On this episode, Biofuels and Feedstocks Market Specialist, Jackie Reigle, and Argus' VP Business Development, Louise Burke, discuss the latest market trends affecting Argus' newly launched California renewable diesel spot indexes.
They discuss what the indexes are, their advantages, and how they can be used in the context of ever-changing market fundamentals.
Louise: From Argus Media, this is "Driving Discussions," a podcast series with a focus on forces that affect North American road fuels. I'm Argus' VP Business Development, Louise Burke. And on this episode, we're speaking with Jackie Reigle. Jackie's one of our biofuels and feedstocks market specialists. Together, we'll be introducing our latest offering of US renewable diesel indexes in the context of falling D4 RIN credits and movements in the soybean oil-heating oil spread. Jackie, welcome, it's good to have you.
Jackie: Hi Louise, thanks for having me.
Louise: So renewable diesel, it's a popular topic in the transportation fuel space, and for good reason. It provides a lower-carbon, renewable-based alternative to petroleum-based diesel and is a “drop-in” replacement for ultra-low sulfur diesel. But, most of all, there are the large financial incentives provided by low carbon fuel standards along the US west coast, the US Renewable Fuel Standard, the US Biodiesel Tax Credit, and potentially the Inflation Reduction Act. Driven by supportive legislation, there is significant renewable diesel production capacity under construction or on the drawing board, including major conversion projects in California. So Jackie, can you shed some light on what price indexes and metrics Argus has to provide transparency into the US market?
Jackie: Most recently, on 13 November, Argus added California R99 head of the pipeline spot assessments, which will be the focus of our discussion today. But other offerings that we have include four calculations for different feedstock-based renewable diesel margin indicators at the US Gulf coast, and eight R100 renewable diesel price quotes for potential reference in term deals. We launched the California R99 head of pipeline assessments because it became clear the market was searching for an unbiased spot price reference. Around June, we started noticing that in California, where RD is heavily incentivized and the top credit generator in the state’s LCFS, an RD spot market (head of the pipeline in Los Angeles and San Francisco) was maturing and set to become more liquid as more capacity comes online.
Louise: So tell us more about Argus' new California head of pipeline R99 spot assessments. What are these indexes and their advantages?
Jackie: Argus' California renewable diesel bulk indexes are market-surveyed assessments that capture the spot value for head of the pipeline transactions of R99 at Kinder Morgan's Watson and Concord terminals in California, which receive renewable diesel by vessel and rail. The Argus indexes are published against both a Nymex ULSD and CARB ULSD + attributes basis. Also, importantly, the assessments exclude all credit value. The advantage of these indexes is that they provide transparency to what has been an opaque market, and help buyers and sellers understand the market value of the product they are transacting, especially in an environment marked by volatile RIN, diesel and soybean oil prices.
Louise: Could you expand on how California head of the pipeline R99 prices have been affected by the fundamentals you just listed?
Jackie: Head of pipeline prices in California have been inversely tracking the D4 RIN-BOHO spread closely since June. Both the D4 and BOHO spread are directly linked to the blend economics for renewable diesel. The BOHO represents the difference between soybean oil and heating oil futures and along with the D4 can be used to gauge the practicability of discretionary renewable diesel blending. D4 RINs are credits under the US RFS program that are generated from producing renewable diesel. Therefore, the lower the spread between D4 RINs and BOHO on a ¢/USG basis, the less economic it becomes to produce and blend renewable diesel. That spread fell from 0.5¢/USG on 9 June to -0.3¢/USG on 25 July, which represents almost a two-fold decline. During that period, R99 differentials in California head of the pipeline were fairly robust, averaging a 13-19¢/USG discount against CARB ULSD + its attributes. But by August, with the D4-BOHO spread increasing, R99 differentials took a plunge, falling to average a 26-42¢/USG discount that month. Differentials have since recovered to beginning-of-June levels, valued between around 10¢/UG under CARB ULSD + attributes. There's an inverse relationship between the D4-BOHO spread and R99 prices because as renewable diesel production margins deteriorate, producers are prompted to increase the level at which they can offer the product.
Louise: And how can these Argus indexes be used?
Jackie: Contracts - Renewable diesel producers can use these prices in spot contracts and in contract negotiations with buyers. Also, internally within organizations it can be used for transfer pricing. Risk management- Companies buying R99 can use this independent index for mark-to-market valuations. Optimization - Refiners, traders and renewable diesel suppliers selling R99 can identify shortages/oversupply to manage production and maximize profits. Analysis- R99 indexes can be used to monitor the evolving premium to conventional diesel and as an input to price forecasts.
Louise: Concluding thoughts