U.S. Refiners’ Profits at Risk From Rising Biofuel Costs
(Bloomberg) -- The profit for turning crude into gasoline is at the strongest in years, but the mighty margins that entice refiners to churn out product may end up burning them.
The gasoline crack spread, a rough measure of profit, surged above $24 a barrel on Friday to the highest seasonal level since 2015. There’s a lack of gasoline in the U.S. -- fuel inventories are at the lowest since November -- after freezing weather in Texas last month caused widespread refinery outages. Ultimately though, rising biofuel costs are threatening to sting some refiners wanting to ramp up and take advantage of juicy margins.
Refineries that haven’t made the shift to producing fuel that aligns with the country’s environmentally-conscious blending obligations have to purchase RINs, which are tradeable credits to track compliance with renewable fuel standards. As RINs prices climb, which they have been for much of the past six months, that obligation becomes significantly more expensive.
About 40% of the gain in margins in the past three weeks can be attributed to biofuels adding to gasoline value, which may hurt refiners, said Robert Campbell, head of oil products research at Energy Aspects Ltd.
Every gallon of gasoline or on-road diesel is assigned a 38-digit RIN, or renewable identification number, to represent biofuel content, including ethanol and biodiesel. RINs are traded as a commodity independent of fuel and have a deep reach into broader oil markets, affecting not just refining margins but also pump prices and cargo arbitrages.
The obligation for biofuels in one gallon of fuel, the so-called RVO or renewable volume obligation, climbed to 16.6 cents Thursday, representing about 6% of the U.S. retail gasoline price, according to data from Argus and auto club AAA. It marked the highest value since the Argus RVO data was first reported in 2013 and has risen about 6 cents since the start of January. The historical data comprises periods of changes to the federal government formula to calculate the RVO.
The RVO rose on a rally in corn markets and the expectation that U.S. President Joe Biden’s administration will support biofuels in a push to reduce pollution.
Still, margins will likely remain elevated. Warmer weather and easing pandemic restrictions across the U.S. will lead to more drivers hitting the road, increasing their use of fuel, at a time when supply is seen remaining limited.
The transition for refineries to producing renewable fuels will “take months and even years to bring online,” said Ryan Fitzmaurice, commodities strategist at Rabobank, in a note. “As such, there is likely to be a window of refined product tightness until renewable fuel production is able to meet the looming supply gap.”
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