Power Up: Renewable diesel in turmoil
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May 13 -By Liz Hampton
U.S. Energy Markets Editor
Welcome to Power Up. There's been a lot in the news about diesel markets of late, in particular softening demand and the hit refiners are taking to margins as a result. Today we're going to dig into renewable diesel and look at the oversupply facing that market, as well as what that means for the budding industry and the impact that's having on traditional diesel markets. Let's dive in!
Budding U.S. renewable dieselindustry's faces trouble
Renewable dieselhas gained a lot of traction since the pandemic, as some traditional U.S. petroleum refiners have converted their facilities to produce the biofuel. Renewable diesel and biodiesel are both produced from biomass like cooking or vegetable oils; however, renewable diesel is a complete substitute for diesel, giving it a competitive edge.
Both are more expensive to make than petroleum-based diesel and their markets are supported by government blending mandates from the Renewable Fuels Standards (RFS) program and tax credits.
Overall, U.S. production capacity for renewable diesel has nearly quadrupled to 3 billion gallons, up from just 791 million annually in 2021. Phillips 66 is currently making30,000 barrels per day (bpd) of the fuel at its recently converted Rodeo refinery in California, while Braya Renewable Fuels in February began production at its Come by Chance refinery in Newfoundland and Labrador, Canada.
As it stands, current capacity for both biodiesel and renewable diesel is at 5 billion gallons annually, sharply higher than blending targets set through the RFS, which stand at around 4.5 billion gallons through next year.
The jump in supply has slashed the value of credits refiners earn under the RFS for producing or importing biofuels. D4 Renewable Identification Numbers (RINs) - those tied to biodiesel and renewable diesel - earlier this year fell below 40 cents a gallon, their lowest since 2019. They are currently around 44.50 cents, down from an average of $1.50 last year.
This is also hitting refiners margins and prompting some firms to shutter facilities. Valero saw a 21% year-on-year decline in margins for renewable diesel, while Vertex Energy last week said it would convert a small renewable diesel facility in Alabama back to fossil fuel production. Chevron recently shuttered two biodiesel plantsdue to unfavorable market conditions.
The growing supply of renewable and biodiesel is also displacing a growing amount of petroleum-based diesel. Product-supplied of distillate fuel oil - a proxy for demand - fell to 3.9 million bpd in February of this year, down from 4 million bpd the same time last year. That, however, was offset by an increase in supply of biodiesel and other renewable fuels which rose to 300,000 bpd, from 200,000 bpda year earlier, according to government data.
More recently, petroleum-based diesel markets have faced their own problems, with softer demand and higher supply also hitting margins for refiners. The crack spread for diesel fell to a two-year low of $20 a barrel in April, down from $40 two months earlier.
The four-week average demand for distillate fuels - which includes diesel and heating oil - was at its weakest level since the pandemic last week, according to U.S. government data, while inventories are at their highest seasonal level in three years.
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We hope you're enjoying the Power Up newsletter. We'd love to hear your thoughts and feedback. You can reach us at: powerup@thomsonreuters.com.
Editing by Marguerita Choy
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