The latest talks over the RFS resulted in the announcement that the Trump administration will allow E15 gasoline to be sold year-round. Although policy details remain unclear, this development will move the RIN market into surplus, reduce D6 RIN prices, increase blending of ethanol into the gasoline pool at the expense of petroleum based components, and temper the recent crude-led rise in gasoline prices.
E15 Waiver Loosens RIN Market and Tempers Gasoline Prices
As expected following the most recent meeting between senators and the White House over the Renewable Fuel Standard (RFS), it was announced that E15 sales would be extended year-round. Less expected was a proposal to allow ethanol and other biofuel exports to count against obligations.
Although the details and timing of any policy changes remain unclear, both policies will undermine RIN prices as they effectively increase D6 RIN supply. Additional E15 blending will increase the supply of D6 RINs. Allowing ethanol exports to generate RINs would also increase the supply of RINs to offset obligations.
According to ESAI Energy RIN balance estimates, the D6 RIN market was short by less than 500 million RINs in 2017. As ESAI Energy discussed last month, the additional small refinery waivers could have already eliminated that gap. Even without additional waivers, the U.S. exported 1.3 billion gallons of ethanol in 2017. Allowing exports to count against obligations would have turned the D6 RIN market from a deficit in 2017 to a surplus. Moving forward, the market will move into a perpetual surplus.
The move to a surplus will dramatically reduce D6 RIN prices. Little subsidy is needed to blend additional ethanol at current prices. Ethanol prices are well below other gasoline blending components and ethanol comes with an octane benefit. As a result, ESAI Energy expects the allowance for E15 to be sold year-round to entice blenders to make investments to sell higher ethanol blends. The pace of that investment will be tempered by lower D6 RIN prices, though.
The D6 RIN surplus will also have an impact on other biofuel markets. It will reduce demand for advanced RINs, which have been used to balance the D6 and overall RIN markets in recent years, lowering prices for both D4 and D5 RINs. Reduced demand for D4 and D5 RINs and lower prices is likely to lower biodiesel demand.
As more ethanol is blended into U.S. gasoline, particularly during the summer months, demand for petroleum based blending components as a percentage of the total blend pool will fall slightly. At least initially, ESAI Energy expects ethanol to replace less than 50,000 b/d of petroleum based demand, but this will increase as more E15 is blended.
Historically, the percentage of ethanol in the gasoline pool has been lower in the summer months due to stricter RVP caps. However, in response to the newly announced E15 waiver, summer ethanol blend rates will rise to at least winter levels in the near term. Additional ethanol volumes, particularly in summer grade gasoline, will replace more expensive, high-octane and low-sulfur blending components such as alkylate and reformate. With ethanol prices well below RBOB and even further below alkylate prices, an increase in ethanol blending will temper the recent crude price-led rise in gasoline prices.
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