March 6, 2013 6:11 pm

US ethanol credits surge 1,400% this year

The niche market for US ethanol credits has started the year with a furious rally that underscores concerns about the practical impact of Washington’s renewable fuel mandate.

Ethanol RINs

The credits, known as Renewable Identification Numbers, or RINs, have gained 1,400 per cent in 2013 as oil refiners and fuel wholesalers worry they will be unable to meet ethanol blending mandates with physical supply. The Oil Price Information Service recently described the market as “RIN-Sanity”.

Fuel suppliers and oil refiners can use excess RINs in lieu of selling physical barrels to satisfy biofuels mandates. The numbers are 38-digit codes generated when biofuels are produced.

The US Renewable Fuel Standard, updated in 2007, requires blending 13.8bn gallons of corn-derived ethanol with petrol this year. But most forecourts sell petrol blends containing only 10 per cent ethanol, and with US petrol consumption projected to be flat at 134bn gallons this year, this translates into demand for 13.4bn gallons of ethanol -- less than the mandate.

“The thresholds that were set for ethanol blending in 2013 are anachronistic,” said Tom Kloza, an OPIS analyst.

High corn prices and weak petrol demand have meanwhile forced some ethanol refiners to shut down plants. US ethanol production last week was running at an annual rate of about 12.3bn gallons, meaning insufficient domestic supply to meet the mandate.

Market participants say oil companies have been buying excess RINs from blenders and others to ensure compliance with the rules as the difference between mandated levels and actual renewable fuel widens.

There is also unconfirmed talk that speculators have entered the secondary market on the assumption that RIN demand will grow.

“There is a perception, which I feel is justified, that if not this year then next year there will be very real problems creating enough of these,” said a US east coast petrol marketer active in the RIN market.

Prices this week rose as high as 80 cents per ethanol RIN, up from 5.25 cents at the end of 2012, Argus Media data show. The certificates cost just pennies throughout 2012.

“What we have seen in the RINs market is prices shooting up very rapidly,” said a spokesman for Valero, whose oil refineries’ production of petrol and related blendstock far exceeds output from its 10 US ethanol plants, making it a net RIN buyer.

Last year meat companies and several state governors petitioned the Environmental Protection Agency to waive the ethanol fuel standard in a bid to cool animal feed prices. The EPA denied the request, noting that a fifth of a previous year’s RINs can be banked for use the following year.

Analysis by Nick Paulson of the University of Illinois indicated about 2.5bn gallons worth of conventional ethanol RINs left over from 2012 that oil companies can use this year. Traders are now buying RINs issued in 2013, some of which they may bank for use next year when the corn-ethanol mandate rises to 14.4bn gallons.

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