When Congress announced the US Renewable Fuel Standard a decade ago the aim was to combat the growing need for foreign oil as well as increase the production and promotion of clean, renewable biofuels.
As 2016 approaches, and the Environmental Protection Agency is days away from the updated renewable volume obligations (RVO) for 2014, 2015, and 2016, the landscape that led to these implementations has changed considerably.
Demand for foreign oil in the US has dropped tremendously as domestic oil production has increased to its highest level in 17 years, while the growing increase in fuel-efficient vehicles has led to total gasoline retail sales by refiners dropping to more than half of their 2005 levels.
With the EPA proposing lowering the volume requirements by 20.5% (4.2 billion gallons), as well as growing support and creation of anti-RFS lobbying groups, US ethanol and gasoline traders and brokers hesitantly await the incoming decision that could have lasting impacts on both markets.
Most gasoline traders say the 2014 and 2015 mandate levels are already generally outlined based on consumption and production levels, but a question mark looms over the 2016 level.
"2015 is basically over now, so again going to have to set this year either at or very close to consumption levels," a Gulf Coast gasoline trader said.
Those polled by Platts uniformly believe that infrastructure constraints and warnings from automotive makers about potentially voiding vehicle warranties prevents the EPA from pushing significantly past the 10% blend wall to the E15 level. But where precisely below this level the limit will be set is uncertain.
"It's not rocket science to see that US gasoline demand is up 3.7%, so they'll have to adjust the [2016] requirement upward," a second Gulf Coast gasoline trader said. "In my personal opinion, if they make changes, they'll raise it."
Refiners, who are naturally long gasoline, have lobbied against an increase in the mandate limits, but they've also taken positions in the market to mitigate the effects of a higher limit.
An analyst at a major Gulf Coast refiner said his company was not keen on the increase, "but we plan ahead, so it won't really affect us."
While refiners may wince at a potential increased mandate, which would cut into gasoline's market share in the fuel supplied to end users, gasoline trading outfits without refineries welcome a higher mandate.
"My biggest fear would be that 2015 and 2016 levels of D6 [RINS] are reduced or left the same," the first Gulf Coast gasoline trader said. His company does not own a refinery, but it does trade around.
Companies that have sold gasoline on long-term contracts would welcome a move that boosts D6 RINS values, as they would raise the price of the finished product supplied to end users.
"We do generate [RINS and] and an increase in value would help us as we have a lot of gas sold out in the future," a refined products marketer in the Northeast said.
Brokers, traders, and producers have widely varying opinions regarding the upcoming RFS mandate, but the prevailing theme encompassing the market remains uncertainty.
"I think it's fair to say," said an ethanol broker, when asked if the impending decision has hampered the market. "My guess is that since they want to lower the corn base ethanol blending percentage, I would assume we'll see price drops to where they'll start flirting with plants profit margins."
Lower profit margins for already shaky financial ethanol plants could result in plant shutdowns and consolidations, resulting in thinner liquidity, the broker added.
The latest EPA proposed RVO volume requirements for 2014, 2015 and 2016, while increasing over time, fall short of statutory requirements currently in place.
While less ethanol demand could result in shutdowns and consolidations for smaller, less financially stable refineries, larger ethanol producers, such as POET, have also shared their disapproval with the latest EPA proposal and the potential ramifications of a lower blending percentage.
"The EPA's proposed weakening of the required base renewable fuel (the difference between the RVOs for the total renewable and advanced biofuel volumes) would permanently undermine the purpose and function of the RFS," POET said in July.
The nation's largest ethanol producer went on to say that if the EPA's proposed base renewable fuel requirements are not strengthened, confidence in its incentive structures for all biofuels will be lost, effectively undermining the entire RFS program.
Todd Becker, CEO of Green Plains, the nation's fourth-largest ethanol producer, believes the RFS mandate would not have a large impact on future demand for the product.
"I don't think we're going to see a significant change," Becker said earlier this month during a Q3 earnings call. "There is a possibility we could see a bigger number based on some of the winds that are blowing, but again I don't have very good insight to what that number is going to be." Becker added that Green Plains did not complain about the latest proposal from the EPA in May, believing that the proposal is "adequate enough to keep good base demand in the US for 2016.
While Energy Information Administration data has shown largely static weekly ethanol production and total stocks, the impact on the ethanol market has already been felt in the physical trading of the product. May 2015 saw 1.06 million barrels of Chicago Argo ethanol traded during the Platts Market on Close assessment process, that figure dropped to 155,000 barrels traded in June following the EPA's RVO proposal on May 29.
"I do think that it has effected the physical flow of ethanol," said the US ethanol broker regarding the delayed RFS decision. "People want to see and know the final version ... until then it's a waiting game."
