By June 29, 2016 Read More →

Prices of US biofuels credits jump on supply worries


One energy analyst firm is expecting a sharp drop in biofuels inventory by the end of the year. Shutterstock photo.

Higher biofuels use requirements in 2017

By Chris Prentice

NEW YORK, June 29 (Reuters) – U.S. biofuels credits hit near three-year highs on Wednesday after Goldman Sachs Group warned supplies could more than halve by the end of 2017, in what could mark the return of prolonged wild prices in the niche market for the first time in years.

Traders raced to buy credits, giving the thinly traded and opaque market a sudden midmorning jolt, as traders circulated a note from the influential bank that forecast prices will rise as demand increases due to the more “ambitious” targets for biofuels use proposed by the U.S. Environmental Protection Agency (EPA) in May.

“We see risk of persistently high(er) and more volatile RIN prices as the market gains a greater appreciation of potential tightening of RIN stocks,” Goldman said, referring to the renewable fuel (D6) compliance credits known as Renewable Identification Numbers, or RINs.

The bank predicted inventories of the credits will fall by a quarter this year to 1.39 billion gallons (5.26 billion liters) and by another 43 percent to just 786 million gallons by the end of 2017.

Prices of RIN credits jumped by a nickel, or about 5.7 percent, in early trade to 93 cents each, the highest in nearly three years, according to data from Oil Price Information Service.

Goldman’s note came about a month after the EPA unveiled requirements for the amount of biofuels required to be blended with gasoline and diesel for 2017. Oil refiners and importers use the paper credits to prove their compliance with the mandates.

The market has not priced in the potential difficulty in meeting those targets due to the so-called “blend wall,” the bank said.

That blend wall represents what oil companies say is the 10 percent saturation point for use of ethanol in gasoline without a major overhaul in infrastructure and vehicles.

RIN prices for 2016 compliance eased off the session’s highs to trade at 91.5 cents each, 3.5 cents above Tuesday’s highs. Biodiesel (D4) RINs traded up to 96 cents each, from as high as 92 cents on Tuesday.

Wednesday’s gains suggest some traders, gas blenders, and refiners may be loading up on credits, fearing a repeat of the surge in prices seen three years ago and as demand for diesel and gasoline have remained surprisingly robust.

A rise in costs of the credits could hit refiners like Valero Energy Corp and PBF Energy Inc, Goldman said.

In 2013, prices vaulted over $1.40 as traders and refiners fretted over a potential shortfall of the credits, which are generated with each gallon of renewable fuel produced.

That buying frenzy fueled criticism among refiners who complained about the additional cost of complying with government mandates.

Goldman’s note came as biofuels supporters and critics have flooded the EPA with nearly 6,000 comments ahead of a July 11 deadline for comments on the May proposal, according to a federal government website on Wednesday. The agency is required to finalize the plan by Nov. 30.

Valero, Delta Air Lines’ Monroe Energy LLC and others have pressed the EPA to consider changing the program to reduce their burden of compliance.

Meanwhile, biofuels producers like Archer Daniels Midland Co and Green Plains Inc would be key beneficiaries of use of higher ethanol blends, the note said.

The over decade-old program, designed to boost use of renewable energy sources in a bid to reduce greenhouse gas emissions and promote energy independence, has become a battleground for entrenched oil and corn interests.

(Additional reporting by Jessica Resnick-Ault; Editing by Marguerita Choy and Jonathan Oatis)

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