US Gasoline Prices Spike in Response to OPEC Deal

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

The January reformulated blendstock for oxygenate blending futures contract on the New York Mercantile Exchange settled at a better than five-month high on the spot continuous chart in concluding its first session as nearest delivery on December 1, continuing a midweek rally ignited by an historic agreement by the Organization of the Petroleum Exporting Countries (OPEC).

After two sessions, which included the expiration of the December RBOB contract on November 30, nearest delivered gasoline futures had rallied 16.99cts or 12.3% to $1.5470 gallon. The previous high settlement on the spot continuous chart was reached during the summer driving season on June 23 at $1.6035 gallon, less than 10 days after US gasoline demand reached a weekly record high of 9.815 million bpd, per data from the Energy Information Administration.

During their biannual meeting in Vienna on November 30, OPEC agreed to a 1.2 million bpd cut in their production to 32.5 million bpd that takes effect January 1, with the agreement creating a surge in futures trading.

The Chicago-based CME Group reported single-day volume traded in Energy-Complex products on November 30 at a record high 4,510,408, well above the previous record of 3,932,201 contracts on February 11. NYMEX West Texas Intermediate futures volume spiked to 2,530,530 contracts, soaring past the prior record of 1,861,909 contracts set the day following the presidential election on November 9.

WTI futures with nearest delivery topped $50 bbl for the first time in nearly six weeks on December 1, rallying $5.82 or 12.9% in two sessions to a $51.06 bbl settlement, and could test resistance near $60 bbl in the coming weeks.

Volatility in oil futures is expected to increase further following the OPEC agreement, which cuts production for the first time in eight years. OPEC expects another 600,000 bpd in production cuts from non-OPEC members, with Russia reportedly agreeing to reduce output by 300,000 bpd.

The quota agreement has a six-month term, with OPEC to review its affect and market conditions in May 2017.

The market will closely watch OPEC members for cheating, with the cartel having a checkered past in complying with quotas. Also, the 32.5 million bpd production quota, the low end of a pledge made by members in Algiers on September 28, doesn’t include Indonesia, which suspended its membership, so the production cut is less dramatic than the headline number. Secondary sources report Indonesia produced 722,000 bpd of crude oil in October.

The agreement is nonetheless significant and seen aided by strong growth in oil demand from the United States. However, the upside in crude values is also expected to be limited, given ongoing excesses in global oil supply, with US commercial crude inventory at 488.1 million bbl on November 25, 30.9 million bbl or 6.8% more than the comparable year ago period, data from the EIA shows.

Moreover, US shale oil producers whom have already been reactivating rigs that helped boost domestic production to an 8.699 million bpd 5-1/2 month high during the Thanksgiving Day holiday week and 271,000 bpd above a 26-month low plumbed in the final days of the second quarter, are seen as benefactors of OPEC’s cut. Many more wells are seen economical with WTI at $55 to $60 bbl that would add oil to the market and slow the draw down in bloated inventory.

Gasoline economics are healthy in the United States amid ample crude supply and strong demand both domestically and for exports. Statistics from the EIA for September, the most recent monthly data available, shows U.S. refinery and blender net production of finished gasoline was 10.3 million bpd in September, 303,000 bpd above a year ago.

“Refinery output remains strong even in the late fall; the first two weeks of November had a net output of 10.5 million b/d and 10.2 million b/d, respectively, compared with output of 9.7 million b/d and 9.6 million b/d for the same weeks last year,” said EIA in a weekly report November 30.

After nearly 11 months, gasoline supplied to the primary market has averaged 9.394 million bpd, 250,000 bpd or 2.7% above the corresponding period in 2015. EIA shows gasoline exports averaged 564,000 bpd in September, up 208,000 bpd from September 2015, with 60% of the country’s gasoline exports that month sent to Mexico.

Another dynamic in a busy November for the oil market was an increase in the required amount of renewables in the transportation sector from a May proposal. On November 23, the Environmental Protection Agency finalized the 2017 Renewable Volume Obligation for the nested renewable fuel category which is overwhelmingly satisfied by conventional corn-based ethanol at the 15 billion gallon statutory level, 200 million gallons more than proposed in May.

Tradable D6 Renewable Identification Numbers, credits obligated parties under the Renewable Fuel Standard–refiners, importers and blenders–submit to the EPA to show compliance again spiked above $1, surging nearly 30cts or 38% from a mid-November low to $1.07 on December 1.

The blend wall, which refers to the 10% maximum ethanol content level in gasoline that can be used in all vehicles on US roads, remains an impediment in adding more ethanol to the gasoline pool even as the mandate to do so expands, spiking RIN values.

In a November 28 blog from consulting engineers Turner, Mason & Company, they project ethanol in the gasoline pool at 14.771 million gallon or 10.18% in 2016 compared to 13.59 million gallons or 10.16% in 2012.

“The percentage of ethanol in the gasoline pool has stayed remarkably constant over the past five years. The general conclusion is that the blend wall is still a limitation and demand for E15 and E85 has not grown significantly,” explain the consultants.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

U.S. Biodiesel Industry Again Waiting on Government Largesse

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

The higher cost of biodiesel compared with petroleum-based diesel fuel, especially in the third year of low global crude oil prices, requires a bridge to incentivize demand, and for several years the biodiesel industry in the United States has had those incentives amid multiple government programs.

