Back in April we showed "Why RINs Could Be 2013's 4-Letter Word For Gas Prices [5]." Now that that gas prices have soared to their highs just in time for summer driving season and are about to take out the 2011 all time summer highs, it is time to look back at what the RIN chart is showing. In a nutshell, nothing good, if only for that statistically irrelevant sampling of the population that relies on internal combustion engines to get from Point A to Point B (after all, the Fed says gas prices are non-core, and why would the Fed lie: obviously Joe Sixpack buys a $5,000 hedonically-adjusted 80 inch LCD TV far more often than he has to hit the pump). The chart in question:
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Why has the price of RINs exploded with such ferocity since the last time we looked at them? JPM explains:
As the EPA’s RFS mandate has surpassed the industry standard of E10, the demand for RINs has likely increased as refiners/blenders need to show compliance with the RFS mandate to the EPA. This is reflected in ethanol RIN prices, which have surged to the highest levels since the peak in March earlier this year. Higher RIN prices could dissuade refiners from producing finished gasoline, and instead, would incentivize them to send more of the gasoline internationally to minimize their gasoline production with mandated RIN compliance. This gasoline would likely be sent as motor gasoline blending components, which includes RBOB. In theory, this could also help tighten the US gasoline market, however, there are limited markets for this gasoline, so unless it is pricing at a significant discount to world prices, it may be difficult to push this gasoline out of the US market without sufficient demand pull.
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It may be (although last we checked US refined product has a Hummer-wide discount to world prices) but refiners already squeezed by the collapsing Brent-WTI spread will sure try. And during said "market text" period, when there is a gasoline shortage in the US market what happens? Well, aside from an even higher surge in gas prices, it will all be the speculators' fault of course. That and the CME and ICE being forced to finally start ramping WTI and Brent margin head over fist once the Margin Hiker-in-Chief makes a concerned phone call.
And for those who missed the RIN primer the first time around, here is the April repost in its entirety [5].
Why RINs Could Be 2013's 4-Letter Word For Gas Prices
RIN is the mechanism for enforcing the Renewable Fuel Standards (RFS) - Suppliers can either blend their own to meet standards OR buy RINs from other blenders... due to weather issues last year 2012 RINs were in short supply - and with Feb as the last date to pay for them we saw prices surge. These RIN prices were passed on to customers at the pump. The problem is there is now not enough for 2013 (and even less for 2014) which means that instead of $0.03, RINs for 2013 could stay high in the $0.75 to $1.00 range (depending on ethanol production) and higher for 2014. This could mean the implementation of several possible alternatives - dependent on exogenous factors such as the supply of feedstock (corn, soybeans, sugar and palm oil) and spare biofuel production and blending capacity - supporting corn prices but the higher prices, we suspect, will lead Congress to revise (lower) its RFS mandates. At current levels, given the weighting of renewable fuels, RINs are adding around 7c to each gallon at the pump; should the RINs rise to $3, then that will mean a 10% rise in the price at the pump implying a 0.9% drag of GDP growth - something our Congress won't accept.
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Via Goldman Sachs,
The key to the recent rally in RIN prices, the instrument used to enforce the US Renewable Fuel Standard, has been the looming inability to blend as much conventional (corn) ethanol as mandated in 2013 and 2014. In particular, while the 2013 requirements will still be met by drawing down carryover of 2012 RINs, there will not be enough 2013 carryover RINs to achieve this in 2014. As a result, our recent analysis showed that it would take several large adjustments to overcome the 2014 shortage in ethanol (D6) RINs.
Unfortunately, the 2014 shortage in D6 RINs likely just got bigger. The EPA RIN reporting system was updated to now include data for February, a key month by the end of which obligated parties need to comply with their 2012 obligations.
Detailed paper here - everything you need to know about RINs and were afraid to ask.
Gs Labyrinth [9]