bit. But ultimately, they're just going to...The RIN markets will remain volatile. Like as I said, I think they're going to move on legal news a lot through 2022 and beyond, and the fact that a lot of this stuff's gonna remain unresolved. They've got a really long runway on compliance that was set out earlier this year. So, still, a lot to play out.
Jason: Zander, we'll get you out on this. Really sounding like it's ripe territory, things like volatility, uncertainty gonna play a factor. What projects have you all been working on in this pretty rapidly growing space last couple of weeks or so?
Zander: Oh, yeah, absolutely. I think these markets are gonna remain volatile. One other point I should mention is...One thing that keeps me up at night is really the potential for trucking strikes on both sides of the border, the US and Canada, as a result of pushback to federal vaccine mandates that are set to take effect in early January in the US and mid-January in Canada. So, this could have a huge knock-on effect to renewable markets and the feedstock markets, as they disproportionately require movement on rails and trucks as they can't be piped for the most part.
So yeah, that's just another factor. I forgot to mention that. In terms of projects, for the last half-year, I've been working on the Argus Biofuels Outlook. And this is just a fantastic, fantastic, and very short, punchy report that covers a 12-month outlook, comes out on the second Wednesday of every month. And I think it's essentially...If I was trading right now, I could not trade without this on my desk right now.
It sits between your daily in the weeds and granular information of a daily price report and the wider, longer-term forecasts of traditional consulting. So, this is a consulting-style forecast and outlook report. It's truly global. It covers everything from the EU to the US, South America, and Asia. So, I've been covering the North America and South America sections and I think...Yeah, it's just kind of like our discussion today, it just kind of tells you our general guidance and interpretation on the markets, as well as some factors, you know, particularly different harvests and blend mandate reductions or increases throughout the globe that are going to impact S&D. So yeah, that's what's been keeping me busy. I'm kind of on loan to consulting right now. So, it's been a very, very volatile year and I don't expect much to change next year.
Jason: He is the Lead Deputy Editor, the US Refined Products at Argus and also plays guitar from what we understand. Pretty good at it, I bet too. Zander Capozzola joined us and Zander, we appreciate the time, my friend. Thanks for doing this. And looking forward to catching up with you in 2022.
Zander: Yeah, I appreciate it. It's been good to be on "Driving Discussions" for the first time. Look forward to more.
Jason: A great many thanks to Zander for joining us, and that will do it for another edition of "Driving Discussions", a production of Argus Media. Make sure to check out the other episodes in our series and for more information on Argus's Global Refined Products coverage, be sure to visit argusmedia.com/oil-products.