Indeed, the US biodiesel industry ratcheted up production from 20 million gallons in 2003 to 2.1 billion gallons in 2015, according to the National Biodiesel Board, with an increasing amount of output, 24.5% of the 2015 total, renewable diesel. NBB, the industry’s national trade organization also reports 2.1 billion gallons of biodiesel was used in the United States in 2015.

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The US biodiesel industry is an exceptional growth story, but also a challenging one that has seen a large number of bankruptcies, and frustrated traders too, when federal programs lapse or lack clear direction on how they will be implemented. These waiting games have pushed otherwise promising companies that lack protracted financial durability out of business or into distressed sales. Indeed, the industry continues to consolidate that defines its maturing status as much as it demonstrates the risk in government dependence.

In early November, and deep in the shadows of an extraordinarily contentious US presidential race, the US biodiesel industry awaits the finalized mandate for renewable fuel demand for 2017, and the renewal of a tax incentive to encourage blending. Even as clarity is sought on these two programs, a stream of news releases from the US Department of Justice highlights the fraud seemingly endemic in government programs, and so frequently twinned with unintended consequences.

The US Environmental Protection Agency appears to be on target in meeting its end of November deadline in issuing the volume obligation for renewable fuels under the Renewable Fuel Standard for 2017, having submitted their finalized Renewable Volume Obligation to the White House Office of Management and Budget in mid-October. OMB reviews such government diktats to ensure conformity with the administration’s goals and policies.

The law establishing the current mandate, which is known as RFS2, lists the volume of renewables obligated parties must use every year, which vary across several nested categories of renewables, and increase annually through 2022. However, the EPA, the administrator of the RFS, must review the market to ensure there will be enough supply to meet the mandate, and that pushing this supply into the market doesn’t cause serious harm to the economy or environment.

The legislated mandate for 2017 is that 24.0 billion gallons of renewables in five categories of varying quantities are used in lieu of petroleum-based products, although the EPA proposal released in the spring at 18.8 billion gallons is well below the target due to an inadequate supply of cellulosic fuels and limited space in the gasoline pool based on current fuel specifications, auto manufacturer restrictions and consumer choice.

Of that 18.8 billion gallons, biomass-based diesel fuel accounts for 2.0 billion gallons, with biodiesel also able to satisfy the advanced biofuel mandate proposed for 2017 at 1.68 billion gallons. Oil refiners and importers must meet their RVO, whether through blending or in buying a compliance credit in the market known as a Renewable Identification Number.

RINs vary in inherent value based on the renewable they were generated by, with D4 RINs satisfying the biomass-based diesel nested category trading over $1 gallon from late September through the full month of October. A finalized RVO above the proposal would likely trigger a higher RIN value in response in December, with RIN valuations seen climbing in 2017 as obligated parties struggle to squeeze more ethanol into the US gasoline pool.

The RIN is a critical component in a producer’s income stream. Since a RIN can be separated from the renewable as it moves through the supply chain and sold in an open market, speculators have done the math and have squeezed RIN prices higher, knowing the RIN market will continue to tighten.

There’s also been a considerable amount of fraud around the RIN program that have caused harm to obligated parties amid the EPA’s buyer beware policy. Doug Parker, president of E&W Strategies and a former Director of EPA’s Criminal Investigation Division who oversaw investigations into the Deepwater Horizon disaster and Volkswagen’s defeat device fraud case among others, said current RFS-related fraud cases reflect $271 million in documented fraud and another $71 million in seizures of illicit profits.

“In my experience this represents a fraction of the actual overall fraud impact, and significantly larger losses will be formally identified in upcoming court filings,” said Parker in a white paper issued early September commissioned by Valero Corporation.

RINs associated with the fraud will be retired, and parties that bought those RINs will be forced back into the market to reacquire a compliance credit, further tightening the RIN market.

A tax credit that pays $1 per gallon for blending biodiesel into a petroleum-based fuel known as the blender’s credit expires at year’s end, and has stymied forward term transactions for biodiesel because of the uncertainty in knowing whether the credit will be passed by the US Congress for another year or more. The tax credit has been allowed to expire four times over the past 10 years, and has been made retroactive at times, creating windfall profits, yet the uncertainty has challenged business planning and trading activity.

A bitterly divided Congress adds another layer of concern that the tax credit will again be extended, and in what form. The blender’s credit has been criticized since imports can also qualify for the tax subsidy with one estimate forecasting US biodiesel imports would reach 800 million gallons this year. There have been calls to move the credit from the blending level to producers.

A bill to extend the credit, H.R. 5994: Biodiesel and Renewable Diesel Incentive Extension Act of 2016, was assigned to a committee in mid-September that will consider sending it to the House or Senate for a vote. PredictGov gives the bill a 1% chance of being enacted.

Producers ramped up production in August and September, with EPA qualified biomass-based diesel output at 1.79 billion gallons for the first three quarters of 2016, which compares with 1.81 billion gallons for all of 2015 when you strip out renewable diesel. Renewable diesel uses the same feedstocks as biodiesel but employs a different technology.

Spot transactions for biodiesel remain limited early in the fourth quarter, but when completed are primarily transacted in a differential against the ULSD (ultra-low sulfur diesel fuel) futures contract that trades on the New York Mercantile Exchange. After a rally from September lows into October, ULSD futures were range bound until a selloff in closing out the month.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

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