California R99 hop buoyed by canal issues, poor margins

The California renewable diesel head of pipeline (hop) market gained strength for most of November, buoyed by a drought that has restricted Panama Canal transits and lower renewable diesel (RD) margins that have raised costs for US Gulf coast producers.

While the canal issues stifled market activity and vessel deliveries in September, Argus biofuel vessel tracking data show that deliveries to California picked up in October. Three vessels from Asia and the Netherlands, with a combined capacity of 342,000 bl, made their way to California in October, along with one vessel delivering a maximum 285,000 bl from Port Arthur, Texas.

As Neste deliveries from Singapore to California held steady last month, the tightness in R99 hop pricing that started in October and extended into November likely reflects the lack of supply through the Panama Canal, and potentially the tougher RD margin environment at the US Gulf coast.

Panamax lock wait times for vessels without reservations hit all-time highs of 28 days for northbound and southbound transits through the canal on 27 November.

Auction slots for Panamax lock transits, for vessels such as Jones Act-compliant MR tankers, now regularly exceed $1mn. But the canal might not be an option for much longer, as no auction slots are expected to be available for the larger Neopanamax crossings from January until further notice, according to the Panama Canal Authority.

Meanwhile, RD margins at the US Gulf coast reached 159.59¢/USG on 21 November before falling to 126.89¢/USG on 27 November, after which margins began to recover, pressuring R99 hop differentials with them. The margins closed at 142.88¢/USG on 1 December.

Head of pipeline differentials inversely track RD margins. The lower the margin, the less economic it becomes to produce renewable diesel, which can raise offers. There is an inverse relationship between RD margins and R99 hop differentials because as RD production margins deteriorate, producers are prompted to increase the level at which they offer the product in the spot market.

California supply to provide respite

With Panama Canal congestion and poor margins posing challenges for US Gulf coast producers looking to send volumes to California, the onus has fallen on local California renewable diesel facilities to meet growing demand.

The 730mn USG/yr expansion of Marathon Petroleum's 260mn USG/yr Martinez, California, RD facility is expected to reach completion by the end of this year. Sizeable rail volumes were already seen hitting the market for the week ended 17 November, which pressured rail pricing near San Francisco by nearly 150pc compared with levels heard in July/August. This created a big dislocation between R99 hop and rail markets.

The excess supply seen the week ended 17 November may tone down movement into the first quarter of 2024, according to participants. This is because of a fire on a flare stack that was reported 20 November at the Marathon Martinez RD plant.

But until Panama Canal drought conditions and US Gulf coast margins improve, California RD production may be the best way to meet growing demand moving into 2024.

By Jacqueline Reigle

Argus California hop R99 spot differentials ¢/USG