A Bullish Run

Biodiesel RINs remain high
By Erin Voegele | September 08, 2011

While the 2011 return of the biodiesel tax credit was expected to result in depressed RIN prices, this has not happened. “The current market for 11D4’s (2011 biodiesel RINs) is extremely bullish,” says Sam Gray, a fuel trader with Ft. Worth, Texas-based VICNRG LLC. “And, when prices start running as they have recently, you must look to see how the oil majors are going to deal with such increases in compliance  cost.”

According to Gray, many of the obligated parties that are short 2011 biodiesel RINs have not adequately developed a wholesale market to distribute product. “Either they develop such markets, purchase other marketers that have developed such markets, or continue to be short RINs and go to the open market to buy compliance,” he says.

As we near the next RFS2 compliance period, Gray says he expects RIN prices to continue to climb. “There is simply demand that is staying ahead of supply, and this demand is tied to mechanical buying rather than producer or blender margins,” he explains. “Plain and simple, 2011 is the year of biodiesel. Producers are making the highest margins on record, downstream blenders are seeing wholesale biodiesel prices 30 to 40 cents under rack, and both of these events are tied to the current high RIN price. Any producer or blender not seeing a positive bottom line is completely out of touch. If the RIN buying from obligated parties was correlated to producer and blend margins—both at historical highs—then there may be some contraction of these margins and RIN prices would be much lower. However, short is short, and a short squeeze can persist in this market for some time.”

Regarding the expectation that RIN prices would drop with the 2011 reinstatement of the biodiesel tax credit, Gray notes that the RIN prices behaved completely opposite of what he was expecting. He also says that the real shocker was seeing the overall lack of domestic infrastructure available to get biodiesel blends to the end user. “The industry had been spoiled for too long with a splash and dash model whereby U.S. taxpayers subsidized Europeans to purchase our fuel and there was no feeling as to what other domestic blender margins would have to be to entice marketers to splash diesel with biodiesel,” he says. “Clearly this margin is well above the historic margins seen by petroleum diesel marketers, and the size of this margin this year has guaranteed that infrastructure would be added to achieve necessary blends.”

The pending expiration or renewal of the biodiesel tax credit in 2012 will likely impact the price of RINs next year. According to Gray, whether RIN values have to rise proportionally to compensate for the lack of the $1 tax credit will depend, in part, on how much value is carved out of a pound of feedstock in the event the credit vanishes. He also says it’s conceivable that RIN values could be reduced in 2012 due to the wildcard factors of biodiesel imports from Argentina, Malaysia and Indonesia, if those countries receive permission to export biodiesel to the U.S. and generate RINs.

Alternatively, Gray says if the biodiesel tax credit is reinstated for 2012, we’ll simply continue to have subsidy on top of a mandate. “This will ensure that biodiesel feedstocks continue to carve out their profit share of volumes up to and above the RFS mandated volumes of biomass-based diesel,” he says.

—Erin Voegele

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