December 19, 2017 Biofuels Outlook - December 2017 Biofuels Outlook - December 2017 Despite only a small change in renewable fuel volume requirements for 2018, RIN prices will rise in 2018. The absence of a biodiesel credit, tariffs on biodiesel imports from major suppliers, and a growing annual D6 RIN deficit, will all contribute to a high RIN price environment in 2018. At the same time, a bearish wind continues to blow for U.S. ethanol. Additional production capacity in 2018 will increase supply but outlets for this supply will be limited. Slow gasoline demand growth and the lack of an E15 waiver will limit additional domestic demand. At the same time, additional ethanol prodcution in Brazil and Asia will limit export opportunities. No parts of this publication may be duplicated, transmitted or stored without ESAI Energy's written permission. The estimates, forecasts and analyses in this report are our judgment and are subject to change without notice. 2017 ESAI Energy LLC 401 Edgewater Place Suite 640 Wakefield, MA 01880 +1.781.245.2036 www.esaienergy.com
Biofuels Insight: 2018 Another Bullish Year for RINs Despite only a small change in renewable fuel volume requirements for 2018, RIN prices will rise in 2018. The absence of a biodiesel credit, tariffs on biodiesel imports from major suppliers, and a growing annual D6 RIN deficit will all contribute to a high RIN price environment in 2018. EPA Sets 2018 Mandated Volumes Similar to Last Year The E.P.A. set final 2018 RFS volume requirements slightly higher than the proposed targets they released in July but roughly on par with 2017 mandated volumes. The only marked change in final volume obligations was an increase in the cellulosic biofuel requirement. However, a slightly higher cellulosic target reduced the amount by which the EPA could lower overall advanced and renewable fuel volume obligated volumes for 2018 under the cellulosic waiver. Preliminary analysis suggests RIN prices will remain high in 2018, despite the small change in renewable fuel volumes for 2018 compared to 2017. Even at the lower levels proposed in July, ESAI Energy expected a bullish market for RIN prices in 2018. The absence of a biodiesel credit, tariffs on biodiesel imports from major suppliers, and a growing D6 RIN deficit will all contribute to a high RIN price environment in 2018. Tariffs on biodiesel imports from Argentina and Indonesia will increase the marginal cost of biodiesel supply. In 2016 and 2017, imported biodiesel accounted for a significant amount of RFS requirements for both biomass-based diesel and total advanced biofuels. To meet the slightly higher 2018 advanced biofuels mandate, biodiesel prices will have to rise enough to stimulate additional domestic production to replace lost imports, or they will have to rise to compensate importers for tariffs. Either way, biodiesel prices will increase. Meanwhile, it appears less likely that the expired blenders credit will be replaced with a production credit for biodiesel. This means that D4 RIN prices will rise in 2018 as an incentive for enough higher priced biomass-based diesel to be blended into the diesel pool to satisfy the biomass-based diesel requirement and fill the shortfall in overall advanced biofuel volumes. D4 RIN prices typically need to be high enough to make biodiesel competitive with ULSD. D5 RIN prices will rise with them, due the nesting structure of RFS, as D4 RINs will continue to be required to satisfy overall advanced RIN obligations. At the same time, a continued shortfall in ethanol blending will support higher D6 RIN prices in 2018. ESAI Energy estimates conventional ethanol blending would need to be 10.4 percent in 2018 to completely balance D6 RIN obligations. This would represent a substantial increase in higher ethanol blends. Although an E15 waiver could contribute to additional ethanol blending next year, it remains uncertain. Without it obligated parties will most likely draw down D6 RIN stocks or turn to higher priced advanced RINs to satisfy obligations. Either outcome will support higher D6 RIN prices. From the chart above, ESAI Energy expects RIN prices will be slightly higher in 2018. 2017 ESAI Energy LLC December 19, 2017 Licensed for ESAI Energy Pg 2
Altogether, higher advanced and conventional RIN prices will raise renewable volume obligation (RVO) costs for obligated parties. ESAI Energy forecasts RVO costs will average 10 cpg of conventional fuel produced in 2018, compared to 8.5 cpg in 2017. 2017 ESAI Energy LLC December 19, 2017 Licensed for ESAI Energy Pg 3
Biofuels Price Forecast 2017 ESAI Energy LLC December 19, 2017 Licensed for ESAI Energy Pg 4
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Ethanol Outlook: U.S. Ethanol Loses Export Markets Ethanol export netbacks declined considerably in recent months and will limit export opportunities for U.S. ethanol. Limited export options and a wider U.S. ethanol surplus in Q4, due to weak domestic supplydemand fundamentals, will put downward pressure ethanol prices and crush spreads in Q4. U.S. Ethanol Loses Export Markets U.S. ethanol prices have benefitted in 2017 from high netbacks in key markets. From the charts below, higher netbacks to Brazil and Europe have contributed to higher exports and have been supportive for prices through August. A high netback from Brazil contributed to higher domestic ethanol prices late in 2016 and continued to provide an incentive to export early in 2017. Higher netbacks to Europe during the summer months when Atlantic Basin gasoline demand peaks also provided an incentive to export. However, ethanol netback pricing to Chicago in both Brazil and Europe have contracted in recent months. Simple netbacks in both markets have fallen from annual highs of $1.60 per gallon in July in Europe and $1.70 per gallon in Brazil early in 2017. Weaker supply-demand fundamentals in both of these markets will limit projected ethanol export opportunities through the beginning of 2018. Additional ethanol supply in Brazil and weaker seasonal gasoline demand in the Atlantic Basin through the first quarter of 2018, will both limit the need for imports. As a result, ethanol prices will be more dependent on bearish domestic supply-demand fundamentals during the coming months. Gasoline demand typically softens during the final quarter of the year, which will temper demand for ethanol blending, despite higher ethanol blends outside of the summer tempering the impact on demand. This lower demand and limited export opportunities have contributed to U.S. ethanol stocks rising back above 940,000 gallons in October, well above the three-year average and already high levels in 2016. 2017 ESAI Energy LLC December 19, 2017 Licensed for ESAI Energy Pg 6
Biofuels Dataset Tables For the complete Global Bioduels Outlook dataset in Excel, visit the client login at www.esaienergy.com. Tables Include: 1. Global Ethanol Fundamentals & Price E1. Ethanol Price Forecast E2. US Gasoline & Ethanol E3. Ethanol Balance E4. Ethanol Demand E5. Ethanol Supply 2. Global Biodiesel Fundamentals & Price B1. Biodiesel Price Forecast B2. US ULSD & Biodiesel Demand B3. Biodiesel Balance B4. Biodiesel Demand B5. Biodiesel Supply 3. RFS Data & Prices R1. Obligated Volumes (Conventional) R2. RIN Balance R3. Biofuel Production Table R4. EPA RIN Generation R5. RIN Price Forecast R6. Ethanol & D6 RINs 2017 ESAI Energy LLC December 19, 2017 Licensed for ESAI Energy Pg 7