Rising RVO driven by vast market uncertainty

Sharp gains across all RIN types that bolstered the Argus Renewable Volume Obligation (RVO) this week to all-time highs were driven by buyers wary of regulatory uncertainty and the forthcoming policy under the new White House administration.

The Argus RVO, which represents the cost of compliance with the Renewable Fuel Standard (RFS), has increased more than sevenfold since last January's 2.43¢/USG following court-ordered restrictions on biofuel blending waivers and the Covid-19 pandemic slashing both biofuel and conventional fuel demand. At the height of the pandemic in spring 2020, obligated parties were heard to even sell off RIN credits that would count toward their obligation to raise funds to stay afloat.

The Argus RVO has since far exceeded its last major rally in 2013, when it hit 13.93¢/USG, and is currently 17.17¢/USG.

Buyers now scramble to purchase credits amid a litany of unknowns, including overdue biofuel blending mandate volumes for 2021 and several ongoing court battles.

Regulatory purgatory

The biggest unknown to obligated parties under the RFS is the US Environmental Protection Agency's (EPA) proposal and finalization of mandated biofuel blending volumes for 2021. Lacking a mandate for the ongoing year, many obligated parties appear to be erring on the side of caution and buying heavily.

RFS requires that refiners, importers and certain other companies each year ensure minimum volumes of renewables blend into the gasoline and diesel they add to the US road fuel supply.

Blending requirements do not apply to exports, jet fuel or other off-road uses, such as heating and power generation.But as the domestic fuel market grapples with the regulatory uncertainty, market participants say exporting to avoid compliance costs is not as easy as it sounds.

"I'm not sure it's entirely possible for a lot of [obligated parties]," one participant said. "They just [have to] eat the cost, which is why they petition the EPA in the courts so much."

Lingering low fuel demand abroad from the pandemic would also deter obligated parties from relying solely on exporting, according to another market participant.

A lack of RVO percentage standards for the current year has also sown uncertainty in many obligated parties, leading them to go long in the market for fear of getting caught flat-footed and short on credits upon the EPA's future unveiling of blending volumes.

Whereas the EPA under former president Donald Trump passed a record number of small refinery exemptions (SRE), waiving dozens of obligated parties from the RFS, the market expects far fewer under the administration of President Joe Biden.

Additional court cases that could lead to sharp changes in the market include the 10th US Circuit Court's decision to limit the number of refineries eligible for waivers of the mandates now set for arguments in April before the US Supreme Court.

A separate court ruling compelling the EPA to tack on an additional 500mn USG of biofuel blending is also on the market's radar.

By Thom Dwyer