REFINERY MARGIN TRACKER: US margins take a hit as EPA mandate uncertainty roils RINs prices

US refinery margins slid for the week to Aug. 20 due to the dramatic fall in the prices of RINs on expectations that the Environmental Protection Agency will set a lower requirement for refiners to meet the renewable fuel standard in 2021, an analysis from S&P Global Platts showed Aug. 24.

Sources familiar with the subject have said no EPA decision is likely to be reached before President Biden's infrastructure bill is passed, leaving the actual mandate requirements open to speculation and causing fluctuations in RIN prices.

RIN prices were pummeled for the week to Aug. 20 by expectations that when the EPA's twice-delayed 2021 RFS is released, blending levels will be set below 2020 levels -- a blow to renewable fuel demand as well causing a decline in US refining margins.

The price of RINs -- the renewable credit used by refiners to meet their renewable fuel obligations -- are built into US refining margins calculated by S&P Global Platts Analytics. Stripping them out of US margins creates a more accurate margin comparison between US refiners and those in Europe and Asia.

Along the US Gulf Coast, WTI MEH cracking margins averaged $14.43/b for the week to Aug. 20, down from $16.10/b the week earlier, according to Platts Analytics data.

After stripping out the cost of RINs, WTI MEH cracking margins averaged $8.71/b for the week, closer to the crude's $6.44/b cracking margin for Northwest European refiners.

USGC Arab Medium coking margins averaged $13.32/b for the week. By removing the cost of RINs the weekly average margin falls to $7.39/b, narrowing the gap with Chinese Arab Medium coking margins that averaged $6.44/b for the week.

Decoupling RINs a possibility

There is a likelihood the 2021 EPA mandate will decouple the D6 ethanol RINs from the D4 biomass diesel RIN, having a greater impact on the D6 RINs, as refiners continue to recover from the drop in refined product demand wrought by the coronavirus pandemic, according to some analysts and refiners.

"In 2020, the ethanol blending requirement into gasoline was a brutal 11.5%, yet the actual blend rate was only 10.5%, a level basically unchanged over the past five years. Thus, refiners had to use D4 RINs to cover D6 obligations, pulling D6 prices up near D4 levels," wrote Tudor Pickering Holt analyst Matthew Blair in a research note.

Blair calculated that an EPA rollover in either volume or blending requirements from 2020 into 2021 will continue the shortage of D6 RINs. D6 RINs account for about 69% of total refinery RIN cost.

"Thus, any efforts by the EPA to reduce the D6 blending mandate and decouple D6s from D4s could be very beneficial for refiners," he added.

The price of D6 RINs, which averaged $1.5318/RIN for the week to Aug. 20, is down almost 10% from the week earlier, while the price of D4 RINS fell about 5% week on the week, to average $1.6978/RIN, Platts assessments showed.