Viewpoint: Little biodiesel blending help from D4 RINs

D4 RIN credit prices in 2019 will provide little support for blending biomass-based biodiesel into the US fuel supply amid weak production margins and uncertainty with small refinery exemptions and the blender's tax credit (BTC).

Poor blending economics usually drive the need for stronger D4 RIN credits to incentivize blending more expensive biomass-based biodiesel into conventional diesel. But a series of factors may outweigh any strength in D4 prices in 2019.

Biodiesel production margins ended December at a nine-month low amid what appeared to be a de-escalation of the US-China trade dispute, which supported market optimism for soybeans. Production margins also fell amid ineffective Opec production cuts, which weighed on ultra-low sulfur diesel (ULSD) prices.

The heating oil/soybean oil (HOBO) spread, which is a guide for the profitability of producing biodiesel made from soybean oil feedstock, ended December at -40¢/USG, down from a year-high of +25¢/USG on 10 October and close to a nine-month low of -41¢/USG on 6 April.

Nymex heating oil futures ended the year at 166.47¢/USG, 22.15¢/USG lower than 7 December, when Opec and non-Opec producers agreed to reduce crude output.

Although the front-month soybean oil CBOT futures ended the year at 27.52¢/lb, down from a year-high of 33.74¢/lb, a temporary trade truce between the US and China at the beginning of December kept prices above a year-low of 26.96¢/lb.

D4 RIN credits will also face challenges in battling poor blending economics amid uncertainty surrounding small refinery exemptions and the BTC.

An uptick in December of applications to waive 2018 Renewable Fuel Standard (RFS) requirements for refineries smaller than 75,000 b/d could signal higher waivers for 2019. The Environmental Protection Agency (EPA) reported 22 applications in December, up from 15 in November.

The final blending mandate issued by the EPA in November did not address waivers of the RFS, which requires refiners, importers and other companies to each year ensure minimum volumes of renewables blend into the gasoline and diesel they add to the US fuel supply.

Uncertainty on the future of the BTC also remains.

The drop of the biodiesel blend credit from the US House of Representatives' proposed tax legislation in mid-December further disincentivizes biodiesel blending.

Prospects for a multi-year extension of the BTC seems uncertain until well into the first quarter of 2019.

US biodiesel prices should remain split between regions moving into early 2019, as rail logistics issues have disrupted the flow to the Atlantic coast.

An embargo on rail deliveries to IMTT's terminal in Bayonne, New Jersey, and to Kinder Morgan's terminal in Carteret, New Jersey, in late November redirected flows to Chicago, where there was a backlog of railcars. The rail embargo was lifted on 10 December, but supply in the midcontinent has been slow to re-enter the northeast.

At the New York Harbor, B99 SME material rose by 33pc to Nymex -7¢/USG between 20 November and end of December. Chicago B99 SME differentials plunged as rail logistics prevented material from exiting the region, causing a backlog of inventory. B99 SME material fell by 63pc to Nymex -32.50¢/USG over the same time period.