Viewpoint: RINs could fall short of 2017 target

Generation of renewable identification numbers (RINs) used to show compliance with federal biofuel mandates is on pace to fall short of the 2017 target set by the Environmental Protection Agency (EPA), according to an Argus analysis.

RINs are projected to fall at least 400mn credits, or 2pc, short of the final 19.28bn USG blend mandated by the EPA amid a steady decline in ethanol blending.

The entirety of the draw will be made up of Renewable D6 RINs — the credits used to satisfy compliance with the conventional, corn-based ethanol blend requirement. A glut of biomass-based diesel credits — generated via biodiesel blending — will more than offset a shortfall in advanced D5 RINs and cellulosic D3 and D7 RINSs.

The draw on D6 RINs is a result of a steady decline in ethanol blending. Blending is up on both a volumetric basis — averaging 903,000 b/d versus 2016's 889,500 b/d— and percentage basis, averaging 9.89pc versus 9.52pc last year.

But the blend rate has been trending lower over the course of this year. Since peaking at a record 10.41pc of the gasoline pool in January 2017, blending tumbled to 9.47pc this summer, just shy of the year-to-date low of 9.46pc and down from the 9.5pc rate achieved during the same week last year. The 2016 D6 RINs traded at 93.5¢/RIN this time last year compared to the 82¢/RIN for current year ethanol credits trading 25 July.

Yet blend economics have improved markedly since 2016 with spot ethanol averaging a 2.77¢/USG premium to spot gasoline compared to a premium of nearly 25¢/USG for the same period last year. Ethanol production has averaged 1.023mn b/d thus far this year, up nearly 5pc from year-ago levels, while exports have surged nearly 40pc year-over-year, soaking up the bulk of this surplus. Yet US stockpiles have grown by 980,000 year-over-year, equal to roughly one day's worth of demand, indicating there is certainly more room for domestic blending.

RINs prices and spreads show the market is coupled with raw fundamental data as regulatory drivers, such as the status of the biodiesel tax credit (BTC) and possible antidumping measures, take a back seat for the time being. Since bottoming out at 33.5¢/RIN in early March, D6 RIN prices have soared 150pc to 84¢/RIN. The spread between 2016 vintage and 2017 vintage D6 credits has compressed to just 0.3¢ from premiums of more than 1.5¢ earlier in the year as the market indicates an increased need to draw on banked 2016 ethanol RINs. The spread between biomass-based diesel and ethanol credits has more than halved in just over two and a half months to 27.75¢, an acknowledgment to the mounting D4 surplus.

A potential compliance shortfall in the cellulosic category is also driving up prices for D3 RINs, with the current year vintage adding 41.5¢/USG, or over 17pc, in less than two months. The spread between 2016 and 2017 vintage D3 credits has narrowed from a high of 46.5¢ this year to just 3¢; again a response to the need to draw on banked 2016 credits to satisfy this years' obligation.

Compliance costs, as measured by the Argus Renewable Volume Obligation (RVO) have surged 3.91¢/USG, or nearly 65pc, to 9.95¢/RIN in less than three months, briefly surpassing the 10¢/USG mark in intra-day trade late last week. With traders facing a 19pc reduction in the 2.06bn credit 2017 RIN bank this year, several factors are staving off an unchecked RIN rally. Chief among them the 15bn USG cap on conventional ethanol consumption and the seemingly unending supply of versatile D4 credits at the margin.

Hinging compliance on D4 supply means exposing obligated parties to an import-supplied market at a time of increasing threats to the trade. Those include the potential for a shift to a producers tax credit for biodiesel and possible antidumping measures against Argentinian and Indonesian biodiesel imports.

For the time being, increasing US inventories in the face of profitable blend economics demonstrate higher D6 prices are warranted. A return to the 93.5¢/RIN seen this time last year would place RVO just shy of 11¢/USG.