FEATURE: Surging RVO cost negligible for US fuel producers, importers amid pandemic

Fallout from the coronavirus has so disrupted normal refined product economics that a high cost to comply with the US biofuel blending mandate, once a substantial concern for fuel producers, is now an afterthought, even as the price continues to climb.

When the cost of complying with Renewable Fuel Standard blending requirements gets too high, refiners often chase higher margins by switching from diesel to jet fuel production or by selling fuel overseas, thus avoiding the need to buy Renewable Identification Numbers, which the US issues to track use of alternative transportation fuels.

The cost of those RINs combined, the Renewable Volume Obligation, reached a fresh multiyear high Thursday at 5.79 cents/gal, its highest value since being assessed at 5.80 cents/gal on March 27, 2018. That strength came from the expectation that the US Environmental Protection Agency will raise the mandated biofuel blending volumes for 2021 when they're released in the coming weeks.

Traders and brokers in RINs markets have also watched ongoing battles over the EPA's granting of small refinery exemptions, which allow refineries with 75,000 b/d or less of throughput to apply for a pass from biofuel blending mandates. Recent court decisions have signaled that the agency may grant fewer exemptions, keeping biofuel demand closer to the annual mandates the EPA sets.

The 2020 biofuel mandate requires US refiners to blend 20.09 billion gallons of renewable fuel into gasoline and diesel this year, making up 10.97% of the nation's transportation fuel supply.

While a high RVO cost normally has reverberations throughout the refined products sector, the unprecedented situation for oil markets has virtually erased any potential issue or benefit created by the rising cost of RINs.

"The bigger issue now is the demand for diesel," one source said.

Stay-at-home orders across the global had a dramatic effect on all fuel demand, leading to a saturated supply. While demand has slowly recovered as countries and cities reopen, producers still struggle to capture a good margin for their barrels.

Cracking margins for a barrel of WTI MEH crude on the US Gulf Coast have averaged just $2.48/barrel so far in May, compared to $8.93/b over May 2019, according to Platts Analytics data. While gasoline weakness has led the way, cracks for products like jet fuel or naphtha are even worse, leaving producers with fewer options than normal.

A high RVO typically leads to more jet production in lieu of diesel, as the former does not have to comply with the biofuel mandate. But canceled flights around the world have crushed jet fuel demand and pushed US production levels to record lows.

"I don't personally think it is enough to want to push more jet production," a trader said of the high RVO. "The market doesn't seem like it has much more out there than we have in the past."

US total jet fuel production reached 469,000 b/d the week ended May 22, a one-month high, according to the most recent US Energy Information Administration data. But that figure was just two weeks removed from an all-time low and well behind its year-ago level of 1.79 million b/d.

IMPORTERS UNABLE TO CAPTURE DISCOUT

Unlike the obstacle a high RVO cost can create for US producers, markets that import US barrels benefit from the stronger price because it gives them a larger discount on their supply.

One Caribbean importer said earlier this year they need the price of RVO to be at least 3 cents/gal to have favorable economics for US supply compared to other options.

Barrels shipped away from the US don't have to comply with the RFS at all, which as of Thursday meant an importer buying US product for consumption abroad could buy a barrel of diesel at a 5.79 cents/gal discount to a US buyer. But that incentive is of little consequence in a coronavirus world, where demand is low and tanks are full.

"It is good for importers in South America, but now there are no volumes purchased," one Latin American trader said.

The rolling four-week average for US refined products exports surpassed a two-year low at 4.07 million b/d the week ended May 22, EIA data showed. The decline was led by gasoline exports at 290,000 b/d, the lowest volume since August 26, 2013.