US RINs complex collapses in 2023/24, driven by oversupplied biomass-based diesel market

US D4 Renewable Identification Number prices have plummeted 72.3% since January 2023 primarily because of an increase in renewable diesel production, and a decline in the BO-HO, the feedstock soybean oil and blendstock heating oil spread.

Although D4 RIN prices will most likely decrease to a level which will disincentivize further biomass-based diesel production, tumbling feedstock soybean oil prices, elevated heating oil prices, adequately priced LCFS credits and the Blender's Tax Credit continue to maintain a breakeven point for profitable production margins in the near term, according to market sources.

D4 biomass-based diesel Renewable Identification Number credits hit 51.50 cents/RIN on Jan. 29, its lowest level since May 6, 2020.

Given the current oversupply of biomass-based diesel in the US, D4 RIN prices will most likely be pushed toward 30-35 cents/RIN in the coming weeks to months, which is the current breakeven point for profitable production margins for biodiesel, according to market sources.

Current RVO landscape

Biomass-based diesel production surpassed the 2023 Renewable Volume Obligation mandate by around 118 million gallons in September; and by the end of the year, the US was around 1.2 billion gallons over the mandate – totaling around 4.03 billion gallons for 2023, according to US Environmental Protection Agency data.

Renewable Diesel surpasses biodiesel stock levels

Producers have continued to churn out biodiesel and renewable diesel at high monthly rates, helping to cause excess stock builds, specifically in renewable diesel, tipping the supply-demand balance, and adding pressure on the already suppressed D4 and D6 RIN markets.

Credit advantages driving production

Qualified blenders can claim an income tax credit of $1.00/gal through the Blender’s Tax Credit by blending biomass-based diesel. The BTC functions as a credit mechanism intended to stimulate biodiesel production in the US.

Qualified blenders can earn the BTC alongside receiving 1.50-1.70 RINs/gallon. For every gallon of renewable diesel produced, 1.70 D4 RINs are generated, providing around 91 cents/gal at current D4 RIN values, while for every gallon of biodiesel produced, 1.50 D4 RINs are generated providing around 84 cents/gal at current D4 RIN values.

Also, greenhouse gas emissions and air pollution reduction programs including the Low Carbon Fuel Standard in California, Clean Fuels Program in Oregon or Clean Fuel Standard in Washington further incentivize regulated entities under fuel pathway-based crediting, which is currently paying around 19-48 cents/gal depending on which feedstock is used. Biodiesel produced by the feedstock, soybean oil will currently receive credits closer to 19 cents/gal, while biodiesel produced by the feedstock, used cooking oil will receive credits closer to 48 cents/gal due to the associated higher GHG savings.

RFS background – D4 RINs driving down D6 RINs

Historically, D4 RINs have traded at a significant premium to D6 RINs due to the fuel-nesting scheme set forth in the US EPA’s Renewable Fuel Standard.

According to the RFS, renewable fuels with a higher GHG reduction threshold can be used to meet the standards for a lower GHG reduction threshold. Biomass-based diesel, including both biodiesel and renewable diesel, has a required lifecycle GHG reduction threshold of at least 50%, while corn ethanol has a threshold of at least 20%.

The increase in D4 RINs supply due to the growth of renewable diesel production, and a decline in the BO-HO, paired with the fuel nesting scheme of the RFS, has placed significant downward pressure on the price of D4 RINs and consequentially D6 RINs as well.

BO-HO continues to fall

The BO-HO has experienced a significant decline during 2023, which has persisted into 2024. On Jan. 30, it settled at 52.31 cents/gal, a notable drop from its level on Dec. 29 at 97.27 cents/gal. The BO-HO spread tracks the difference between the cost per gallon of soybean oil, the feedstock for biodiesel and heating oil.
The drop came as CBOT front-month soybean oil futures settled at 46.02 cents/lb, down 4.48% since Dec. 29, and the March NYMEX ultra low sulfur diesel futures contract settled at $2.7919/gal on Jan. 31, up 11.89% since Dec. 29.

Favorable blending economics for biomass-based diesel producers should continue in the near term, helped by a lower BO-HO spread driven by higher ultra low sulfur diesel prices caused by Middle East geopolitical concerns and lower soybean oil prices because of poor export demand coupled with improving weather in South America and an expected large 2024 soybean crop.