RVO halves US refining margins

The cost to comply with the US Renewable Fuel Standard (RFS), as measured by the Renewable Volume Obligation (RVO), has risen to more than half of refinery margins on the US Gulf coast for road fuel producers with maximum exposure.

The Argus-calculated RVO averaged 52pc of Gulf coast 3-2-1 refining margins against WTI Houston crude for the two weeks ending 4 June. Gasoline and diesel producers who are unable to blend biofuels into their finished productand have limited means of export face a worst-case scenario in which margins on paper are cut by more than half, from $17.80/bl to $8.56/bl after paying for the RVO.

The RVO is an aggregate of Renewable Identification Number (RIN) credits that obligated parties must pay in lieu of physical blending. Producers have varying degrees of current and past exposure to the credit market depending on their access to biofuels and blending facilities. Demand for RIN credits has outpaced supply because of relatively low production of ethanol RINs last year combined with increased demand after several Trump-era waivers from the RFS program were withdrawn.

The historically high RVO adds a layer of difficult-to-hedge, volatile costs to refiners, and has helped cap Gulf coast refinery throughput even as domestic fuel demand is hitting post-pandemic highs at the onset of peak summer driving season.

The 3-2-1 crack spread has narrowed slightly from mid-May highs, when a five-day shutdown of the Colonial pipeline lifted gasoline and diesel prices. Since then, crude gains have outpaced the corresponding gains in product prices, although Gulf coast cracks remain wide relative to historical margins.

At the same time, RVO continued to to set fresh highs as uncertainty over RFS waivers and volume mandates prompted fears of a credit shortage. A run on biodiesel feedstocks and record high soybean oil futures also contributed to sustained RVO gains.

While it's not uncommon for RVO to cut refining margins by as much as 50pc in low-margin environments for those maximally exposed — as was the case for much of the fourth quarter last year — it is rare when margins are approaching $20/bl.

Crude throughputs at US Gulf coast refineries have held above 8mn b/d since mid-April, high for the pandemic era but largely below pre-pandemic levels, according to US Energy Information Administration data.

This is despite nationwide gasoline demand exceeding 9mn b/d since mid-May, including two consecutive weeks of hitting post-pandemic peaks. Expectations are high for a return to peak summer fuel consumption in the coming months, as vaccinations and re-openings create a path to release pent-up travel demand.

This tension between rising domestic demand and RVO-dented margins has created a shortage of intermediate feedstocks. While refiners limit their RVO exposure by curbing crude throughput, they are also seeking to maximize rates at secondary units that produce gasoline and blending components with the start of summer driving season.

Vacuum gasoil (VGO) has seen a recent rise in demand from US Gulf coast refiners using it as a feedstock for fluid catalytic crackers (FCCs). Refiners have squeezed out fuel oil blenders from the VGO market in recent weeks as FCC rates have climbed. This is a departure from earlier this year, when blenders of low-sulphur fuel oil provided the main source of demand for VGO.

By Chunzi Xu