Why are we reviewing RIN prices?
Refiners’ earnings are consistently affected by RIN (renewable identification number) expenses. Refining companies have to blend renewable fuels at a rate that satisfies the US Environmental Protection Agency’s annual quota. If refiners fail to do so, they have to buy RINs, resulting in a continuous compliance expense.
However, RIN costs have been falling due to a decline in prices. Valero’s biofuel blending cost stood at $91 million in the first quarter of 2019, ~$115 million lower than in the first quarter of 2018.
RIN prices in the second quarter
According to the data published by Valero Energy (VLO), prices of ethanol RINs have fallen 50% YoY (year-over-year) to 15.3 cents per gallon in the second quarter so far. The rates of biodiesel RINs have also dropped 34% YoY to 35.2 cents per gallon in the same period, which could mean lower RIN expenses for refiners in the second quarter.
Thus, RIN expenses continue to dent refiners’ earnings, but the costs will be weakened in the second quarter. Moreover, lower RIN expenses could partly offset the YoY expected fall in refining earnings caused by the possibility of weaker oil spreads and crack indicators in the second quarter. Valero Energy’s crack indicators have plunged in the Gulf Coast and North Atlantic, its prime operating regions. Oil spreads such as Cushing-Midland and WTI–Western Canadian Select are also lower YoY in the current quarter.