New York — US refiners are facing higher RINs prices – again – but this time their playbook is different.
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As ethanol production declines in line with lower gasoline demand, so are the number of RINs produced, causing their prices to quadruple since the beginning of the year.
This is increasing the cost of the RVO – Renewable Volume Obligation – each refiner is liable for under the Renewable Fuel Act based on their production volume of transportation fuels.
Refiner reduction of gasoline output to match lowered coronavirus-led demand has also reduced RVO obligations. But it has also lowered demand for ethanol and thus the amount available to meet RFS-mandated gasoline blending requirements.
Less ethanol means more expensive ethanol-linked D6 RINs, creating a double bind for refiners which need to buy RINs if they can't access ethanol to blend to meet their RVO.
RINs or Renewable Identification Numbers, are used by obligated parties like refiners to help fulfill their RFS (Renewable Fuel Standard) requirements.
With ethanol production at about 85% of capacity this year, the price of D6 RINs has increased from an average 9.5 cent/RIN in January to an average 63.96 cents/RIN so far in November, according to S&P Global Platts assessments, reaching the year's high of 70 cent/RIN on Nov. 9, the week after the presidential election.
"Right now we in the midst of a "Biden bump" as D6 RINs prices have increased each day since Election Day (Nov. 3) on the belief that a Biden administration would result in stronger enforcement of biofuel mandates," said Corey Lavinsky, biofuels analyst with S&P Global Platts Analytics.
New RINs math
Refiners have felt the pain of rising RFS costs before. In 2016, ethanol RINs averaged 82.35 cents/RIN for the year, a big jump up compared with the 55.34 cents/RIN in 2015, taking a big bite out of their bottom lines.
But what's different this time around is that refiners are more savvy and involved in the renewable fuels space, allowing them to understand the process and navigate the price rise more efficiently through blending, producing and trading operations put in place.
For example, as of now, refiner HollyFrontier is meeting 50% of its RVO through blending within its system, executives said on the Nov. 5 earnings call.
But that will change when its two renewable diesel projects come online at its Artesia, New Mexico, and Cheyenne, Wyoming, refineries in 2022, which are expected to make HollyFrontier RIN-neutral.
At that time, HollyFrontier expects its RVO to be "balanced when the renewable diesel plants come up and are in operation," according to Tom Creery, HollyFrontier's head of commercial operations.
"We look at the difference in the price of D4s and D6s and assume that we will sell all the D4s and take those revenues and purchase back the D6. And that's keeping consistent with RVOs," he explained.
Politics and uncertainty
From 2016 through 2018, the Trump Administration granted 85 Small Refinery Exemptions to refineries, which exempted 4 billion RINs from compliance, Levinsky noted.
But a January federal appellate court ruling on the SREs means about two dozen fewer refineries will be eligible for exemption, turning those refiners from sellers of RINs to buyers. Even though affected refiners like CVR are appealing the ruling, the impact on their bottom line is evident.
CVR Energy reported on Nov. 3 call third quarter results below expectations due in to part to recording $36 million of RINs expenses in the quarter, compared with a $2 million benefit in the third quarter of 2019.
"The year-over-year increase in RINs expense was due to an increase in RINs prices during the third quarter of 2020 and a reduction of our renewable volume obligation in the prior year period," said Tracy Jackson, CVR's chief financial officer on the call.
The case is now before the US Supreme Court, but the lower court ruling is expected by many industry participants to stay intact, increasing further demand for RINs.
"This has put upside pressure on RINs prices as more companies need RINs for compliance at a time when D6 RINs generation has sunk 14.6% year on year due to a large reduction in domestic ethanol output," said Platts Analytics' Levinsky.
This brings up the "legitimate concern" that there will not be enough domestic ethanol available if 2021 mandates are not lowered from 2020 levels, he said.
Levinsky also notes that "2021 is shaping out to be the first year since 2015 that we will enter a new year without the mandates," referring to the mandates set yearly by the Environmental Protection Agency for different renewable fuels.
This mandate uncertainty and its impact on the refining industry and RINs prices combined with the "bullishness over President-elect Biden" will continue to keep RINs prices rising throughout the rest of the year, according to S&P Global Platts Analytics.