Viewpoint: Run on the RINs bank this year

OREANDA-NEWS. August 09, 2016. The bank of carryover RINs used to comply with US renewable fuel mandates faces a draw of nearly 500mn RINs this year to meet a stiff blend requirement of 10.1pc of the country's transportation fuel.

An Argus analysis found that obligated parties may need to make use of roughly 478mn RINs this year, and could draw an additional 462mn credits in 2017, for a total drawdown of 940mn credits by 2017, when the blend requirement is set to increase to 10.44pc, according to the EPA's proposed percentage and volumetric standards. This would leave just over 809mn RINs, after starting off 2015 with a balance of 1.74bn credits.

The market has responded to this structural tightening accordingly, with RIN prices slowly creeping higher since to start of the year to gain more than 40pc by late-July. While RIN markets initially took their cues from D6 renewable RINs, it was not until late June that the marketplace grasped that the shortfall was going to be particularly severe in the overall advanced category — namely cellulosic, biomass-based diesel and advanced biofuels. Since then, the spread between biomass-based diesel RINs and renewable ethanol credits surged to 8?/RIN from 4?/RIN, as traders eyeing unworkable arbitrage economics with Brazil recognized it was almost entirely up to the US biodiesel industry to fill the shortfall.

While on the demand side stringent blend mandates of over 10pc are sure to keep markets volatile with price risk to the upside, supply side metrics show that markets responded to the stark reality laid bare this June almost immediately. Generation of D4 RINs reached an all-time high of 369.5mn RINs for the month of June, while ethanol blending surged to 957,000 b/d during the first week of July, the highest rate on record.

Imports of biofuels certified for RIN generation are also climbing sharply. Estimates for 2016 imports of Argentine biodiesel range from 6.3mn bl to 7.8mn bl, up sharply from the 4.4mn bl purchased last year. The US imported just under 8mn bl of biodiesel last year, 55pc of which came from Argentina. The US imported 2.9mn bl of biodiesel during the first five months of 2016, up 73pc on the same period last year and the highest five-month period on record.

Imports of renewable diesel are also on the rise, albeit not at the pace achieved by biodiesel. The US imported 1.7mn bl of renewable diesel during the first five months of 2016, up 11pc on the same period last year, marking a record high for the five-month period. If this pace can be maintained through year end, imports of biodiesel and renewable diesel can be expected to contribute around 1.2bn RINs toward 2016 compliance.

While the easing supply situation has begun to impact pricing — RIN values have shed 6.5pc in just four sessions since peaking on 29 July — the larger structural tightness caused by ever-increasing blend requirements alongside compliance headwinds such as anemic E15-E85 demand, improving vehicle fuel economy and electric vehicle market penetration, will ensure a tight RIN market well into 2017 and beyond.

Viable long-term solutions to structural tightness, such as the need for new renewable diesel and cellulosic biofuel plants and blender pump infrastructure projects, involve long lead times and large amounts of capital up front. All of this is within a regulatory environment that does not always inspire confidence in investors. RINs will ultimately signal the markets' long-term needs.