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Soya methyl esters biodiesel spot prices in the United States dropped 10.5% or more in the third quarter to four-year lows despite higher implied demand for distillate fuels, pressured by a 10.9% decline in the benchmark Ultra-low Sulfur Diesel futures contract traded on the New York Mercantile Exchange and lower values for federal government compliance credits.
The price decline, which accelerated in September, came alongside listless trade activity in the spot physical market. The trading paralysis, an ongoing theme for much of 2014, continued as the industry awaits a finalized ruling from the US Environmental Protection Agency on how much biomass-based diesel demand would be mandated for the current year.
The weakness in spot biodiesel prices coincided with robust producer margins of more than $1 gallon throughout the third quarter, reaching a $1.53 gallon nine-year high in early September. Despite the wide profit margin, output dropped 22% in August from July per EPA data, as the industry neared the proposed federal government mandate for demand at 1.28 billion gallons with production totaling 1.106 billion gallons during the first eight months of 2014.
August output, the most recent data available, was a five-month low and the first time in 2014 that monthly output was down against the comparable year prior production level. US biodiesel output in August was down 37.1 million gallons or 21% from August 2013, with total 2013 production just shy of 1.8 billion gallons.
The National Biodiesel Board, the trade association for the US biodiesel industry, has petitioned for an increase in the Renewable Volume Obligation for 2014 to 1.7 billion gallons, consistent with production in 2013. Under the Renewable Fuel Standard which dictates annual mandated demand, the RVO for biomass-based diesel has a floor of 1.0 billion gallons since 2012 although the EPA has conditional discretion to increase the mandate which it did in 2013.
Mandated demand under the RFS, which increases each year through 2022, is primarily satisfied through ethanol consumption. Limitations in how much ethanol the US gasoline market can absorb based on current law and consumer preference referred to as the Blend Wall prompted the EPA to propose its first cut in the overall RFS since the expanded program’s inception in 2007. An RFS was initially introduced in 2005, with the Energy Independence and Security Act passed into law in December 2007 dramatically increasing the mandate to 36 billion gallons in 2022. The EISA is part of the Clean Air Act.
In November 2013, the EPA proposed a reduction in the RFS for 2014 from 18.1 billion gallons to between 15.0 and 15.52 billion gallons, although left unchanged at 1.28 billion gallons the mandate for biomass-based diesel. NBB is optimistic when the final rule is released by EPA that it would increase the RVO for biomass-based diesel, with some in the industry expecting an adjustment to 1.4 billion gallons.
Such an increase would, however, violate the CAA noted the American Petroleum Institute in a September 26 letter to Gina McCarthy, the EPA administrator. API, a trade association for the oil and gas industry, said any increase in the biomass-based diesel mandate for this year would have had to been made nearly two years prior and after a six point analysis.
API, which said in the letter it was aware of EPA’s consideration in lifting the volume under the RFS, “reminds EPA that it: (a) lacks the authority to increase the biomass-based diesel standard in 2014 and (b) is legally required to follow the express language of the Clean Air Act when setting the final standards for 2014.”
The statute allowing for the expanded RFS requires any increase above the stated volume to be promulgated 14 months before the first day of the year it is to be in effect, setting the deadline for an increase for the 2014 mandate at October 31, 2012. Moreover, the EPA would have first needed to analyze six criteria in what affect the higher mandate would have, including environmental impact, energy security, expected production, impact on infrastructure, cost to consumers, and factors such as food prices and rural development.
“It is irrelevant if more than 1.28 billion gallons of biomass-based diesel has been produced this year because the RFS imposes obligations on individual companies, not the industry as a whole, and changes to individual company obligations clearly harms these obligated parties,” wrote API.
An obligated party includes refiners, blenders and importers of petroleum-based products that are required under the RFS to offset a portion of this output with an increasing amount of renewables.
API as well as biofuel trade groups have voiced their displeasure and concern over another statute violation by the EPA. Although proposing the 2014 RVO, EPA has not finalized the mandate which was required no later than November 30, 2013. In late August, EPA sent its finalized version for vetting to the Obama administration which runs between 30 and 90 days. Expectations are the final rule would not be released until after midterm elections on November 4.
“Unfortunately, political gamesmanship has further delayed the 2014 requirements, and as a result EPA’s authority to increase the 2016 biomass-based diesel standard is soon to pass,” said API.
Although taking a different approach, the NBB has frequently expressed its concern for the long delay in the final rule. In late August, NBB said, “We also continue to urge the Administration to finalize the rule as quickly as possible. The original EPA proposal and continued delays have severely disrupted the U.S. biodiesel industry this year. We can reverse the damage with a meaningful increase in the biodiesel volume that is finalized as quickly as possible so that producers can ramp up production in a timely fashion.”
As the market awaits the final rule, credits used by obligated parties to show compliance in meeting their RVO known as Renewable Identification Numbers have lost value. D4 RINs generated in 2014, which satisfy the biomass-based diesel nested category under the RFS, lost 11.5% of their value during the third quarter to $0.50. Until separated, the RIN is included with the gallon of biomass-based diesel, so the weaker value pressured biodiesel spot prices.
The larger weight sinking spot biodiesel prices was NYMEX ULSD futures, with the nearest delivered contract dropping 10.9% or more than $0.32 gallon from $2.9708 gallon June 30 to $2.6472 gallon September 30. Strong refinery utilization in 2014, owing to the massive increase in US crude production, pushed refinery output of distillate fuels to several weekly highs. During the first three quarters of 2014, distillate output was higher than in 2013 80% of the time, outpacing demand growth to exert price pressure on the ULSD futures contract.
