The US ethanol blendwall crisis has been projected to be coming for awhile. And the market is signaling that it’s now here.
The crisis was assumed to be caused by three things all coming together: the fact that only a small minority of the auto fleet can burn ethanol blends more than 10% ethanol, and the infrastructure to provide higher blends for those that can is in its infancy; the fact that US gasoline consumption has been on a long-term decline; and the fact that the US government’s renewable standard is a fixed number of gallons.
(Update: From the first sentences of a story that was published by Platts on Friday: Prices for renewable fuel credits cracked the $1 barrier Friday and RBOB
prices settled sharply higher as the war of words over who is to blame for skyrocketing credits prices also escalated. The price for the traded Renewable Identification Numbers for corn-based ethanol settled Friday at $1.02 for 2013 RINs after hitting a high mark of $1.10/RIN. Prices for the credits, which are used to show compliance with the federally mandated Renewable Fuel Standard, have jumped from a trading range of about 2-3 cents/RIN at the start of the year.)
So with a roughly 10% cap on the size of that demand, and with the demand falling, meeting the RFS by dumping more ethanol into the gasoline pool becomes impossible. Instead, the requirements of the RFS could only be met by purchasing renewable identification numbers (RINs).
A RIN is a credit generated by the production of a renewable fuel, such as ethanol. A blender or a refiner that can’t meet its RFS target through the use of ethanol can purchase RINs, which for regulatory purposes acts the same as blending in a gallon of ethanol. (One question: will those signs on pumps that say “Contains 10% ethanol” be changed to “Contains some ethanol and a lot of RINs?”)
Blog entry continues below…
|Request a free trial of: Oilgram News|
|Oilgram News brings fast-breaking global petroleum and gas news to your desktop every day. Our extensive global network of correspondents report on supply and demand trends, corporate news, government actions, exploration, technology, and much more.|
And RINs are suddenly the hottest commodity in town. For example, a RINs generated in 2012 — which can be carried over to fulfill futures needs — averaged 3.85 cts per RIN in the second half of 2012, based on Platts’ assessments. In January, that average was 12.4 cts. Since February 1, the average has been about 36 cts per RIN. But in the first four trading days of March, the price of a 2013 RIN has been, respectively, 60, 62, 61 and 69 cts. The price of a 2013 RIN was assessed by Platts March 6 at a bit more than 80 cts. (A 2012 RIN expires next February, so its shorter shelf life gives it a reduced value from a 2013 RIN.)
In a recent Platts story written by Gary Gentile and Shameek, Stephen Brown, vice president-governmental affairs at Tesoro, said “the industry is clearly at the blendwall.” “Everyone I’m talking to is hitting the blendwall this year — some sooner than others — but we’re all hitting it this year,” he said.
David Dunn, an analyst at Florida-based brokerage Progressive Fuels Ltd., thought the blendwall was going to be hit next year, but that purchases now ongoing could be carried over into next year, if in fact that turns out to be the key crunch time.
It’s clear from the way the market has behaved this year, and in particular, the last few days, that the market has turned to RINs to fill its perception of a gap between mandates and the effective limit on how much ethanol it can put into the gasoline pool. “It is unlikely that there will be enough (corn-based ethanol) RINs available to meet the anticipated 14.4 billion gallons requirement (for 2014) at an E10 blend ratio,” Dunn said.
There’s another measure that Platts calculates that shows the blendwall has not been hit, but is getting there. The four-week rolling average of the ethanol blending rate — calculated by dividing the four-week rolling average the weekly refiner and blender net ethanol input by the four-week rolling average of gasoline demand — rose last week for the sixth consecutive week a s it moved up 0.12 percentage points to a nine-week high of 9.5%, a half a percentage point down from the 10% “blendwall.”
(The blendwall is not exactly 10%. It probably isn’t exactly anything. It’s going to be affected by the E15 usage that is out there, and even more so, by E85 consumption. But 10% is a good target for discussion purposes).
Whether the market is there or not, Bob Greco, downstream director for the American Petroleum Institute, put the price into context in a briefing last week: “Suddenly this is a very real issue. The RIN price is a really good proxy.”