Why are we reviewing RIN prices?
Refining earnings are impacted by RIN (Renewable Identification Numbers) expenses. Refiners, being producers of petroleum products, have to blend renewable fuels at a rate that satisfies the EPA’s annual quota. If refiners aren’t able to do so, they have to purchase RINs, which results in a continuous compliance expense.
Valero Energy (VLO) incurred ~$942 million to purchase RINs in 2017, which is ~26% of its operating earnings. PBF Energy (PBF) and HollyFrontier (HFC) have been impacted by most of the RIN costs. PBF Energy’s RIN expenses were ~$300 million in 2017.
The cost is continuously denting the company’s earnings. However, due to softening RIN prices in 2018, Valero Energy’s RIN cost fell by $64 million YoY to $337 million in the first half of 2018. The cost basically depends on RIN prices.
RIN prices in the third quarter
RINs prices have fallen sharply in the past few quarters. According to data published by Valero Energy, the prices of ethanol RINs have declined 49% YoY to $0.306 cents per gallon in the third quarter. Also, the prices of biodiesel RINs have fallen 49% YoY to $0.532 cents per gallon in the same period, which could mean lower RIN expenses for refiners in the third quarter.
RIN expenses continue to dent refiners’ earnings. However, the expenses will likely be weaker in the third quarter. Refiners could save some of the earnings that were utilized towards RIN expenses in the same period last year.
Valero Energy expects its RIN expenses to be $500 million–$600 million in 2018. Earlier in the year, the company expected the cost to be $700 million–$800 million. PBF Energy expects its RIN expenses to be $150 million–$175 million in 2018, which represents a YoY decline.
Lower RIN expenses could partly offset the YoY fall in refining earnings caused by weaker margins in the third quarter.