Ethanol, biodiesel face varied year-end challenges

OREANDA-NEWS. August 28, 2015.  Ethanol and biodiesel have weathered the drop in crude prices differently, but both face further challenges later this year.

Ethanol margins have fallen by more than 22pc this month as corn prices held steady while crude prices plummeted. Biodiesel producers have fared better, with margins down just 9pc as soybeans retreated by 8pc this month. But producers are selling biodiesel at hefty discounts to the implied RIN value, assuming that federal tax credits will be reinstated.

With analysts calling for crude oil to remain low, including some bears predicting a sub-\\$40/bl price, the rest of the year could be challenging for biofuels.

Last week, spot ethanol prices reached premiums to spot gasoline for the first time since late April, when ethanol prices made a brief foray over RBOB amid a touch of buying support ahead of the summer driving season. Prior to this the last period in which ethanol commanded sustained premiums to the petroleum product it replaces was in late 2014, when Opec's refusal to curtail oil production set off the current crude price fall. Ethanol premiums to gasoline reached as high as 90?/USG on 1 December 2014. From early November 2014 through late January 2015, the last period over which ethanol stood at premiums to gasoline, D6 RIN prices surged 61pc to over 72?/RIN.

Should ethanol prices fail to keep up with falling crude for the rest of 2015, D6 RINs prices should find support, as was seen during Q4 2014 and Q1 2015. Yet ethanol production is stubbornly high as gasoline demand unexpectedly surged to nearly 9.7mn b/d this summer. Monthly output of D6 renewable fuel RINs reached the highest mark this year at 1.28bn credits last month, putting the industry on pace to surpass this year's requirement of 13.4bn USG by 1.2bn USG.

Yet the pace of production is set to change as many of the nation's largest producers will undergo heavy maintenance during the second half of the year. The sharp declines in margins, coupled with soft RIN values and a shaky macroeconomic situation could see some producers throttle back on rates.

These developments have not gone unnoticed by Brazilian producers who, incentivized by the D5/D6 spread of over 20?/RIN and a rebound in Low Carbon Fuel Standard (LCFS) credits, will send as much as 100,000m? to the US next month. It is likely low crude prices will see US export demand crumble from discretionary blenders in place like China and the Mideast, which do not have blend mandates. The two factors — surging Brazilian imports and waning export demand — could hit US ethanol producers simultaneously this fall.

While the ethanol industry ramps down production, biodiesel producers are increasing output to capture tax incentives and to supply additional demand created by the — perhaps unintentional — protectionist consequences of a possible shift to a producer's biodiesel tax credit (BTC).

The biodiesel industry is operating as if the return of the \\$1/USG BTC is a certainty, with July production of biodiesel RINs, and hence biodiesel, reaching the highest level since December 2013 and the second highest on record at 294.3mn credits, or a volume of 192.7mn USG. Producers have sold product at discounts of as much as 17?/USG to the implicit RIN-value of the B100 fuel, apparently confident a reinstated BTC will make them whole.

Yet the added supply and anticipation of a reinstatement of the BTC has wreaked havoc on D4 prices this year. After peaking at over 95?/RIN on the latest proposed Renewable Volume Obligations (RVO) from the Environmental Protection Agency (EPA) on 29 May, current year biomass-based diesel RINs have managed to climb in just 13 sessions. That compares with 42 days of losses and six days unchanged, which has pushed D4 values down 39pc in just over 2 months. Low D4 RIN prices coupled with the shift from a blenders' tax credit to a producers' tax credit erodes the incentive to biodiesel. This comes at the same time that biodiesel producers are looking to maximize output, ensuring further discounting of the fuel itself to get deals done.