Viewpoint: US biofuel blendwall faces test in 2016

OREANDA-NEWS. December 25, 2015. US RINs markets in 2015 absorbed a triple shock, once from an expiring biodiesel tax credit (BTC) and twice from major federal rules on biofuel blending for the on-road fuel pool.

Perhaps the biggest shock was the Environmental Protection Agency's (EPA) move in May to set biofuel quotas for 2014-16.

EPA's current Renewable Fuel Standard (RFS) timetable sets compliance deadlines within a month of what was originally intended by March 2017. That is a far cry from 2013, when the industry had to operate in a regulatory vacuum because the EPA was delayed in issuing its RFS rules.

The EPA has shown that it serious about deadlines and has committed to avoid triggering the reset clause to the point where it could test the boundaries of the blendwall, the level of biofuel blending beyond which current infrastructure and auto fleet limitations make it difficult to surpass.

The 14.5bn USG of conventional ethanol required for 2016 will outpace the E10 blendwall of 14.21bn USG by 290mn USG. Three years of consistent growth in RVOs means fewer RINs will be on hand for carryover each year, making for a total D6 shortfall of 380mn RINs.

While this math is starker than the 10.1pc percentage standard implies, the E10 blendwall will be narrowly averted next year. As always, advanced biofuels, in particular renewable diesel, will provide the safety valve allowing the industry to breach the blendwall without heavily impacting RIN prices. So far this year, renewable diesel has generated 312.7mn D6 credits, while biodiesel has contributed 105.3mn D6 RINs. If similar production levels can be reached in 2016 the blendwall will be averted by more than 40mn D6 RINs, putting the US within 0.2pc of the E10 blendwall.

Whether this is too close for comfort will largely depend on the impact of the recently reinstated BTC. The imposition of the blenders' BTC for 2016 will prove bearish for biomass-based D4 credits. This will only partially be offset by a 9.8pc year-over-year increase in the biomass-based diesel component of the 2016 RVO as market participants clamber to collect on a guaranteed credit.

Biodiesel imports will play a large role in averting the blendwall next year.

Argentinian biodiesel imports hit 2.4mn bl during the first three quarters of 2015, nearly double full-2014 import levels. Remarkably, that growth occurred without a tailwind from the BTC and with first-time approval from the EPA to generate RINs.

Imports of Argentinian biodiesel are on pace to surpass the record 3.1mn bl set in 2013 when the BTC was in place. Argentina biodiesel imports accounted for 46pc of all US biodiesel imports in 2015, compared with just 27pc during 2014 when the BTC and approval for RIN generation was not in place.

With the BTC in place in 2016 as a blenders' credit, D6 RINs will lead the market, while D4 credits will set the ceiling price. Yet with the BTC pressuring D4 RIN values, the 2016 D4/D6 spread looks set to compress below the 4?/RIN currently on the board. The Argus RVO, a measure of RFS compliance costs, averaged 5.29?/USG year-to-date. With the BTC in place, RVO should come in around 5.65?/USG, whereas in the absence of a BTC, RVO would have averaged as high as 8.09?/USG.