Ethanol-Credits Rally Threatens to Erode Refiner Profits

July 16 (Bloomberg) -- The soaring cost of ethanol credits may erode full-year profits for U.S. crude-oil refiners by more than 15 percent, said Faisel Khan, Citigroup Inc.’s managing director of integrated oil and research.

The run-up in corn-based ethanol credits known as Renewable Identification Numbers, or RINs, may reduce refiner earnings by more than 15 percent this year, exceeding Khan’s earlier estimate of 5 percent to 15 percent, the analyst said at a Senate hearing in Washington today.

The price of RINs jumped more than 1,800 percent this year to a record $1.35 a gallon today, according to data compiled by Bloomberg. Demand for RINs has climbed after the worst drought in eight decades boosted corn prices last year, quashing ethanol output, and refiners grappled with limits on how much of the additive can be safely burned in car engines.

Given the most recent price surge, “costs could move much higher than what we have in our numbers,” Khan said.

Federal law mandates that refiners add specified quantities of ethanol to the gasoline they produce each year, or purchase RINs to cover those amounts.

Valero Energy Corp. will kick off the earnings season for U.S. refiners when the San Antonio-based company announces second-quarter results on July 23.

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