Renewable diesel glut hits US refiners

A rush by US fuel makers to recalibrate their plants to produce renewable diesel has created a supply glut for low-emissions biofuels, hammering profit margins for refiners and threatening to impede a young industry.

Turmoil in the biomass-based diesel sector, an umbrella term for renewable diesel and biodiesel, could become a roadblock to future investments in biofuels, the US Energy Information Administration (EIA) said this year. That could potentially stall the transition away from traditional fossil fuels.

Some producers of these biofuels have already shuttered plants this year, and industry participants say more are set to go out of business before the year's end.

US renewable diesel production capacity nearly quadrupled following the coronavirus pandemic from just 791 million gallons a year in 2021 to 3 billion gallons by 2023, as refiners sought ways to survive the transition away from their petroleum-based products.

Combined with biodiesel, total US output capacity for biomass-based diesel surpassed 5 billion gallons by 2023.

Renewable diesel is a complete substitute for diesel, whereas biodiesel can only be used as a blend, making the former more attractive for producers.

Both compete for the same feedstock - biomass, such as used cooking oil and vegetable oils - and are more expensive to produce than petroleum-based diesel, so their demand relies almost entirely on governmental blending mandates and tax credits.

But blending targets for biomass-based diesel, set under the US Environmental Protection Agency's Renewable Fuel Standards (RFS) program, generate combined demand of just up to 4.5 billion gallons a year through 2025, according to Scott Irwin, a professor at the University of Illinois.

That is already below existing domestic production, before factoring in imports. By 2025, Irwin estimates US renewable diesel and biodiesel output capacity will top 7 billion gallons.

"The crux of the matter is that market participants convinced themselves that 'if we build it, the EPA will mandate it'. That didn't happen," Irwin said.

The oversupply has cut prices of Renewable Identification Numbers (RINs) - the credits refiners earn under RFS for producing or importing biofuels - to the lowest in five years. D4 RINs tied to biodiesel and renewable diesel fell below 40 cents a gallon in February for the first time since 2019.

United States: Refiners build new oil processing facilities

US oil refiners aim to run at up to 94% of a total 17.9 million barrels per day processing capacity this quarter, according to company forecasts and analysts, driven in part by expectations of seasonal travel demand.

Strong prices and demand since late 2021 have encouraged refiners to run above 90% of their processing capacity and in a sign that they expect fuel demand to remain high, two refiners have added units or enhanced their output, reviving a once routine practice that disappeared amid COVID-19 closures.

This quarter is traditionally one of the year's hottest for demand as companies build gasoline and jet fuel output for the summer vacation season. Motorist group AAA on Monday predicted the May 27-29 Memorial Day holiday weekend will be the third busiest for auto travel since 2000 and most active at US airports since 2005.

This quarter's pace compares to 91.3% utilization in the year-ago quarter and the 71.5% and 87.8% run-rates in 2020 and 2021 as the industry struggled with COVID-19 lockdowns that reduced fuel consumption and crushed industry profits.

Behind the higher run-rate is the fact that motor fuel stocks are beneath their 5-year averages. Gasoline and distillates inventories are 7% and 16% below, investment firm Tudor Pickering Holt & Co estimated.

"Demand trends are strong in gasoline and jet (fuel)," said Matthew Blair, a managing director at Tudor Pickering. He estimates refiners overall will run at 94% utilization rate this quarter, matching the 2017-19 average for the period.

Among larger refiners, Marathon Petroleum plans to run at 91% of capacity, Valero Energy at between 90% and 93%, and Phillips 66 in the mid-90s, officials said.

"I would expect utilization to go up a couple of points (this quarter)," from the early May run rate of 91%, said David Hackett, chairman of fuel consultancy Stillwater Associates.

High prices will keep US refinery utilization rates at levels near last year's about 91.7% this year and next, the US Energy Information Administration forecast in January 2024.

Refiners will add the capacity to process an additional 328,000 bpd in this quarter, increasing gasoline and diesel supplies this summer.

Exxon Mobil added 250,000 bpd at its Beaumont, Texas, refinery; Citgo Petroleum Inc 38,000 bpd at its Lake Charles, Louisiana, plant; and Marathon Petroleum Corp 40,000 bpd at its Galveston Bay Refinery in Texas City, Texas.

Two others whose refineries were offline last quarter - Suncor's in Commerce City, Colorado and Cenovus in Superior, Wisconsin, are resuming operations.

"Margins are not going to be as robust as they have been in the past year and a half," said John Auers, managing director of Refined Fuels Analytics.