Big Numbers, Big Profits: The Fleetingly Lucrative RIN Trade

Renewable energy credits, or RINs, are one of the hottest things on the energy market right now because they are making up for a shortfall of refining capacity to blend ethanol with gasoline in compliance with renewable fuel standards (RFS), shortfalls from suppliers, and lower demand for gasoline. But this is a small window of opportunity, so it’s now or possibly never.

The RIN is a 38-digit serial number attached to each gallon of ethanol. If an oil company or another party under blend obligations blends more renewable fuel that it needs to for the RFS quota, it accumulates more RINs than it needs and then can trade or sell those to another company that would rather buy RINs than blend ethanol. This is the open RIN market, and they can only be traded at the end of the supply chain, after they have been separated from the gallon of renewable fuel—once it becomes a being of its own.

Each gallon of renewable fuel is equivalent to one RIN. What happens is that when an oil company buys a gallon of renewable fuel, it takes that RIN and sells it on the open market. There’s a choice here: oil companies can either buy a gallon of renewable fuel or they can buy an RIN to meet their Renewable Fuel Standard (RFS) quota instead. They are interchangeable.

Oil companies are bidding up the price of RINs rather than adding more ethanol to gasoline to meet the RFS. Right now, ethanol is about 65 cents cheaper than gasoline (per gallon). The justification for trading in RINs instead of buying gallons of ethanol to blend with gasoline is that there is a “blend wall” that oil companies say they have reached. (Proponents of the blend mandate disagree, but we don’t’ see the economics here).

Oil companies are trading in RINs increasingly, pushing up their price and thereby pushing up the price of gasoline, which the consumer in the end is paying for, and which in turn reduces demand. Oil companies are complaining about this, but for now they’re benefitting from the trade in RINs. However, they know it’s not going to last. 

Let’s just take a quick walk through the woods here and find out where it all started. In 2005, the Energy Policy Act obliged the Environmental Protection Agency (EPA) to set mandatory levels of cellulosic biofuel for refiners to blend into transportation fuels. In 2010 and 2011, the EPA mandated refiners to blend millions of gallons of cellulosic biofuel—none of which was produced in those years, making this a bit tricky. Refiners still paid penalties for failing to produce the necessary blends. In 2012, the EPA set the biofuel mandate at 8.65 million gallons. In January 2013, a DC appeals court reversed this mandate because only 20,000 gallons of cellulosic biofuel had actually been produced. Despite this, the EPA immediately responded with new mandates for 2013, higher than the 2012 mandates, at 13.8 million gallons. In 2007, we saw the rise of the “renewable energy credit”, or RIN as the answer to poor ethanol blend economics. 

The difference now is that under previous ethanol mandates, more ethanol was being produced than was needed. There was a glut and not such a need for RINs. With the increased 2013 mandate, the opposite is true and now that stockpile of RINs accumulated under earlier mandates is suddenly VERY valuable. 

Ultimately, these RINs have to be in the possession of refiners or importers who are obliged to comply with the RFS. But here’s where it gets interesting: Anyone can trade them in the middle as long as they are registered with the EPA to do so. For the past several years, this playing field consisted largely of oil companies and renewable fuel suppliers, but new ethanol blend mandates have changed this and there is now an onslaught of other players as everyone catches on. 

So ethanol producers are using RINs to solidify their position in the market. They are tracking RINs closely, buying them up at low margins and selling at the right time—always having the choice of whether to sell them for a profit or produce more ethanol while they wait for RIN prices to rise. 

Devil in the Details: Following the RIN Market

The first two weeks of March alone saw the price of corn-based ethanol (D6) RINs increase from 7 cents (per gallon) to $1.06 and then fall back a bit. Overall, ethanol RIN prices have moved from about 5 cents per gallon in late December to a record of over 90 cents per gallon on 8 March. Since then they have hovered between 70 and 80 cents per gallon, settling on 10 April at 80 cents.

We have over 2 billion RINs carried over from 2012 for use this year. What can we expect from ethanol-based RIN prices over the coming months? The EIA predicts a drawdown in RINs despite a forecast increase in ethanol production, so prices are set to rise.

Refiners with limited capacities are having a tough time meeting the RFS obligations, so they have to buy RINs to make up the difference. While this is squeezing refiners’ profits, it’s also driving up the prices of RINs, making them more valuable to trade. And the medium-term view here is that refiners are going to need to buy increasingly numbers of RINs to make their quotas, fearing that RIN stockpiles will dwindle in the next couple of years, or sooner. This is what the new traders of RINs are banking on.

There is likely only a small window of opportunity here. Some analysts think RIN stockpiles could be gone by the end of 2014. There is also the possibility that the government will intervene before this gets out of hand. After all, the RIN system is essentially the recognition that refiners and suppliers can’t meet the RFS blend obligations without this side trade in RINs. That means the EPA pretty much knows it’s not going to work. The market isn’t driving it—government policy is.  Real demand for ethanol blend gasoline is at best stagnate, at worst declining.

The most likely response from the government will be to implement a higher blending standard to artificially boost demand by obligating an E15 blend (ethanol 15% blend with gasoline), but this has many detractors in Washington and will be difficult to push through. (Right now it’s an E10 blend).

So here’s the bottom line: You either get in on this now, or you don’t get in on it at all. Unless gasoline demand experiences a sudden—and large—uptick, RINs will run out and traders and the market for this will fizzle. But as long as you have RINs, you will be able to trade them at a premium—until the government steps in to fix this.