Biofuels compliance credits rally amid battle over U.S. mandates

Source: By Chris Prentice, Reuters • Posted: Tuesday, July 12, 2016

Prices in the niche market for biofuels compliance credits jumped to three-year highs on Monday as traders fretted about supplies because of higher U.S. government mandates to increase the use of biofuels next year.

Trading in the opaque market for Renewable Identification Numbers (RIN) – the paper credits that can be bought and sold to meet government requirements for biofuels – has picked up in recent days. Expectations have mounted that the government’s plan for biofuels use through 2017 will potentially use up inventories.

Oil importers and refiners use the credits to show they are meeting annual standards for the amount of ethanol and biodiesel to be blended with gasoline and diesel. The credits are generated with each gallon of renewable fuel produced.

The flurry of activity in the market was just ahead of Monday’s deadline for public comment on the Environmental Protection Agency’s latest plan for biofuels use, which had received over 40,000 comments by Monday afternoon, according to a government website.

Prices of renewable fuel (D6) credits jumped as much as a nickel to a high of 99 cents apiece on Monday, up from 94 cents last week, to the highest since August 2013. In 2013, RINs vaulted to about $1.45 on worries over supply shortages.

The more than a decade old Renewable Fuel Standard (RFS) program was designed to reduce greenhouse gas emissions and dependence on foreign oil, but has been stymied by regulatory delays and a heated lobbying battle between entrenched oil and farming interests.

Biomass-based diesel (D4) RINs jumped as much as five cents on Monday to trade from $1 to $1.04 each, their highest since August 2013, according to Oil Price Information Service prices.

The more challenging the government mandates, typically the higher the RIN price.

On a call with clients on Monday, Goldman Sachs Group forecast prices of the D6 RINs to range from 90 cents to $1 each for 2017 compliance, up from about 85 cents to $1 this year, according to traders who heard the forecasts. Buying increased last week when Goldman Sachs forecast shrinking inventories.

The forecast puts prices well below 2013’s historic highs above $1.40 each, however, and suggests the effects of the supply tightness has largely been baked into current prices.

Still, protracted high prices will prove costly for refiners, which spent more than $1 billion last year on the compliance. (Reporting by Chris Prentice; editing by Grant McCool)