A record rise in renewable volume obligationshas tied its price swings as tight as a school of fish to the spread of jet fuel and ultra low sulfur diesel in the first quarter of 2021.
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An S&P Global Platts analysis between the US RVOs and the benchmark Gulf Coast jet/ULSD spread showed a correlation of +0.92 since Jan. 1, a nearly one-to-one movement unseen since 2013 when the RVO value first blew up onto the products scene.
"It's all about the RINs," a jet fuel trader at a major refiner said. "It's affecting all that I do."
Being so in sync is mostly a reflection of refinery decisions in times of turmoil to cut the distillates stream more to jet or diesel, traders said.
"Those are the levers of the market, to move the prices to attract people to make it or not make it, or export it or not," a second refiner trader said. "When we've seen such volatility, if RINs goes down 3 cents today, jet is going to be up 3 cents today. It's the biggest indicator of jet fuel price. Diesel minus the RINs is going to be the jet price."
Market sources pointed to additional factors, including swaps activity, that help push to correlation to near perfection, but agree the yield cut due to RINs is key. Jet fuel averaged a 1-cent premium over ULSD until RINs skyrocketed in 2013.
RINs and repeat
The RVO is a per-gallon cost of complying with biofuels mandates, calculated by an EPA formula for renewable identification numbers of four types of biofuels, including ethanol. RINs are traded credits that refiners and importers of gasoline and diesel must buy to demonstrate compliance if they can't offset obligations by making biofuels themselves. Jet fuel carries no RVO obligation.
RVOs prices averaged 2.83 cents/gal in 2019, ranging from 1.90 cents to 3.73 cents/gal, according to Platts data. USGC jet fuel, meanwhile, ranged from a 7.30-cent premium to ULSD to a 5.25-cent discount. The full-year correlation was -0.07, indicating movements in the two were unrelated or just slightly inversely related.
In 2020, RVO prices averaged 5.87 cents/gal, from 1.76 cents/gal in January to crossing the 10-cent barrier on the final day at 10.13 cents/gal. Jet fuel ranged from a 1.75-cent premium to a 37-cent discount in the pandemic days when few flights happened but trucking demand picked up.
"Diesel values are somewhat steady," the second trader. "On the other side, if don't want jet at all, it can disconnect and go well below." The full-year 2020 correlation was -0.05.
But in the first quarter of 2021, the RVO rose above 10 cents all but three days, reaching a record 17.21 cents on March 15, or $180,600 for a typical 25,000-barrel deal. Jet fuel discounts to ULSD ranged from 8.25 cents Jan. 12 to 18.45 cents on March 15. The Q1 correlation of +0.92 indicates every move in RVO was mirrored by the jet/ULSD spread. The first quarter had a +0.02 correlation in 2019 and a +0.38 in 2020.
Swaps play a part
The trend has occurred at other times of RINs volatility. The resulting RVO in 2017 gyrated from 6 cents between 10 cents in the first eight months before Hurricane Harvey. Fluctuations in the jet/ULSD spread mirrored the performance, with a +0.72 correlation. But the biggest change occurred in 2013, when the RVO started from 0.50 cent/gal -- a relatively high value since the program was created eight years earlier. The RVO rose to 14 cents/gal that July as gasoline consumption could not keep up with federal mandates for renewable fuels that increase every year, forcing producers to buy RINs to offset their obligations. The jet/ULSD correlation to RVO rose to +0.93 for July through August of 2013.
Besides output, refiners can manage costs by hedging. Brokers have said there are RINs swaps, but they're illiquid and expensive. They did not even exist during the first surge, so traders said they tried to hedge by buying ULSD and sell jet fuel swaps, or vice versa.
At the least, a third active jet trader said, companies seem to be hedging jet more. Volumes for CME Gulf Coast jet swap contracts jumped from 13 million in December to 28 million in January.
"It's definitely impacting paper decisions, the RVO is," a third active US jet trader said. "I'm guessing the jet players are long RINs, so as they move they have an offsetting position on jet paper. But cash and fundamentals on the front end will tell the real story."
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