From Linsanity to RINsanity, how an unknown can wreak havoc in the market

A year and a half ago, the New York Knicks thrust a complete unknown named Jeremy Lin into their lineup. He put up Michael Jordan-esque numbers for longer than expected, wreaked havoc with opposing game plans and became a global phenomenon known as “Linsanity.” That same pattern of a sudden rise of an unknown has played havoc this year in refined products trading. Right down to a popular nickname — “RINsanity.”

At the Platts Oil Forum in Chicago on September 12, I talked about the effect of RINs on US refined products in 2013. RINs stands for Renewable Identification Numbers, and they are used to track renewable fuel usage throughout the supply chain.

US refiners, importers and some others have to meet federal Renewable Fuel Standard volumes for on-road use. They do this most visibly by blending up to 10% ethanol into gasoline used in your cars. That’s not enough anymore as renewables have hit what’s called a “blend wall.” There’s just not enough gasoline consumed thanks largely to the recession to meet mandated RFS volumes. This has forced producers to buy RINs, which are renewable fuel credits that can offset their obligations.

Platts assessed all US current-year biofuels RINs assessments at more than six-month lows September 16, with the major one, current-year corn-based ethanol RINs, down 3 cents to $0.5825/RIN.

For on-road diesel and gasoline, Platts calculates a per-gallon value based on RFS obligations. The calculation is based on a basket of four types of RINs: cellulosic biofuel, biodiesel, advanced biofuel (sugar-based ethanol) and renewable biofuel (corn-based ethanol).

A good rule of thumb is to think of it as nearly 10% of the ethanol RIN value since that’s by far the biggest driver. On September 16, that RINs basket calculation dropped 31 points to 5.84 cents/gal.

That’s higher than the start of the year when it was under a cent, but lower than the peak of 13.89 cents on July 17. The first spike from 2.67 cents February 15 to 9.92 cents April 8, however, was the one that had traders asking what a RIN was and why is it was costing them so much money.

Traders have been coping since, by adding to already high export levels that don’t carry renewable obligations; subtracting from already fading import levels since those do need RINs, and passing along prices to consumers at the pump. Refiners also have adjusted run cuts of non-road fuels to avoid RINs and traders used swaps to hedge against RINs.

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The recent steady dive came after the EPA on August 6 — after a long wait — gave refiners and other obligated parties more time next year to meet 2013 renewable requirements. But the EPA has yet to set 2014 standards, and there’s pressure on Congress to change those standards or push for E15, a 15% ethanol mix, in gasoline.

However and whenever they decide, the market has reversed its climb for the basket, at least for the 2013 season.

It’s hard to accurately gauge the effect on gasoline since RINs are largely wrapped inside the overall price. But the spot price of RINs jumped from less than 0.4% of Atlantic Coast gasoline, to 4.6% of that price at the peak, according to Platts data. The correlation of RINs to NYMEX RBOB futures is at a high 0.74 from April 1 to the end of August. A zero correlation is a completely random relationship while +1 means they move in parallel like a school of fish.

It is in non-transportation fuels like heating oil and jet fuel you can see the full effect of RINs. Platts introduced a Gulf Coast assessment July 1 called ultra low sulfur heating oil. ULSHO is basically the same thing as ultra low sulfur diesel, more commonly called ULSD, but for home heating instead of trucking. ULSHO is geared to export markets and states like New York that are shifting sulfur requirements to a much cleaner product.

For now, some consider ULSHO as a proxy for ULSD minus the RINs. Any change in RINs is quickly captured by a corresponding change in the spread between ULSD and ULSHO, for a 0.91 correlation in July and August. Many sources note that only about 80% of the RINs value is being passed along to the buyer.

It gets more interesting when you look at a seemingly less-related ULSD and jet fuel and get an even higher correlation of 0.93 between that spread and RINs. Basically, when RINs prices go up, there’s more incentive to produce extra jet fuel and less diesel and avoid the RINs cost. Swaps players say jet swaps also were being used as a way to hedge RINs costs as well as jet fuel costs, bringing in more liquidity and turning it further into a RINs proxy.

ULSD since the recession has actually averaged a 1-cent discount to jet fuel in the Gulf Coast. But ULSD moved into a large premium when RINs started blowing out in the spring, at one point more than 15 cents over jet fuel in May.

RINs also gave renewed emphasis to export/import trends that had been forming for years. As RINs prices jumped from April to August, gasoline imports into the East Coast fell. US Energy Information Administration weekly data showed 804,000 b/d in total gasoline imports for the week ended April 5 and 415,000 b/d for the week ended August 30. Monthly import data was less steep, but still showing a sharp drop instead of the usual sharp rise seen in the busy summer months.

The real export story has been on the distillate side since the mid-2000s. The US has been sending diesel at various sulfur points on an ever-increasing pace and for the last three weeks of August sent out an estimated 1.256 million b/d. That’s four average-sized cargoes each day, and a record pace powered largely by ULSD priced without the RINs.

Jeremy Lin was exported from New York to oil-rich Houston, settling into routine play with the question of whether he can recapture that Linsanity next season.

Trade in refined products has also settled down on the RINs front. But there’s still uncertainty on government action on renewable fuels, and whether it prompts a return of RINsanity.


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  1. Brent at October 3, 2013 12:07 pm

    Likely that if you match up the increase in expected 2013/14 gasoline demand (higher blend wall) and declining corn price, you get to a much cheaper implied RIN

     

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