Oil Refiners Cry Foul as ‘RINsanity’ Returns Amid Margin SqueezeBy
Price of renewable fuel credits jumped 32 percent in 2 months
Compliance to cost merchant refiner group $1.8 billion in 2016
While oil is mired in a bear market, prices in an obscure corner of the fuel world are only going higher.
Renewable fuel credits surged 32 percent in the past two months, even as oil slumped. This year, U.S. refiners from CVR Refining LP to Valero Energy Corp. will pay $1.8 billion for the credits, known as RINs, adding to the pain of the lowest summer profit margins in five years. The market has gotten so frothy that fuel makers are looking to increase exports to avoid the cost and ethanol lobbyists are calling for an investigation into potential price manipulation.
"RINs continue to be an egregious tax on our business and have become our single largest operating expense, exceeding labor, maintenance and energy costs," Jack Lipinski, chief executive officer of CVR Refining, said last week in the company’s second-quarter earnings call. "As a matter of fact, RINs are double our labor cost."
A Renewable Identification Number, or RIN, is created along with each gallon of ethanol or biodiesel that’s produced. Refiners and importers need to meet a biofuel quota set by the government, either through blending fuel with ethanol or buying RINs. Companies that don’t operate retail gasoline stations are feeling a growing financial burden from the rising costs, as they are unable to generate the credits by blending biofuels with the petroleum-based fuels they produce.
Prices for 2016 ethanol credits rose to 97.75 cents July 13, according to data from Progressive Fuels Ltd. compiled by Bloomberg, and were pegged at 91.25 cents Wednesday. The credits last rose this high in 2013, when government quotas for using biofuels such as ethanol were increasing faster than gasoline demand, leaving fuel makers with an obligation they couldn’t meet by blending ethanol into gasoline. This year, similar fears of a credit shortage are driving prices higher.
The 2016-vintage credits are forecast to average 95 cents each this quarter, the highest quarterly cost on record, according to Tudor Pickering Holt & Co. The prior high was set in the third quarter of 2013 at 85 cents, during the summer of RINsanity.
"It’s called RINsanity the sequel," said Andy Lipow, president of Houston-based Lipow Oil Associates LLC. "The reason that it’s the same as 2013 is because we see an ever-increasing amount of renewable fuels being mandated into a pool that, for a variety of reasons, cannot be accommodated."
On Thursday, the American Fuel and Petrochemical Manufacturers trade group petitioned the Environmental Protection Agency to shift the responsibility of program compliance with distributors who blend gasoline with ethanol for delivery to filling stations, not with refiners who make the petroleum-based fuels. The appeal comes six months after Valero, the country’s largest independent refiner, sued the agency that enforces Renewable Fuel Standard program. Valero and the others believe the blending program needs restructuring to even the playing field.
"The simple fact is that RINs were intended to be a certificate of compliance under the RFS, not a method of extracting value or creating winners and losers based on asset configuration in the value chain," George Damiris, HollyFrontier Corp.’s chief executive officer, said on the company’s second-quarter earnings call.
This week the biofuel industry’s top lobbyist, the Renewable Fuels Association, urged Timothy Massad, the U.S. Commodity Futures Trading Commission Chairman, to investigate potential manipulation in the RIN market.
"While various theories have been advanced, the real reasons for this dramatic increase in RIN prices remain unclear. Basic market fundamentals suggest RIN prices should have remained stable — or fallen — following the proposal’s release," Bob Dinneen, president of the Renewable Fuels Association wrote.
Goldman Sachs analyst Neil Mehta downgraded PBF Energy Inc. to neutral in late June, citing higher RIN costs. "We view higher RINs prices as a headwind for merchant refiners without large retail/wholesale businesses," Mehta wrote in a June 29 note.
Merchant refiners like PBF and Valero may find some relief from rising RIN costs by exporting the fuels that would otherwise come with an obligation to buy the credits. And just as exports provide relief from RINs, some importers of gasoline and diesel will bear a bigger burden.
"Since fuel importers incur a liability to hold RINs for the gasoline they send to the U.S., the rising price of the credits is a potential stumbling block for importers," Robert Campbell, head of refined products research at Energy Aspects, wrote last month. Campbell also noted that prices fell sharply after 2013’s surge.
"Pricing in the RINs market is notoriously opaque and volatile, and we would not be surprised if prices were to fall back suddenly," he said.
PBF has been taking steps to increase its export capabilities in refineries acquired from Exxon Mobil Corp. Gasoline export cargoes began to depart from Chalmette, Louisiana, in the first quarter after PBF made repairs to the marine facilities that Exxon left in "disrepair." The newly-acquired Torrance, California, refinery near Los Angeles may also provide fresh outlets for PBF’s gasoline.
"Very, very importantly, we want to get into the export market," Thomas Nimbley, PBF’s chief executive officer, said on the company’s second-quarter earnings call. We see the benefits "both from a RINs perspective and an overall netback standpoint," he said.
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