Recent volatility in the Renewable Volume Obligation (RVO) — a measurement of the cost to comply with US renewable fuel blending mandates — has added difficult-to-hedge risks to gasoline and feedstocks spot trading, resulting in reduced liquidity across markets.
Argus-calculated RVO has gone from hitting consecutive historic highs of 23.5¢/USG to a one-and-a-half month low of 18.5¢/USG in the space of one week. The RVO is already difficult to hedge given the uncertainty of volume mandates, but this kind of volatility reflects extreme uncertainty among participants in the renewable credit markets, which is rippling through related commodity markets.
The New York Harbor gasoline market, which relies heavily on imports from Europe, has been thrown into disarray as market participants cited volatile RVO as the reason for the slowdown in spot trade.
Offers for gasoline have trended lower since 11 June as bids thinned out in the prompt market. The spread between bids and offers in New York Harbor have grown in the past week from 0.1¢/USG to 1¢/USG.
RBOB barge bids in particular have been lacking, while CBOB offers have been shown for an entire trading session without seeing an offsetting bid yesterday. This is unusual as CBOB and RBOB are typically the most liquid grades in this market, with several trades per session.
Volatile RVO has particularly complicated the import market as it directly affects the profitability of arbitrages. Arbitrage margins have already thinned in recent years as global refining capacity has exceeded demand growth. US importers of European gasoline must pay the cost of RVO unless they already have access to biofuels and blending facilities.
Cargo loadings from Europe to New York Harbor paused from 11-14 June, according to Vortexa, as uncertainty in the import market grew following the sudden decline in RVO. One 190,000 bl cargo loaded today, the only cargo to load since 11 June. In comparison, as much as 290,000 b/d of European gasoline and blending components loaded for New York Harbor during the 6-10 June period, prior to the drop in RVO.
Feedstocks hit by RVO swing
The intermediate feedstocks market has also been directly impacted by the RVO. Even though fluid catalytic cracker (FCC) and reformer margins have been bolstered by a strong gasoline market, refiners have kept their inventories of vacuum gasoil (VGO) and naphtha, the main feedstocks for FCCs and reformers, at minimum levels in recent months.
The unwillingness to commit to feedstock purchases is a direct result of elevated RVO weighing on unit margins, sources say.
In the VGO market, liquidity has centered on small, prompt parcels as traders managed volatile margins and demand expectations. As a result, wide margins on paper are reduced in varying degrees by the RVO depending on each refiner's exposure.
In the Gulf coast Colonial pipeline market, liquidity was already low as the shipping cycles have been extended to double its typical duration of around five days, possibly as a result of lingering scheduling disruptions from last month's ransomware attack on the pipeline system.
Despite the recent volatility, RVO has remained historically high, and that continues to provide incentives for exports. Gasoline and diesel exports have risen out of the US Gulf coast in part as refiners attempt to avoid high RVO.
