All Eyes on Renewable Diesel Margins – Part 4, What Caused the $1.70 Crash in RD RIN value?

Get the Attractor spreadsheet

The headline story in this quarter’s renewable diesel producer’s earnings reports was again renewable diesel (RD) margin. The effects of feedstock prices, lags in supply chains, and delayed plant startup schedules were again discussed in depth.

Read other posts in this series: All Eyes on Renewable Diesel Margins:

The humongous $1.70 drop in the D4 Renewable Identification Number (RIN)’s value was discussed at a surface level, not in any depth and not with the focus it deserves. No one pointed to the magnitude of that $1.70/gal crash, how it dwarfed all the other margin factors, or addressed questions like

  • why was it so large?
  • how much must the mandate change to recover that much lost margin?
  • how much must production fall for the RIN to “re-normalize”?

As in previous quarters, the earnings discussions miss crucial aspects of RIN price behavior, including the “trap door” aspect, which was the biggest factor in this most recent crash, and is explained in the third episode of our current “Upside Down” blog series on the RBN Energy blog (Part 3 coming soon).

The RIN is discussed at a surface level as if it were itself a simple commodity, or a simple subsidy, or an offset, instead of the integrated price-control system that it is. It seems that is the depth to which it is understood. Until one goes below the surface to grasp its complexities, the conclusions from previous quarters stand:

  1. There is no evidence refining executives anticipated the 3rd quarter D4 RIN price nosedive.
  2. Explanations of that nosedive are weak.
  3. There is no basis for investor confidence in refiners’ forecasts of RIN prices.

Copied below is an excerpt that seemed to me the deepest treatment of the topic from this round of earnings reports – those interested should scroll down to the heading “Bob Day”.

Hoekstra Trading clients use the ATTRACTOR spreadsheet to compare theoretical and market prices, analyze departures from theoretical value, and identify trading opportunities on the premise RIN market prices will be attracted toward their fundamental economic values.

Get the Attractor spreadsheet, it is included with Hoekstra Research Report 10 and is available to anyone at negligible cost.

George Hoekstra +1 630 330-8159

Bob Day (Darling Ingredients), answering a question from Adam Samuelson (Goldman Sachs) in Darling’s 2024 first quarter earnings conference call, April 25, 2024

I’ll just provide some color from a broader S&D (supply & demand) perspective on renewable diesel. I think there’s a really different picture between 2024 and 2025. In 2024, we always knew that the RIN S&B was going to be a bit heavy. We’ll produce eight billion or 8.5 billion D4 plus D5 RINs this year versus an RVO (Renewable Volume Obligation = mandated minimum quantity) of 5.55 and maybe a shortfall in D6 of one. So it’s about two billion RIN oversupply. But when we get to 2025 the RVO increases to 5.95 and if we move to the producer’s tax credit, really imported biofuel and domestically produced biodiesel it loses a lot of support and that represents almost 4 billion of the 8 billion to 8.5 billion RINs. So, it’s a significant change. And if you kind of look at where biodiesel is today at a call it a $0.20 per gallon margin without the blenders tax credit, it goes to minus $0.80. And so in order for biodiesel to be at breakeven, the RIN has got to do the work. And so we’re bullish RINs as we get into 2025. And then if you just look at CARB’s estimates through the regulatory impact assessment, they estimate we’re going to be seeing $1.30 a gallon type LCFS credit values, at least that’s what they’re aspiring to. And so if you layer that all on top, it really bodes well for renewable diesel margin as we play out. And as we get to the end of 2024, we believe the market is going to see that and we’ll start to react to that type of an S&D reality.

This is a quantitative accounting of the current supply/demand picture for the D4 RIN. But it treats the RIN as if it were a simple subsidy, ignoring that it is also a tax, a mandate, a bankable asset, a borrowable asset, a contingent claim, and one element of a nested structure. Until those elements and their interconnections are factored in, explanations will be weak, understanding will be poor, and forecasts will be useless.

Get the Attractor spreadsheet

George Hoekstra

630 330-8159

Hoekstra Trading LLC