In a high stakes game of chicken between the renewable fuel industry, the refining industry and the Environmental Protection Agency, it appear that the EPA just made a turn before hitting the brick blendwall. RBOB futures (NYMEX:RBU13) took a hit on the rumors and bounced back on the fact. This comes against a backdrop of the new Iranian President calling for swift nuclear talks and a Fed that is trying to prepare us for the great taper.
Well it got to the point where even the ethanol industry knew something had to be done and the EPA did it! Well kind of anyway. While the final 2013 overall volumes and standards still require 16.55 billion gallons of renewable fuels to be blended into the U.S. fuel supply. The EPA is also providing greater lead time and flexibility in complying with the 2013 volume requirements by extending the deadline to comply with the 2013 standards by four months, to June 30, 2014. Those extra four months can stabilize the RIN market as refiners being forced to mix more ethanol into less gallons of gas would have sent RIN prices and pump prices soaring.
At the same time, EPA received comments from a number of stakeholders concerning the "E10 blend wall." Projected to occur in 2014, the "E10 blend wall" refers to the difficulty in incorporating ethanol into the fuel supply at volumes exceeding those achieved by the sale of nearly all gasoline as E10. Most gasoline sold in the U.S. today is E10. In the rule issued today, EPA is announcing that it will propose to use flexibilities in the RFS statute to reduce both the advanced biofuel and total renewable volumes in the forthcoming 2014 RFS volume requirement proposal. Is this a cause for celebration? Robert Campbell of Reuters says no. He says "Hardly anyone will be truly happy with this decision. The agricultural lobby will be dismayed by the tacit abandonment of the effort to dump ever more corn into the nation's fuel mix."
Those merchant oil refiners who do not blend their own fuel such as Valero or CVR Refining are still on the hook to buy up as many ethanol blending credits, known as RINs, as they were before. The firms that profit from this set up — the traders and hedge funds that have been speculating on RINs as well as companies like oil major BP that blend more gasoline than they import and manufacture — will still be winners from this flawed system, but even they must be wondering if it would be preferable to have a clear legal regime rather than an endless series of ad hoc fixes. So what have the regulators done? They've thrown a bone to the losers in this trade in the form of an extended compliance deadline and a reduction of the unworkable advanced biofuels requirement that will ease the pressure on buyers for 2013.
But, say you are a trader at one of the firms short RINs. How would you trade for 2014? Would you slow purchases in the hope that the Environmental Protection Agency's 2014 RINs rules are flexible enough to keep your requirements under control? Or do you instead keep buying to try and hoard 2013 RINs? In essence all the EPA has done is admit that the Renewable Fuel Standard is irretrievably broken without offering a fix. And to be fair it is outside of the EPA's duties to fix the Renewable Fuels Standard (RFS) which is, after all, an act of Congress. No wonder it is called RINSANITY!
Oil also took a hit on talk. Talk from Iran's newly elected President Hassan Rouhani said he was ready to enter "serious and substantive" negotiations, reducing the geopolitical risk premium for oil prices. Reuters reported that a spokeswoman for the U.S. State Department said Rouhani's inauguration presented "an opportunity," but that the United States wants to see Iran take "credible steps" toward the solution of the conflict. Yet it was comments from Fed Folks that probably had more cred with the petroleum traders. Taper time is going to happen. Federal Reserve Bank of Atlanta President Dennis P. Lockhart seemed to suggest that tapering was almost a given if not at this upcoming Fed meeting than at least at the next couple. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said he would not rule out the possibility that the Fed could start tapering as early as next month! So forget those Fed fears of low inflation! We are pricing in tapering.
Brent Crude was weak as oil exports from the Buzzard field in the North Sea increased. That could ease worries about a disruption in Libyan crude and tighten the U.S. product export window. We are also pricing in the API. The American Petroleum Institute, an industry group, said on Tuesday that U.S. crude oil stocks fell by 3.66 million barrels and Cushing, Okla., down by 2.2 million barrels.
Dow Jones reported that U.S. crude oil output will rise faster than previously expected and domestic production will surpass crude oil imports in October for the first time since February 1995, government forecasters said Tuesday. Surging output from shale-oil fields will lift U.S. output by 14% this year, to 7.4 million barrels a day, the highest level since 1991. A further jump of 11.4% is expected in 2014, pushing output to 8.24 million barrels a day, the most since 1987, according to the Energy Information Administration. In a month-earlier report, the EIA projected growth of 12.6% and 10.6%, respectively for 2013 and 2014. Adam Sieminski, EIA administrator, said U.S. crude oil output hit 7.5 million barrels a day in July, the highest since April 1991. That represents a jump of 17.4%, or 1.1 million barrels a day, from a year earlier. Rising output continues to slash U.S. reliance on crude oil imports. The EIA estimates output will reach 7.6 million barrels a day in October, topping net crude oil imports of 7.22 million barrels a day. For all of 2013, output will lag net crude oil imports by just 100,000 barrels a day. But in 2014, higher output is expected to push imports down to 6.69 million barrels a day, the lowest level since 1993. Output will top imports by 1.55 million barrels a day in 2014, the EIA estimates.