Due to high fuel prices and mandates, US oil refiners are finally able to profit from biofuels.

U.S. refiners have finally reaped profits from renewable fuels. These fuels had been squeezing margins for many years. But now, demand has risen due to government mandates on biofuels and the rising price of diesel as a result of the U.S. - Israel war?on Iran. The U.S. Environmental Protection Agency (EPA) mandated in late March that refiners blend record volumes of biofuels with gasoline and diesel for this year and the next. The plan calls for a 60% increase of the use of renewable diesel and biodiesel, as well as a requirement that gasoline be mixed with 15 billion gallons ethanol each year. These mandates have forced U.S. refiners into increasing biofuels production, which has boosted profits in a time of tight global diesel supplies. The downturn was caused by a lack of demand for renewable fuel, an oversupply that impacted margins and producers who were forced to absorb a hit following rapid expansion five years ago. Valero is the country's largest biofuel producer. Its renewable diesel business saw a $139-million profit in the first three months of the year, compared to a loss of $141-million in the same time period last year. The profits for the ethanol division of Valero's business have more than quadrupled. The company's executives have stated that biofuel mandates are a "pretty powerful tailwind." Refiner HF Sinclair also saw a positive swing in its renewable diesel results. It posted a $133-million profit, after a $17-million loss a year ago.

Phillips 66 is one of the biggest independent refiners. It has sharply reduced losses in its renewable fuels business. Brian Mandell said, "During an analyst call held last month, the company's renewable-diesel plants are operating above capacity." He said investors should expect to see a "substantial" difference in the performance of the renewable segment compared to a year earlier.

UNEXPECTED WINDFALL

John Deal, managing director for capital markets at Post Oak Group, explained that the new biofuel mandates have effectively "put a ceiling under biomass-based Diesel demand". The new rules help refiners get a higher price for Renewable Identification Numbers. Refiners that blend more biofuel than required can sell credits to other refiners who lack the capacity to blend sufficient biofuel.

Rand Taylor, CEO Fuel Ox Inc., a supplier to refinery industries of fuel additives, stated that the new mandates would bring a multi-year level of certainty as well as stronger RINs.

The RIN credits come in different forms, such as D4 credits (for biodiesel or renewable diesel) and D6 credits (for corn-based ethanol). According to LSEG, the prices for these credits have risen by more than 80% in this year.

"We have waited through hard times. Franklin Myers, CEO of HF Sinclair, told investors in a recent investor meeting: "Let's harvest these good days."

Outlook Uncertain While a stronger demand for renewables fuels, and favorable policy signals has?encouraged refining companies to produce more products, it is unclear whether this will encourage producers to invest capital in expanding production capacity.

Due to the poor conditions on the market, Chevron will shut down two biodiesel plants in the Midwest of America by 2024. Vertex Energy stopped renewable diesel production in its Mobile, Alabama refinery to switch back to "traditional fossil fuels". A strong demand for biofuel feedstocks from biofuel producers, notably soybean oil, as well as a reduction in the soy crushing capacity due to spring maintenance could push soybean prices up. Traders and analysts have said that higher prices and a shortage of biodiesel could discourage the production. Diesel prices spiked during Iran's war. This could encourage refiners instead to increase conventional diesel production. Diesel prices have risen by?46% during the war, and supplies are tight. Conventional diesel production offers a better return in the short term, which makes it more attractive to refiners than increasing renewable diesel production.

Geoff Moody is the senior vice president for government relations and policy of American Fuel and Petrochemical Manufacturers. (Reporting and editing by David Gregorio in New York, Nicole Jao in New York, Siddharth Cavale)

(source: Reuters)