RIN credit prices are likely to remain unsteady in the first quarter of 2022 as refiners and fuel importers adjust their positions following the US Environmental Protection Agency's (EPA) biofuel blending proposals released in early December.
The EPA for the first time in the history of the Renewable Fuel Standard (RFS) submitted a range of possible percentage standards for biofuel blending mandates in addition to retroactive changes for 2020.
For the 2020 compliance year, the EPA proposed to lower percent standards from what had previously been finalized in 2019. Market participants were already expecting lower figures, based on numbers that were leaked earlier in the year. But official proposals turned out higher than the leaked figures. Senators with large agricultural constituents still expressed ire and introduced legislation in an attempt to prevent the EPA from shrinking previously finalized mandates.
The blending target ambiguity that plagued the market for the bulk of the year still lingers, as obligated parties must now try to anticipate what figures the EPA will finalize in addition to the number of small refinery exemptions (SRE) the agency will approve.
In a separate proposition, the EPA is contemplating rejecting dozens of SREs dating back to 2016. Some obligated parties have responded by heavily buying RINs in an effort to adjust their position amid the prospect of en masse rejection of outstanding SRE applications. Some traders have forecast that 85-100pc of SREs awaiting a decision by the EPA will be rejected.
Even though compliance deadlines have already been extended and could be extended again, demand for 2021 vintage RIN credits remains steady as buyers seek to acquire credits before liquidity for that year dries up.
Supply and demand imbalances for specific RIN vintage years have further compounded price swings. Biomass-based diesel D4 RIN credits with 2021 vintage, also known as B21, have assumed a large premium over their 2022 counterparts. Buyers in the market for B21 credits are finding that most sellers are looking to move 2022 vintage D4 RINs, or B22. The B21/B22 spread hovered between 9-10¢/RIN in November before widening to as much as 40.8¢/RIN on 21 December with low demand and bountiful supply keeping a lid on the 2022 vintage D4 credits. More recently, the spread narrowed to 23¢/RIN as some obligated parties appear to take advantage of the price disparity.
Market participants have also noted that the door is open for obligated parties to defer portions of their 2021 compliance into next year and cover it with cheaper 2022 vintage D4 RINs. Any party that has deferred its 2021 compliance obligations would then be able to cash in on the wide 2021-2022 vintage D4 spread by selling its freed-up 2021 credits.
Cellulosic biofuel D3 credits with 2021 vintage have made steady gains and hit an all-time high at 381/RIN amid higher biofuel blending targets for 2021 than 2020, which translated into increased demand. Next year vintage D3 credits have also narrowed their discount to current year credits from 60¢/RIN to 48.25¢/RIN as ambitious 2022 targets translated into higher demand.
Even as higher 2022 biofuel blending targets indicate bullishness, the market has still demonstrated susceptibility to seesawing on days where activity is muted or uncertainty is heightened.
The Argus Renewable Volume Obligation (RVO), a measure of the daily cost of compliance under the RFS, lost more than 1¢/USG on 2 December in bearish anticipation of biofuel mandate developments. In the session following the release of the EPA proposals, the Argus RVO rose by 1.74¢/USG on 8 December as bullish concerns over SRE rejections lifted D6 credits and thus the Argus RVO. This pattern will continue into the new year as participants remain highly sensitive to any developments that emerge.
