What will cause separation of the D4, D5, and D6 RIN prices Part 1 – Studying boundaries with ATTRACTOR
In the U.S. biofuels market, it has become normal for the prices of three Renewable Identification Number (RIN) credits to be the same. They are the D4 (biomass-based diesel), D5 (advanced biofuel) and D6 (conventional renewable biofuel) RINs. This equality is caused by special circumstances that have applied at times in RIN price history. The current question is what will cause the next separation among these three RIN prices?
- Part 1 – Studying Boundaries with ATTRACTOR
- Part 2 – The Big Bang and the Meiselman model
- Part 3 – D6 RIN Pricing Framework
- Part 4 – The Next Big Move
- Part 5 – The ATTRACTOR RIN System Roadmap
Hoekstra Trading’s clients use the ATTRACTOR spreadsheet to answer questions like this. A sensitivity analysis quantifies the theoretical responses of RIN prices to changes in a variable, including variables that could cause the RIN market to cross discreet boundaries into new regions of the RIN price control map.
Examples of discreet boundaries are the blend wall, which caused the Big Bang that launched the price of the D6 RIN from 1 cent to 1 dollar in 2013, and the RIN cliff, which caused the prices of all 3 RINs to fall from $1.60 to $0.40 in 2023, and several other historical boundary crossings that caused the D6 RIN to fall below the D4 and the D5 RINs.
These boundaries are caused by regulatory conditions that do not exist in free, competitive markets. The resulting price shocks were logical outcomes of the complex design of the RIN price control system.
This figure shows a sensitivity analysis that involves crossing a boundary that is in play today:
Here I have not identified the variables, except for one of the RINs (this omission is an attempt to lure readers to accept the recommendation given below). Zero on the x-axis represents the base value of a particular RIN system variable that I have code-named X. The blue lines show how the prices or volumes of different unidentified fuel components respond to that change in X, and the red line is the price of one of the RINs.
The red dot shows that a change of +15% in X would drive this RIN value up by $2.63/RIN, and the red line shows a change of -5% or more in X would cause this RIN to lock in at a fixed value $2.63 below that.
The four blue lines show this boundary crossing would also cause an odd combination of changes in the prices and annual volumes of four other unidentified fuel components. These odd responses are caused by an inherent feature in the design of the RIN price control system, in this case, a discreet boundary that exists as a vertical line at X= -4.95%.
We see no evidence this boundary is on anyone else’s radar screen today. Crossing it would cause the next separation among the D4, D5, and D6 RINs with important consequences that would surprise most in the market, some for better and some for worse.
There are other boundaries that would cause price shocks. They can be foreseen and anticipated through awareness that they fall out of the design of the RIN system as logical but non-intuitive outcomes. It is not necessary to fully understand the RIN price control system to be aware of these risks. And those whose financial or other forms of well-being depend on it should at least be aware of them.
Can you guess what X is, what boundary is being crossed, and which variable is which in the above figure?
Why guess?
Conclusion
This quote from a previous Hoekstra Trading blog post states the conclusion:
Paper simulations with this model allow you to foresee, understand, and anticipate RIN price behaviors instead of trying to navigate the system without a roadmap like ATTRACTOR. ATTRACTOR will help you anticipate the cliffs, boundaries and trapdoors that will otherwise blindside you.
George Hoekstra, December 14, 2024
Recommendation
If RIN prices are important to you or your business, you should not be without this capability! Get Hoekstra Research Report 10 and the ATTRACTOR spreadsheet
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
